Is debt a deal breaker for you?


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D_Lion is online now D_Lion Post #61  October 11,2011, 3:05pm
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mitchell175 wrote :
D_Lion - You are right that a large revolving credit card debt may take a limited number of years to repay in full (in my sister's case, it was more than $30,000). Whether that's 10 years or 20 years or 50 years, if you stop adding any new charges, eventually, you will pay off that debt.

It's much less than that, and more like five years - that's my point.

If a person can make the current minimum payment (yes, this is "if" number one), and they continue to pay at least that amount in real dollars ("if" nnumber two), and have no additional setback ("if" number three), then any amount of debt will be retired, and in about half a decade.

The only way it will take ten years is if the person reduces their payment to correspond to the declining minimum. That's fine, but they shouldn't confuse that as meaning it takes decades to retire the debt.


mitchell175 wrote :
But, you are missing the huge emotional toll that owing money can take on a person. I realize that you don't operate on any kind of emotional plane, but most people do. Money is one of those things that will always be a concern. Either you feel that you don't have enough, or that you might lose what you have. Owing money is stressful, and simply knowing "Hey, I can be completely debt free in 26.5 years!" is really not much of a comfort.

Unless the expense is inflicted upon you - like the person with the medical bill, or high taxes to subsidize welfare people - the borrower also enjoyed the emotional pleasure of the consumption.

The person who elects a higher level of financial comfort by reducing or deferring consumption has an emotional toll too, in the form of a lower quality of life (and potentially severly so, if they delay buying a home or education), and in some cases may lose out entirely on options they might have had had they waited.

***

And in the case of debt incurred to acquire assets, the person should also train their mind to appreciate the value of the asset - be that depreciation (in the case of cars, boats), or appreciation (in the case of real estate.)
 
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mitchell175 is offline mitchell175 Post #62  October 11,2011, 5:08pm
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D_Lion wrote :
It's much less than that, and more like five years - that's my point.

If a person can make the current minimum payment (yes, this is "if" number one), and they continue to pay at least that amount in real dollars ("if" nnumber two), and have no additional setback ("if" number three), then any amount of debt will be retired, and in about half a decade.

The only way it will take ten years is if the person reduces their payment to correspond to the declining minimum. That's fine, but they shouldn't confuse that as meaning it takes decades to retire the debt.
I see what you are saying now - if my minimum payment is $100 and I pay down my debt, then my minimum payment will be $90... If I keep paying $100 anyway, then my debt will be reduced even faster.

However... remember that most people are not that disciplined when it comes to money. When their minimum payment goes from $100 to $90, they don't still pay $100, they pay $90. They figure they have "earned" $10 extra. (I'm not saying this makes logical economic sense for the long term, but you cannot deny that a lot of people think this way).

wrote :
Unless the expense is inflicted upon you - like the person with the medical bill, or high taxes to subsidize welfare people - the borrower also enjoyed the emotional pleasure of the consumption.

The person who elects a higher level of financial comfort by reducing or deferring consumption has an emotional toll too, in the form of a lower quality of life (and potentially severly so, if they delay buying a home or education), and in some cases may lose out entirely on options they might have had had they waited.
So, immediate gratification is always better than long term planning? Can't say I agree with that one... Besides, my "quality of life" is not going to improve significantly if I buy the really spiffy - but overpriced - pair of shoes just because I "want" them. Especially if I know they really don't go with anything that I own, and so the per-wearing cost is still too high to justify the instant gratification.

wrote :
And in the case of debt incurred to acquire assets, the person should also train their mind to appreciate the value of the asset - be that depreciation (in the case of cars, boats), or appreciation (in the case of real estate.)
Here, you're still talking about "assets" that will tend to appreciate over time. I'm talking about consumables, like clothes, shoes and other kinds of apparel that will go out of style and be recycled to the Salvation Army long before the items are even paid off on the credit card.
 
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Mike74 is offline Mike74 Post #63  October 11,2011, 5:28pm
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mitchell175 wrote :
However... remember that most people are not that disciplined when it comes to money. When their minimum payment goes from $100 to $90, they don't still pay $100, they pay $90. They figure they have "earned" $10 extra. (I'm not saying this makes logical economic sense for the long term, but you cannot deny that a lot of people think this way).
This is the key point: I would be concerned that someone who racked up significant credit card debt for frivolous purposes would not have the disciple to stop using the cards and continue with an aggressive debt reduction plan over the long term.

I agree with DL that debt incurred to obtain an asset is offset by the value of the asset. However, the market value of any asset, including intangible assets like education, can rise and fall over time. Although assets generally appreciate in the long term, they may lose value in the short term, leaving the owner more vulnerable to other financial shocks, like job loss, medical bills, or divorce. We've seen this phenomenon play out over the last several years with the decline in the housing market.
 
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D_Lion is online now D_Lion Post #64  October 11,2011, 5:52pm
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mitchell175 wrote :
So, immediate gratification is always better than long term planning? Can't say I agree with that one...

That's overstating my point.

I'm saying that if you want to say that emotional dread at debt is a dread, then emotional joy at having consumed must be acknowledged as well.

Lenders are logical, borrowers should be as well.

In the wise borrower, these intangibles will have balanced, for any marginal borrowing to have been choosen by a rational borrower.

***

My point, is that a lender has only economic variables to influence its decisions.

A borrower may have personal factors - such as taking a long vacation while they are still young, having a child while they are able instead of when they can afford it, etc.

These personal factors can rightly lead to making a questionable borrowing decision, in the analysis of a person not possessing the same factors.
 
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mitchell175 is offline mitchell175 Post #65  October 11,2011, 6:07pm
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D_Lion wrote :
Lenders are logical, borrowers should be as well.
"Should be". That right there is the key word.

wrote :
These personal factors can rightly lead to making a questionable borrowing decision, in the analysis of a person not possessing the same factors.
Exactly the point of this thread. "Is debt a deal breaker for you?" My answer remains: It depends. On lots of factors. Including, how rational and logical is the person about debt? Are they simply an "enjoy now, pay later" type of person, without any kind of forethought about long term goals? Mmmm... Not for me. That would be a dealbreaker.
 
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