Financial Freak Show

I’m not big fan of owing money to anybody. I really began to realize this when I began paying my debts off. I noticed that after I paid off a debt I felt all nice and fuzzy inside but when I acquired a debt I didn’t feel all nice and fuzzy inside. After hearing the proverb “The borrower is the slave to the lender” then realizing I had just spent the last two weeks working only to send it away to pay back some of what I owed – I was working for someone else and I don’t think they were paying me! I quickly came to the realization that, as I said above, I’m not a big fan of owing money to anybody.   

I think for many reasons debt can often do more harm than good, especially over the long term. Not just financial damage but emotional, relational, and sometime physical damage. Debt is not always a bad thing to have and in some cases it can work out. Though in my opinion for a lot of people and a lot of  situations it’s very often either dumb or unnecessary. In Ron Blue’s book The Debt Squeeze he addresses when he feels it is okay to borrow money and carry the debt. He lays this out in four simple rules that I’ll summarize for you:

Rule 1: Common Sense; this rule is pretty straight forward. You need to seriously consider what this debt will do to/for your life. Will the payments stress you family, your business, yourself? Are you making a mistake at some level by bringing this into your life? Will this be a blessing now and in the future of are you signing up for another future financial disaster and just justifying it somehow? Does this purchase fit well into your financial plan and future goals?

Rule 2: A Guaranteed way to repay; this is the rule that caught my attention (it’s a good one so stay with me!)  Can you guarantee repayment for this debt? I’m not talking about promising all of next year’s paychecks, I’m talking about a guaranteed way to repay. What this means to me is not borrowing money towards things that cannot stand good for themselves. Real estate is a great example. A mortgage is secured against the value of the property itself – assuming you had a proper down payment or solid equity when purchased. If you can’t make the payments in theory the value of the asset would stand good for the debt liability. Purchasing a business may also fall into this category assuming you are buying true assets and not just a process or name.  

A car (especially new) almost never falls into the guaranteed repayment category. This is due to the value of vehicles dropping too fast. Cars almost never increase in value (well not the kind you drive anyway). So unless you are borrowing $1,000 on a $12,000 car I doubt a financed vehicle can truly stand good for the purchase on its own. I know this sucks but how many people do you know with a financed car can sell the vehicle and clear the debt with the proceeds from the day they drive it home and through the life of the loan? That’s not a guaranteed way to repay.

Sometimes you can pledge the value of one asset as collateral for another financed asset. If you have the ability to take that route then you may have fulfilled Rule #2 and if you’re okay with that then I’m okay with that!

Obviously there are many variables to consider for Rule #2 but this part of the debt decision deserves some serious consideration and some honest answers to some tricky “what if” questions. Can you remove this debt burden from your life if necessary without being kicked in your financial groin? If you can’t answer yes to that question stop right here and reconsider.

Rule 3: Peace of heart and mind; Rule 3 is a bit more spiritual than the others in my opinion. How is this debt going to make you feel? Are you going to beat yourself up over the next five years for making a quick decision? Are you going to unintentionally going to forgo some big goal in the future for a pick-me-up right now? Will you lock yourself in to a job you don’t really want because you strapped yourself with a house payment you can barely cover? Will you put off your saving for the kiddo’s college to drive a new truck? Will you be able to sleep at night after you sign on the line?

Rule 4: Unity; This rule is easy to explain. This rule relates to married folks or people partnering with someone else in one way or another. Basically what is being said here is if you’re going to be in debt you need to be on the same page with your spouse or partners on what is happening and what is going to happen in the future. That’s really it. The two of you need to have a solid agreement and commitment to carry the burden together as one.

So assuming you can come to terms on all of these four rules a particular debt may not be such a bad thing in your life. That said, if for any reason you question don’t have a solid honest answer for any of these rules you may be buying a ticket for a ride you didn’t really plan on taking. Financial decisions should be very deliberate and well thought out no matter what dollar amount is involved. Slow down, take a little time and consider all your options then move forward deliberately and cautiously – every time

Debt is not always a bad thing to have. Though for most people and most situations it is either dumb or unnecessary. In Ron Blue’s book The Debt Squeeze he addresses when he feels it is okay to borrow money and carry the debt. He lays this out in four simple rules that I’ll summarize for you:

Rule 1: Common Sense; this rule is pretty straight forward. You need to seriously consider what this debt will do to/for your life. Will the payments stress you family, your business, yourself? Are you making a mistake at some level by bringing this into your life? Will this be a blessing now and in the future of are you signing up for another future financial disaster and just justifying it somehow? Does this purchase fit well into your financial plan and future goals?

Rule 2: A Guaranteed way to repay; this is the rule that caught my attention (it’s a good one so stay with me!)  Can you guarantee repayment for this debt? I’m not talking about promising all of next year’s paychecks, I’m talking about a guaranteed way to repay. What this means to me is not borrowing money towards things that cannot stand good for themselves. Real estate is a great example. A mortgage is secured against the value of the property itself – assuming you had a proper down payment or solid equity when purchased. If you can’t make the payments in theory the value of the asset would stand good for the debt liability. Purchasing a business may also fall into this category assuming you are buying true assets and not just a process or name.  

A car (especially new) almost never falls into the guaranteed repayment category. This is due to the value of vehicles dropping too fast. Cars almost never increase in value (well not the kind you drive anyway). So unless you are borrowing $1,000 on a $12,000 car I doubt a financed vehicle can truly stand good for the purchase on its own. I know this sucks but how many people do you know with a financed car can sell the vehicle and clear the debt with the proceeds from the day they drive it home and through the life of the loan? That’s not a guaranteed way to repay.

