The Lies of Good Debt  

 I often read articles that tout the difference between “good debt and bad debt”.  They usually difference the two are by determined  “good debt” as a debt that goes up in value, such as house and “bad debt” as debt that goes down in value, as in a new car.

The “good debt” example is the purchase of a house. In normal housing markets, not post bubble, a house looks like a good investment. Everyone needs a residence and the property taxes are tax-deductible. However what is not accounted for in the cost of buying a home is the increase in living expenses a house generates. In the first year of owning a home, the average consumer will spend an increase of over $10,000. The increase is to cover the many incidentals; garden hose, minor repairs, major appliances, landscaping, trash removal, home owner association fees and homeowners insurance.  Also the reality of home ownership is just a facially because you really do not own the home.

 If you financed any part of the home loan, the bank owns the home. And when crisis hits such as job loss, medical bills or death in the family, and you are unable to make your mortgage payments, the bank will foreclosure on your home.  At that point you will lose any equity; monies that were a down payment or payments on the principle. If you are able to sell your home you may be able to recoup some of the lost equity. Often if you have been in your home for only a few short years, you will be in a position to ‘short sale’ your home and hope to mitigate the loss of market value. And in some cases the lender will not release you from the debt that is owed in a short sale; the difference between what the loan amount is from the sale price. If you are not released from the debt you are now personally liable for the debt. The debt has become uncollateralized or unsecured and you need to seek a debt solution for the remaining amount. 

The second piece of advice of the “good debt” v. “bad debt” argument is, to get rid of credit card debt by refinancing your home.  This is the dangerous advice! Anytime you take a debt that is uncollateralized; one that is not secured by collateral such as a credit card and roll it into a collateralized debt such as a home, you risk the collateral and limited your debt solution remedies.  At that point if you are unable to make your home payment, you have just increased your debt burden and left yourself with only two debt remedies foreclosure and bankruptcy. Never roll an uncollateralized debt into a collateralized one.

The reality of homeownership

• It is the biggest and most expensive debt you will ever take on
• Unless you pay 100% cash the bank is the real home owner
• You need to have a savings fund and enough insurance coverage to cover costs
• Buy less house that your mortgage brokers quote’s
• Know the inherit risks and debt remedies if you should lose your home
• Never roll uncollateralized or unsecured debts into your mortgage or refinance to do so

 Banks ; drain our country of capital, deepen the recession, spur job loss, show no mercy in foreclosure, stall the real estate market from rebounding , fail to lend to generate business, avoid most laws and fees, funnel their money tax free out of the country and avoid jail time. Vote with your dollars and move your money out of the banks. Find a credit union.

Here is a link to the whole story http://www.huffingtonpost.com/janet-tavakoli/how-to-thwart-the-assassi_b_682538.html?ir=Business

The only thing I can think to tell you before you read the summary below is from the movie, Ms. Doubtfire, “Brace yourself, Effie.”  In case you have not seen the movie the line refers to, Ms. Effie Doubtfire was given from her husband just before he  got ready to, err um… launch.

Commercial Real Estate Losses and the Risk to Financial Stability

The Congressional Oversight Panel’s February oversight report, “Commercial Real Estate Losses and the Risk to Financial Stability,” expresses concern that a wave of commercial real estate loan losses over the next four years could jeopardize the stability of many banks, particularly community banks. Commercial real estate loans made over the last decade – including retail properties, office space, industrial facilities, hotels and apartments – totaling $1.4 trillion will require refinancing in 2011 through 2014. Nearly half are at present “underwater,” meaning the borrower owes more on the loan than the underlying property is worth. While these problems have no single cause, the loans most likely to fail are those made at the height of the real estate bubble.

The Panel found that “a significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.” When commercial properties fail, it creates a downward spiral of economic contraction: job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities. Because community banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery and extend an already painful recession.

If you are gasping for breath with the realization of what may come, consider that same 1 Trillion in default loans nearly equals the current US Revolving (credit cards) Debt.  The number as of May 2010 is 830 Billion.  http://www.federalreserve.gov/releases/g19/Current/

The sermon last summer was entitled “Margin & Money”. Here are my notes from that sermon. To be clear and grant credit where it is due I want to point out, most of my notes are taken verbatim and contain very little of my own writing. To listen to the complete sermon; http://mediaplayer.hcbc.com/sermons/30 .

There are so many sources here in Austin for Debt Help you just have to seek them.

“Margin & Money” by Tim Hawks, at HCBC.

The opening question was “How much money do I need so I never have to worry about money again?”

We, as Americans, live in a state of worry and turmoil about money. A recent article from USA Today, stated college students had an inability to understand basic money issues. Today’s college students leave college with debt and then plunge into greater debt driving them into financial ruin.

Where does the money go?

• The first group live on 95% of their income with 5% going toward retirement.
• The second live on 85% of their income with 5% going to retirement and 10% to giving.
• The third have no idea what they are living on and spending more than their incomes. Some are living on 104% of their incomes, supplementing with credit cards.

