Hi – this is Mr Credit Card from www.askmrcreditcard.com. This blog has done a great job (IMO) of encouraging folks to take action and get out of debt (pizza delivery anyone?). Today, I’m going to share my views on how one could possibly avoid debt altogether, especially on stuff which we as a society considers debt to be OK. Hope you enjoy it. And BTW, if you are looking for a credit card, please check out my best credit cards recommendations. (only if you pay in full!)
A good place to start in the war against debt, is finding ways to not get into debt in the first place or rather choosing alternative solutions instead of choosing debt. When you think of it, a lot of our habits are either grandfathered down to us (meaning this is how it’s always been done) or are acquired through simply not knowing any better. There are some things which society accepts as OK to get into debt. However, there are other options and here are a few to take into consideration. I would like to explore these now.
Student Loans – Going to college and acquiring student loans is a slippery slope in which most of us feel don’t really have a choice (or do we). Either take the loans and get an education which leads to a legitimate place in society or don’t go to school at all. Perhaps for many folks, there is no choice because their parents have not saved enough to fully fund their college education. But there are many alternatives to either not incur any student debt or at the very least, minimize it and ensure you have the best chance of repaying it in the future. Here are some things you can do:
- Research scholarship opportunities and apply for as many as you can – this one is pretty obvious but requires lots of time and effort.
- Make sure you get any grant money that is available – same point as above. Research, research and research.
- Work part time in school and keep expenses down as much as possible – Hey if you study music, teach music part time. Do anything to bring in some money in college.
- Consider working and saving up for college – Not many folks take this path. But you could work for a few years and try to save up for college. Heck, if you become wildly successful, you may not even want to go!
- Figure out career opportunities of what you are studying – Nothing is more demoralizing than getting into a ton of debt and graduating, but discovering that there is not a lot of demand for the area of expertise which you have studied. Or if the pay in that particular career is very low. The debt load of a medical student may be high, but the chances of them landing a job is pretty good. And if they move into the right area, it could be very lucrative as well and the student loans become manageable. But a graduate in psychology may not fair as well. It is so important to consider the opportunities in your field of study before you take out a student loan.
Do You Need a Mortgage? – Mortgages have for years seemed to be part of life. If you want to buy a home you have to have a mortgage – or so says conventional wisdom. We have always been told to save for a 20% downpayment and take out a 30 year fixed mortgage. But why not save up to pay for a house in cash? But we cannot afford any house if we save for the whole amount? That is simply not true. But to achieve this, you need to consider the following:
Back until the early twentieth century, most folks do not have mortgage. Those who can afford it own their homes and become landlords. The rest just rent. I urge you to consider changing your mindset that you need to take a mortgage to buy a house. If you decide you want to save and pay cash for your home, you would approach you life and career very differently.
Cars – Buy your car and don’t take out a loan. Cars depreciate and will likely never be worth what you have paid for it, and a large monthly car payment can put a significant amount of debt on your shoulders. When you sell it, you will never get what you paid for it. Save your cash first and buy something reasonable. Best is to get a second hand car. Better yet, there can be some good bargains to be found in repossession auctions (cars which are repossessed because of folks who missed their monthly payments).
Credit Cards – Too many folks fall into this trap. Always pay in full your balances every month. I once heard Suze Orman tell folks that perhaps it is OK to take on some “good debt” – like putting some working clothes expenses on your credit card if you cannot afford it and just make sure you put it on a low interest rate credit card! I have a serious problem with that. If you know you need to have some working clothes after you graduate, then save up for it. It is little things like that which could potentially start a nasty habit of always carrying a balance.
Never use your credit cards as an emergency credit line. Rely on your emergency fund. Instead, if you use your cards responsibly, you could save money by using cash back rewards credit cards or gas rewards credit cards and save money by earning rebates (and paying in full off course).
Other stuff like furniture, plasma TVs etc – I think almost everyone would agree that it is suicidal to buy stuff like furniture, plasma TVs on credit. Many folks in the good old heyday used their home equity lines of credit for vacations! Never ever do that. That is an almost insane thing to do – getting into debt for pleasure and not for the purchase of a productive asset!
Emergency Fund – keys to not dipping into credit – I feel the key to not having to resort to debt is to build up an emergency fund to use. That way, you’ll avoid having to charge an emergency on a credit card. This fund can be used on those expenses that a lot of people without emergency funds have to use credit cards for. Car repairs, medical bills and anything else that is just not an expected expense. An emergency fund will help a great deal in keeping you out of debt.
Having Adequate Insurance – Make sure you always have adequate insurance and medical insurance. This means for your car, your house and anything else that could be damaged and end up costing you an arm and a leg. Don’t go into debt over medical bills and things that can be avoided.
Conclusion – Debt doesn’t have to be a normal part of life, if we make sure that we look into even unconventional methods of paying for and living. If we avoid it from the beginning, we don’t have to waste time later wondering how to get out of it. But avoiding debt of any kind requires a change in mindset from society’s expectations. While society realizes it is good not to have credit card debt, most look upon student loans and mortgages as necessities. But I would challenge everyone to question that assumption. Because if you do, you may find that you may choose to live differently and certainly look at your life differently as well.
I am interested to hear what you folks think about paying cash for your house instead of taking a mortgage.