Sometimes you can pledge the value of one asset as collateral for another financed asset. If you have the ability to take that route then you may have fulfilled Rule #2 and if you’re okay with that then I’m okay with that!

Obviously there are many variables to consider for Rule #2 but this part of the debt decision deserves some serious consideration and some honest answers to some tricky “what if” questions. Can you remove this debt burden from your life if necessary without being kicked in your financial groin? If you can’t answer yes to that question stop right here and reconsider.

Rule 3: Peace of heart and mind; Rule 3 is a bit more spiritual than the others in my opinion. How is this debt going to make you feel? Are you going to beat yourself up over the next five years for making a quick decision? Are you going to unintentionally going to forgo some big goal in the future for a pick-me-up right now? Will you lock yourself in to a job you don’t really want because you strapped yourself with a house payment you can barely cover? Will you put off your saving for the kiddo’s college to drive a new truck? Will you be able to sleep at night after you sign on the line?

Rule 4: Unity; This rule is easy to explain. This rule relates to married folks or people partnering with someone else in one way or another. Basically what is being said here is if you’re going to be in debt you need to be on the same page with your spouse or partners on what is happening and what is going to happen in the future. That’s really it. The two of you need to have a solid agreement and commitment to carry the burden together as one.

So assuming you can come to terms on these four rules this debt may not be such a bad thing in your life. That said, if for any reason you question don’t have a solid honest answer for any of these rules you may be buying a ticket for a ride you didn’t really plan on taking. Financial decisions should be very deliberate and well thought out no matter what dollar amount is involved. Slow down, take a little time and consider all your options then move forward deliberately and cautiously – every time   

Do you agree with these 4 rules? Have you taken on debt without considering one of these principles? How’d that work out for you? Please share.

Those of you that have followed me may be familiar with one of my personal goals. A zero credit score (let me clarify I said a zero credit score…not a low credit score). I want to take a few minutes to explain myself on this one.

To many people the idea of a zero score this sounds like financial suicide. But for those that subscribe to the debt free FinancialFreak way of handling your finances you see the bigger picture beyond the FICO score, and can also see well beyond the “pay off your debts” talk into a more prosperous future where you stack up money instead of stack up bills. Again let me clarify I said a zero score not a low score. Though they sound similar these are two completely different things. A low score shows that you’ve been financially irresponsible (that’s not good a good thing). A zero credit score shows that you do not use debt and in turn do not have to repay those debts (that is a good thing). The credit scoring system is used to calculate the likelihood of a borrower paying back what they borrow, sounds simple enough to me. Credit scores are based on many things amount of debt, debt to income, number of outstanding debts, payment history, types of credit, available credit, blah, blah, and blah. Simply put the score is a number used to represent your borrowing history and your payment history combined with a dash of “what if” representing the near future.

First off let me start by saying the credit scoring system, in my opinion, is greatly flawed and very subjective in almost every instance it’s used. The biggest issue I have is that it does not take into account one of the most basic thing needed to properly repay outstanding debts – the amount of money  you have in your possession (assets) and how much money you have coming in. Now to me the first things I think of if when I make a loan would be “does this dude have a job and how much does he make?” If the answer to that question is yes and more than enough then we can go in to the person’s past repayment behavior.

To prove my point read these quotes from the myfico.comexplanation of what the credit score ignores – remember these are quotes from their web page

FICO ignores your Salary, occupation, title, employer, date employed or employment history

And another:

Any information not proven to be predictive of future credit performance

So according to FICO your “Salary, occupation, title, employer, date employed or employment” are not “predictive of future credit performance” – No wonder our lending institutions are falling faster than Dick Cheney’s hunting partner! And to think most people are making major financial decisions based on the effect it may have on this scoring system. I’m sorry, but I think “Salary, occupation, title, employer, date employed or employment history” are key factors in someone’s ability to repay money I lend them. Honestly I highly doubt they believe your income and assets are not proper indicators of your worthiness. The truth is they have no easy way of acquiring and selling this information legally.

After doing quite bit of research I have decided that there is very little need for a high credit score in my life. True, the last time I checked my credit score it was very high. This was due to the fact that I carried a good amount of various debts for many, many, years and never missed a payment The issue I ran into was that to better pay my debts, and someday create some wealth (hopefully), I had to eliminate the debts that were supporting my high credit score and eliminate them permanently. So the effect this has on my credit score is the more money I have (because I’m not supporting monthly debt payments) the lower my score will fall. So I figure if that’s the case lets shoot for ZERO! I know that may sounds crazy but unless I plan to borrow money often and repay it on regular basis there’s really little benefit in working to support this score.

So unless you plan to borrow and payback money again and again and again why would you base financial decisions on supporting your credit score? Remember these are companies that believe “Salary, occupation, title, employer, date employed or employment” is not “predictive of future credit performance.” I think I’m going to work on getting money and keeping money not work on borrowing money and paying back money.  Oh, and I guess this also means at some point I’ll have a paid for house too, and to that I say “how bitchin’ would that be!”

For more on this topic my post Issues with a Zero Credit Score I discuss some of the potential setbacks I may face with after completeing this goal

So how do you feel about the credit scoring system and your credit score in particular? How do you plan to manage you credit score in the future and why?  - go ahead call me a FinancialFreak, its okay…I can take it