'You can and mostly MUST spend what you haven't got' blog discussion

Former_MSE_Penelope

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.

Read Martin's "You can and mostly MUST spend what you haven't got" Blog.

Please click reply to discuss below.

Rotor

The only good debt is that which you can reasonably expect to give a return higher than the borrowing costs. Everything else is bad debt. Some may be unavoidable debt , such as mortgages or student debt (could be good debt depending on house price rises and inflation) The rest is very bad debt

eve_1979

I remember being taught about APRs during Maths in secondary school - in my last year think - but they never put it into context so it never actually made much sense. (am talking 14 odd years ago!)

I had my first credit card at 18 as going on hols for first time with out parents and it was a second card on my mums credit account but didnt spend on it really, until I was much older.

Although i remember getting a store card when i was 18 as still at college and i spent quite a bit on it and got into a bit of debt that way - as again it was back when no one really explained the APRs on the things, so you just thought it was easy money to spend. (although doesnt stop me now with Credit Cards!! )

But i do wish it was explained at school but in context as to why and how, and the importantance of saving and not spending it all as prob wouldnt be in the debt I am now (managable debt i hasten to add!) and could have had my own mortage and house by now, as still renting and think i will be for the rest of my life unless mortages are easier to get (with lack of savings) and house prices decrease considerably where i live!

bdebt3

I think the important thing to understand about debt is that it adds risk to your personal situation and drains your cash-flow - which prevents you from saving, spending, investing and giving. Let's face it, the only true winner with debt is usually the lender! Even when the lender's screw-up, they still seem to win (all those bail-outs)!!!

I disagree that you HAVE to go into debt in order to go to University. There are parents who have sacrificed and saved for many years to build-up for their kids a college and University fund and also kids should maybe work jobs in summer etc in order to pay for their tuition.

Take the point about mortgages - this is an exception, but in my opinion does not therefore make debt okay - certainly not good!

Suggestion - get free of all debt (except for the mortgage), and when you reach that goal, and then if you find that after 6 months you don't like being debt-free, you can always go back into debt!!

Jon

bonzer

bdebt3 wrote: »

There are parents who have sacrificed and saved for many years to build-up for their kids a college and University fund and also kids should maybe work jobs in summer etc in order to pay for their tuition.

Agree. I never got a student loan despite being available. Debt's not the only way to finance university if you work hard in the summer and live cheap. Although I didn't pay tuition fees in my day so it's probably got a bit harder now.

bdebt3 wrote: »

Take the point about mortgages - this is an exception, but in my opinion does not therefore make debt okay - certainly not good!

While a key way of housing yourself, debt isn't the only way here either. You could rent and invest in something to save up the capital to buy. Or you could rent forever and build your pension to cover housing costs in retirement. Of course depends on rents versus purchase prices, investment returns, lots of variables, risk and unknowables etc etc.

Soubrette

I don't think any debt is 'good' debt but I think some debt is unavoidable for most people.

If I could afford to be mortgage free then I would certainly consider it as the total amount of interest paid on a mortgage is a lot of money - money I could spending on myself

As has already been pointed out - even if I could get a better interest rate on saving rather than my mortgage, it would almost certainly not be instant access so would impact on my cashflow. In general higher interest rates are only available for more risky savings products or for relatively small amounts of money.

Again I might consider taking out student loans for the duration of my course whether I needed them or not, I would certainly be looking to pay it off asap if I could afford it. To hear young work colleagues complain about how it's not worth doing overtime because student loan repayments go up shows how soul destroying large debt can be, even with reasonable repayment terms.

Sou

Percy1983

I will stand up and say there is such a thing as good debt, me and my other half have been looking a for a car and would have been in a good position to buy in approx 2 months. As it is a good deal came up for about £1000 less than we would expect to pay for the make and model we wanted.

To cut a long story short I ended up getting a cash advance on a credit card (huge sin) to buy the car, but looking at the cash advance fee + 2 months interest would it add up to the £1000 saved? it is nowhere near.

On the surface it is silly to get cash advance on a credit card, but as with all debt consider the period of time and the cost and make a call if it is worth it. In this case it was and we now have a bargain of a car.

