You Should Care About Having Debt

The Suze Orman column in the July 2008 issue has one stand-out question:  What’s so wrong with having debt?

Suze goes off.  It’s fantastic!  The writer has $20,000 in credit card debt, owes $165,000 on a first mortgage, has an unspecified home equity loan, and car payments.  She says if it weren’t for debt, they wouldn’t own their own home, etc.  Then they’ve got family memberships to a bunch of places:  Disneyland, a water park, museums, and the YMCA.  “I don’t mind that we’re overextending ourselves because I feel these things are important.  We may live paycheck to paycheck, but we’re happy,” she writes.

Suze sets this woman straight:  “First of all, you don’t own a thing; your lenders do.”  I think people forget this part of “owning” a home.  You don’t own it until you’ve paid off the mortgage.  One friend of mine said she just thought of it as paying rent to the bank instead of to a landlord.  And Suze mentions that if you don’t pay, you can lose it all.

Plus, the writer didn’t allude to any savings, so there doesn’t seem to be a cushion in case of unemployment or illness.  She needs to have that six-month rainy day fund to help out in cases like these, so cut back on the spending (especially those memberships), and start saving.

Personally, I was a bit boggled at all the memberships.  How can they go to all of these places?  A long time ago, I read somewhere that it was a good strategy to get a family membership to one museum for a year.  You go back to that museum a few times, and you don’t have to worry about covering the entire place in one trip.  Spend a couple hours there and see one or two exhibits, then go home before everyone gets crabby.  The next year you choose a different museum and do the same thing.  I don’t have a family, but I thought that was a really good solution, if you like going to museums a lot.

The sidebar in this column explains good debt–”money you borrow to purchase an asset, such as a home you can afford” (I’m noting that last phrase….at some point I’ll get to the issues from during the housing boom, and I’m curious to see what she says back then) or a student loan.  Bad debt is borrowed money for something that depreciates, like a car, or for financing indulgences you couldn’t normally afford.  You should try to have zero bad debt.  Interestingly, her advice for car buying is to spend only what you can pay off in three years.  Otherwise, you’re stretching yourself a little too thin in the pocketbook.