Stupid Debt

A colleague with a drinking problem prone to colorful outbursts once told me, “Bankers are greedy cash thirsty vampires who want to suck your savings dry”.  He was right.  Bankers provide credit to consumers.  There is smart debt and stupid debt.  Stupid debt helps the banker pay his or her kids’ college and put an addition onto their house.  It is important to have some relationship with a banker, but make sure you’re not their favorite customer.  What are stupid debts exactly?  Well…

  • Credit Cards at the time of this writing (early 2011) carry interest rates of 12.99 to 17.99% for people with good credit.  If you have a balance on your card, you are making someone a lot of money.  If you have 13% interest and you have a $3000 balance, if you don’t add any more charges to the card, and pay the minimum, you will make someone else over $1,000. It is very difficult to find investments that pay 12-17.99% per year. DO NOT CARRY A BALANCE ON YOUR CREDIT CARD.  There are times when it is necessary to utilize a balance, such as when you loose your job, or when have a large unexpected medical bill.   In those cases, not having a prior balance on your card will help you, and when you get back on your feet, start paying off the card immediately.  When your credit is somewhat sound, look for balance transfer offers.  At the time of writing, there are 0% introductory rates available on credit cards which allow you to transfer a balance and pay 0% interest on the transferred balance for a certain time period.  Check cardoffers.com or eyeoncredit.com for the latest offers.  If you get one of these offers, read the fine print that comes with the card.  Make sure you do not fall afoul of the agreeement.  Otherwise, interest, and even back interest may kick in.
  • Boats –In all cases debt on a boat is a stupid debt.  If you want a boat, rent one, or pay cash for one.  Good luck selling your boat when you are through with it.
  • Student Loans – does the world need another medieval German literature Ph.D.?  Ideally, before you embark on your college career you should do a cost/benefit analysis of the school you attend and your major.  Most parents will not do this for their children, but it is extremely important.  If you are paying for school yourself, you really do need to assess whether you have more than a 50% chance of finding a job in your major.  If you can’t, why bother spending 4 years+ of your life on the degree?   Unless you can get accepted at Harvard, Yale, or Princeton, why bother going to private school?  Academics is a business, despite what anyone else will tell you.  The Economist had a good article on how many Ph.D.’s are not worth the paper they’re printed on.
  • Car Loans – At this time of writing, car loans are in the 4.5% to 5% range for people with good credit.  Most young people will need to buy a car, and the car should be reliable.  In many cases, buying a car is a smart debt if it helps you get to/from work safely and reliably.  If you pay more than you can afford, or if you would be paying a high APR on the loan, can you buy a used car for cash?  Remember to save money for repairs if you do this.

Stupid debt means someone else is rocking on your dime. Make sure you eliminate stupid debt from your personal finances first, before starting to invest seriously. It’s that important.

Learn how to think for yourself

The key to financial independence is to learn the tools to analyze the market, understand the basics of psychology as they apply to markets, and use this information to invest successfully towards your goal.  Many people who learn the basics of investing successfully will decide that it is best to leave investing in the hands of professionals.  If that’s your decision, there are ways to maximize your, rather than your advisor’s return.  It goes without saying that before you invest, you need to free yourself from ‘stupid debt’, or at least structure them so they are in control and on a path to pay them off.  When is a debt a ‘stupid debt’?