The thinking that creates such a variable between households is, “If I only made, X more, than things would be better”. Then I could save, then I could give, then I could plan for the future. In reality the opposite is true. If you continue to spend at the level of your income, no margins for the future needs, you will always be in a scramble to increase your funds.

The margin is the gap from what you spend and from what you earn. If you live on 80% of what you make you will have a buffer against life’s future needs.

The definition of margin is; “The amount of money you have left to spend after your living expense and commitments have been met.”

If this need for margin is so great, it begs the question; why do we not create financial margins in our lives?

Americans tend to live with a false hope when job loss occurs. The false hope is that everything will be alright and to continue life as normal. That normal is continued to spend at the same rate even without the income. The net results lead to car loss i.e. automobile repossession and loss of property such as foreclosure.

The message was loud and clear, live on a % of what you make.

Another belief is that if we could just increase our income we would have the margin to buff us against the loss. The opposite tends to be true. Income does not take away worry. An example is when you have a job making 25k and you lose that job, there are a number of jobs available for that same 25k pay. When you have a job making 250K and you spending all your income, and you lose that job, your worries are increased. First off there are not that many jobs offering 250K as 25K and your obligations are committed to a much higher pay scale. Your worries are magnified and your losses are greater when you live without margins.

When you live with no margin you are stealing from yourself. Proverbs 21:20 is summarized as, ‘the wise man store up some of what he produces’.

Save a % of what you make, no matter your income level.

Two ways we steal from ourselves is emotionally and relationally. We steal from ourselves emotionally by not living a life of peace. We become unsettled, and worry about making ends meet. A fear for the future needs of retirement, kids education, and fear of sickness.

We steal from ourselves relationally; couples arguing over money and children demanding material objects. We fail to take joy in our own success. We are robbing in joy over what we have when we continually look for our next purchase. We are robbed from the joy in our professions. The professions may be a worthy asset to our community such as a teacher, but the pay can be too low.

The meeting ended with Proverbs 22:7 “The rich rules over the poor, And the borrower is servant to the lender.”

When there is no margin, we feel in bondage and we lose the ability to charter our own course.

I am being stalked and so are you. No need to check your window and lower the shades just yet. Open your front door is there a flyer or two stuck in it? How about someone’s business card jammed down in your car window? Are you asked at every checkout counter to apply for a store credit card? Did you sign up for email notification only to have your inbox overflow? Then you are being stalked. The good news is that they really don’t want you, just your money.

See all the scary news is gone now. Just surrender your money in a frequent and generous fashion and you can have a reprieve. Well not really, because if you do that you’re a customer! And customers have needs, as in more notifications of sales!

If you are laughing right now, then this post served its purpose. Well not really. I want you to laugh, and then I want you to think. Think about just how often you are pitched.

If you TiVo your  television , limit your music to your iPod, train your eyes to avoid the ads online, stay out of the stores, edit your email and screen your calls you might be free.  Free to have a commercial free thought.

If you can free up your thoughts long enough you just might create something new and wonderful. Turn off the noise, drop out of the commercialized market and see how sublime life can be without being pitched.

Need to add a truck for your delivery business?  Or buy some new equipment for booming dog grooming business? Every successful business owner has faced the need for new capital at some point. In days past you use the limit of your credit card or apply for a business loan from your bank.

Now you have a new source, Sam’s Club, backed by the Small Business Administration. Shoppers of Sam’s Club can apply for loans up to $25,000 for its members nationwide. The loans are managed through Superior Financial Group.  The motivation behind the lending is to stimulate spending in Sam’s Club. Sam’s Club gives members a $100 discount on the application fee and lowered interest rates.

Car Debt

Happiness is chemical that is what my college biology professor claimed. Nearly 20 years later, I agree. I believe in ‘the high’. I had it every time I sat in a new car, and inhaled the leather, ran my fingers over the polished walnut and openly lusted from the sun gleaming on a new wax job. And that is all before I even push the key into it, to hear it hum!
It is one thing to want and another to take it home. So I took it home. After all it was before the bubble, money was flush the payment seemed inconsequential. Plus I was ‘responsible’ and put ¼ down. I was good at rationalizing my want.
No less than a year later the real estate bubble burst and the market we worked in tanked. One day the phone just stopped ringing. Silence. Deafening silence.
I had made a mistake. It was a ‘whopper’. I bought; rather I signed my name to a very pretty, new shinny red rolling debt load. That same year, my marriage failed. I was a single mother of two, with a large debt load whose business reference was her soon to be ex. I thought I was sunk financially in a hole, forever. Since I had put so much down on a new car, I was upside down in it.
And my car, like any new love affair faded with age, wear and tear. The kid’s spilled milkshakes, melted crayons and hail damage assisted killing off my attraction.
This year, the gun to my head, which was the car’s hefty payments ended. I paid off the car. Happiness is indeed chemical. Of course today, it’s the not feeling that changed but the formula.