Here’s a long overdue post. I’ve already said it’s ok to have debt. And that it’s literally impossible to avoid using it. In previous posts we looked at investing, how to pay for cars, and how debt permeates our entire monetary system. Now I would like to cover a few of the other ways we can use or abuse debt in the form of loans.
Mortgages. This debt is vital to affording a home – but we need to pay attention to what the housing market is doing before we dive in to home ownership. You never want to find yourself underwater. Look at historical prices to see what could happen if the market tanks and understand the area dynamics to know if you’re in a bubble. You will also want to consider how much you will need for closing costs if you needed to sell. If it’s too risky or you don’t expect to be come out with cash in hand then either look somewhere else, rent, or put more down. Regardless, don’t stretch yourself thin by getting the most you qualify for, and don’t look for investment opportunities in a primary home. We don’t put undue risk into a basic necessity.
Home equity lines of credit. Use for necessary upgrades that are not reasonably saved for. Again, don’t take the max the bank will loan you, only as much as is needed for the project.
School loans. You really need to avoid these as best as you can. There are plenty of options. College is too expensive to figure it out as you go or to just go for he sake of going and end up with a useless degree.
Refinancing. You will usually pay more interest than principal over the life of a mortgage. Reducing the overall cost you pay is the only purpose of refinancing. Don’t be tempted to get a lower payment at the cost of more years on the loan. Refinance into fewer years and/or a lower rate. Consider the total cost instead of the monthly payment (so long as you can afford the monthly payment).
Other significant loans. Don’t take loans for nice to haves. That includes boats, vacations, third cars, second houses. If you need a loan, you don’t need it.
Small loans, especially cell phones. So long as they are 0% or near 0% I don’t really have an issue with these. Just make sure you aren’t trying to afford something you wouldn’t normally get. For example, I won’t spend $1,000 on a phone, which means I also won’t do any plan that lets me have a $1,000 phone for some low monthly cost. I’ll stick with my OnePlus, because I’m willing to spend that much on a phone.
The Way of Humble Living 