The simple rule to me is don't borrow unless you know exactly how and when you can pay it back.

inicholson

Surely the difference is that bad debt makes you worse off in the long run but good better makes you better off?

Borrowing to buy things you can wait for, do without or do more cheaply is bad (I cannot understand people borrowing to go on holiday - miss the holiday or do something cheap and save up for next year).

But taking out a mortgage - if it will cost a similar amount to renting then it's an investment (even more so if you invest in a property that's likely to increase in value). Too many people are buying now because they want to own rather than rent or love the house and will pay what it takes, etc. I would never buy a property that I didn't see as an investment - that's why I would never buy a newbuild house.

Student loans can (and should) be an investment.

All the really wealthy people I know started their business or bought their property with borrowed money. What keeps poor people poor is that half of us are saddled with bad debt, but the half who aren't are scared to take out good debt and invest in themselves.

I've never regretted quitting my job and being worse off for 2 years so I could become a teacher. However, I now find myself teaching in an independent school who have offered me a 75% discount on the fees. It's a great school and I know my kids will thrive there. But the only way I can see to afford it is to add to my (admittedly very small) mortgage. Is that good debt or bad debt? I guess the alternative is to add to my mortgage and buy a house in the catchment area of a good state school...

Liz3yy

I've had up and down experiences of money management and debt. I don't remember receiving any formal lessons about managing finances at school, however my Father was excellent at teaching me to manage what cash I had. As soon as I was old enough he stopped my allowance and told me to get a job, you'll learn the hard way, he said, how people in the real world earn their crust.

I was silly enough to get into major debt when I left home and bought my first flat, I couldn't afford the 5% deposit so borrowed the money and the same time as taking out a mortgage, my parents were against the idea but I was determined so they didn't stand in my way.

Fast forward 5 years and I had a flat which had gone up in value by £30k but I was also almost £20k in debt due to my sheer laziness and not watching what I was doing. All my own fault. I eventually sold the flat and cleared my debts and now live in a rented house with my partner. The only debt I have is £200 on a credit card which will be paid off on pay day.

I guess the lesson I've learnt is that owning a property isn't everything, I was so sure that renting would be throwing money away that I was blind to the hidden costs of owning a home. I vow never to get into that kind of debt again, even to buy a property.

michaels

Financial education for all - what a bad idea - currently the saavy and solvent are subsidised by the lazy and incompetent. I would be much worse off if I had to pay a 'fair' price for the finanacial products I consume.

jenniewb

michaels wrote: »

Financial education for all - what a bad idea - currently the saavy and solvent are subsidised by the lazy and incompetent. I would be much worse off if I had to pay a 'fair' price for the finanacial products I consume.

I don't think its a bad idea: I was 24 when I got my first credit card, it was tied to my job: instead of a straight forward discount on clothing, we were given a credit card where everything we bought had a discount and then we had to pay off what we bought within X days or get billed with interest.

I had to find the information on how they worked myself, I hadn't a clue, having only ever heard of people getting into difficulty with credit cards I assumed they were all bad. I had to do a lot of reading and my non logical brain was really confused, I got the right end of the stick in the end but it makes me wonder how many other people sign up for things like credit cards without fully understanding or assuming they know whats what but having got the wrong end of the stick. Quite basicly, there is no where really to go for straight forward advice like this.

There are many aspects to financial education which could really be useful. I take it for granted that I know how to compare prices in stores by the gram or how long it will take me to use, yet many others rely on the overall price without thinking about longevity.
Budgeting, working out tax, learning where to go for help if you have financial problems and learning enough not to be swayed by endless promises by loan sharks (who advertise something like 5000% apr on the TV ad!!)

I think many people take it for granted that they use whats considered common sense to work things out, not everyone is gifted with the same education and many learn things the expensive way (through debt), its too simplistic to assume its laziness that prevents people acting appropiatly, whilst its likely there are some that are too laid back to take action on their finances, if you are faced with things like no food, bailiffs or homelessness, I doubt very much its always about 'laziness'.