I’m *pretty good* about this, but not perfect

Although it is a vital rule of thumb to avoid debts, it is worth doing the actual calculations, because you can sometimes save money, time, and freedom (or whatever) by assuming debts and even mortgages, rather than save up. Not often, but sometimes, especially if you repay the debt quickly and/or if there is an exceptionally good investment opportunity.

The cash-back thing does not concern me because I use my CC so rarely. I charged $655 in 2010 and $229 in 2009. I received a CC bill in only 10 of the 24 months, so paying a CC bill is a somewhat uncommon event for me.

In preparation, I used some ERE tactics to reduce housing and transportation costs. I requested deferral of my student loans. I started hoarding cash. I also put as much of my remaining expenses as I could on my credit cards and made minimum payments.

Why did I get in credit card debt when I was unemployed? I only had about $5000 in cash, my COBRA payments alone were $300/month and I couldn’t legally get another job. The credit cards helped me stretch my cash.

Once I started working again 6 months later, I had the CC debt, the student loans, and also owed my attorneys ($$ due when my application was approved). The feeling I had towards my creditors was gratitude. I had access to their cash when I needed it,and they made money off me.

I owed a total of ~$30k and I was making $32k. I managed to pay everyone off in a little over a year, which should give you an idea of how focused I was on debt repayment.

In my opinion, debt is neither moral nor immoral (*), but rather a useful tool. Like many tools, e.g., cars, prescription drugs, scissors, classified information, dogs or guns, debt can harm you when misused. Don’t make accruing debt a lifestyle, but use it if you have to. If you are already in debt, develop a plan for getting out of debt. Use whatever motivates you, whether it be guilt, gratitude or a dispassionate spreadsheet.

(*) I’m paraphrasing Steve Austin’s comment on taxes from the previous article.

Now the magic happens:

You go to the mail box and pull out your statement. You go home (directly home and do not pass go and do not collect $200.00).

In your house, you IMMEDIATELY sit down at your desk and write a check for the FULL amount on your credit card statement. You seal the statement in the provided envelope and add a stamp. (You shred the three blank checks they send with the statement, you DO NOT want these laying around.)

You get back in your ride and take the sealed and stamped statement/full payment back to the post office and drop in the mail. You double check everything—stamp, return address, all that stuff–double check it.

You walk away knowing the credit card company works for you instead of the other way around. You know you have a free accountant on your side. The only payment the free accountant gets from you is YOU ARE NEVER, NO NOT EVER late on your part of the deal.

And you get a pittance back–1% (I currently have about $450.00 in my “cash back” column.

I you cannot do the above, then have NO cards.

Similarly when my wife got an offer to do her phd here in Sydney, I immediately supported this idea, from the viewpoint of it being a good investment (financially and personally), even though my own career might suffer temporarily and we would be chewing through our savings. This also turned out luckily, and after four months of minding our first kid, I got postdoc work here, my wife got her phd and then a postdoc, and now we both work in good jobs that we each enjoy and that are wel-paying, and with a little luck, we will both have tenure in a year’s time.

We have also tried to save up whenever we could, and this is yet another sort of investment, in delaying resource-use now in order to increase future possible usage. Yet another type of investment is buying stuff in bulk and on crash-sale, which can sometimes be a good idea even if you’re in debt.

In other words, I like the idea of investments, and they have worked out well (except for my stupid and not-to-be repeated forays into stocks ).

At the same time, however, I am very much against debt and have always strived hard to avoid it. My attitude has almost always been to save up and buy, rather than to spend and pay off, and I have for years wondered at people buying expensive houses on mortgages (that I put buying my apartment back then to young cluelessness – and a lot of luck in that it turned out well).

I was therefore quite surprised the other week to discover that saving up for a house is not always the cheapest strategy, nor the freest.
I had finally gotten my act together after all these years and spent 15min. writing a simple computer routine to calculate just how expensive it would be to save up X number of year while renting and then buy a house with the remaining mortgage to pay off.
It turns out that if you can pay off a full mortgage in a short amount of time (typically 6-7 years but dependant on the prices, income, savings rate etc.), then you will end up paying more in rent than in mortage interest.
Shocking! I’d expected the saving-method to be a clear winner in all but extreme cases. You might be bound for those 6-7 years but this lack of freedom would be offset by the freedom to live on your own terms, rather than potentially being kicked out by successive landlords. (Personally, if I were to buy a house, then I’d save up at least 25% even it were more expensive in the long run, just for financial insurance.)

Shows what’s possible…1 year of savings gives 19 additional years at current year’s living standards.

One way I kept my debt under control was to pay off one of the above (student loans) before taking on another one of the above (home mortgage).

I always paid cash for the cars I bought even if I had one of the other forms of big debt. And, of course, I never had any other types of personal debt such as credit cards.

In 1998, I paid off my mortgage which I first took in 1989 and refinanced in 1992 (saving me hundreds of dollars each month). Been totally debt-free ever since.

In 2008 I retired at age 45.

I just noticed that the header info “I have a written a book etc” mentions a feedburner link for the RSS feed but when looking at the page source the alternate tags lists http://earlyretirementextreme.com/feed. It appears the feedburner RSS feed contains all posts including reposts but the http://earlyretirementextreme.com/feed only contains new posts. Anyway, this is kinda confusing.

@Jacob – thanks for following up with a student loan post. That was helpful.

All that said, my underlying question is, is debt for a “true investment” really that bad? By true investment I would mean a plan for temporary “bondage”, but with a fully analyzed plan and map for not only payback but an assement of how the investment will actually INCREASE our ability to sustain our lives and give back, presented to someone else (or even a small group or family) for feedback, comment, and also accountability.

For example, Eden, have you actually assessed, using independent sources, what the likely long term outcome of your investment is likely to be, beyond the loan payback period? I read an article in the NY Times recently how people are being lured by culinary schools, with dreams of becoming chefs but at least the idea that they can always find work cooking. But these same students are being rudely awakened because the availability of chef or cooking jobs is not what they imagine and the earnings are pretty low. The schools don’t care, they just want their tuition. So the students are coming out with huge debts but are only able to earn low wages. Nobody held the students accountable to their financial fantasies.

Anyway, Jacob, I’m rambling! But you get the question. What about “true investment”? Thanks!