Monday, February 13, 2012

Stop Borrowing Money!

One of the big problems most folks have, is this obsession with borrowing money.  They act like a loan is a gift and doesn't have to be paid back, with interest.  But of course, it does.

In the movie Catch Me If You Can, Christopher Walken plays the part of Frank Abagnale, Sr., the Father of the main character played by Leonardo DiCaprio. In the movie, Walken gets into financial trouble with the IRS, as his stationary store is failing. He tries to get a loan to "help him through this tough time" but of course, the banks aren't lending him any - he is insolvent. He decries the banks and their "little club" that they won't let him in. And you figure out pretty quickly from that, why he went broke.

Poor folks think poor. And one example of poverty-think is the idea that financial difficulties can be "helped" with a loan, when in fact, it is just throwing gasoline on a fire. You are better off facing financial difficulties head-on than trying to forestall them through yet more borrowing.

If you are a restaurateur and the restaurant is going bust, then close the doors. Borrowing money to stay in business is just making things worse. Borrowing from the Employee's Withholding funds is just suicidal.

If you are poor and facing financial difficulties, getting a payday loan is not "helping you through tough times" but rather is taking your financial difficulties and making them toxic. No matter how broke you are, a payday loan is going to make you ten times as broke.

If you are middle class and facing a credit card problem, refinancing your home to pay it off is not "solving" the problem, but rather just taking on more debt - over a longer period of time - to pay off debt. And usually, people who do this end up in more credit card trouble down the road.

Some folks say, "Well, that's easy for you to say, your rich! I'm poor, I have no money, I have to borrow!" and that is idiotic on its face. First of all, I am not rich - I make less money than you do. I just stopped making stupid financial decisions. If you are poor and you borrow money, you are even poorer. How is borrowing money going to make you rich? It ain't! It just guarantees more poverty down the road.

Debt is like a cancer on your finances, and yet many people take it on for frivolous reasons. Or they think that getting a loan is an answer to their problems, when in fact, it just means they have to pay back their problems, plus interest.

Poor people think they are "lucky" to get a loan. Get out of that mindset entirely. Loans are onerous obligations, an no one is "lucky" to get one.

And taking on debt is not a treat - but a burden. Who in their right mind cheerfully shoulders a burden?

No debt is the best way to be. Less debt is almost as good. Limit the debt in your life to one or two things that may actually be worthwhile - your education and your home.

And education CAN pay for itself, provided you don't major in advanced bullshit and get C's in it. If you want to go to school (as opposed to your parents telling you to) student loans can be a way to help you get that degree. But get as few as possible. Many students live a comfortable life as a student, only to pay for it by living as paupers after they graduate. Every dollar saved on a student loan is $5 saved down the road.

Buying a house CAN be a good deal, if the cost of home ownership is cheaper than renting - the overall cost, not just the monthly mortgage payment. Factor in your utilities, insurance, and taxes, and deduct any possible tax deduction. Buy the least amount of house for your needs, and resist the urge to "trade up" to a larger house, just because you make more money. "Look at me" houses are just a recipe for middle-class bankruptcy. If you have that available credit, an investment property is a better bet.

What else? Nothing Else.

Home improvement loans, car loans, vacation loans (!), consumer credit loans, credit cards, and any other kind of debt should be unnecessary in your life. There has never been a part in my life where I needed to borrow money to buy a car. Rather, I chose to do so and convinced myself that my wants for a new (or newer) car were in fact needs. Pay cash, for everything, whenever possible.

Really. It can be done. You can save up for things.

For example, I had a car that was paid-for. It ran well and had about 80,000 miles on it. It was a Toyota and would have gone 100,000 miles more, easily. But, it needed a muffler and a brake job, and I wanted a shiny new car that was faster, so I borrowed money from my credit union to buy the new car.

In a few years, the new car was worth hardly anything. And in the time it took me to pay off the new car loan, I could have saved up far more money than I paid for the new car, and kept driving the Toyota. When the Toyota was ready for the junkyard, I could have gone out and paid cash and bought another secondhand car - in fact the same car I bought new (and borrowed money to get) for less than half the cost.

Total savings? Tens of thousands of dollars. particularly when you throw in the insurance costs.

"But you don't get to drive a new car!" people say. Big freaking deal. New car smell and a window sticker - that lasts about 30 days, tops. Then it is just another used car, period.

It is a choice. And people choose to borrow money, over-spend, and then end up broke, rather than save money.

The message the media sends us, of course, is just the opposite. They want you to obsess about your credit rating - game your score, so you can borrow more! They want you to think of everything in life in terms of monthly payments, not in overall costs. And they want you to remain powerless and in debt your whole life, because people with money are empowered, and no one in power wants that at all - for you, that is.

In fact, the first thing they want to do, if you get money, is separate you from it. And that is why the Mitt Romney's of the world pay 15% Capital Gains taxes and you pay a 25% marginal rate. You'll never be Mitt Romney. Ever, ever.

But you can do better with what you have. And the simplest way to do that is to borrow less and save more.

Get out of the mindset that borrowing money is the first option or first recourse to take in every financial decision in life. Get out of the mindset that borrowing money is a privilege or treat. Get out of the borrowing mindset, entirely.

Just because they offer you "90 days same as cash" doesn't mean you should take it.