Wide Open Wallet

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Good debt?

Is there such a thing as good debt? I’ve never really liked that term, “good debt”.  I don’t think there is truly such a thing.  But I do think there is bad debt, and then less bad debt.  Two examples I can think of that could be listed in the “less bad debt” category are mortgages and student loans.  Both of those debts buy assets.  One tangible, a house, and one intangible, an education.

I wrote a post the other day about business credit.  I took a little heat for suggesting that we will take a loan to pay payroll if necessary.   (read that post here) This actually surprised me.  I know that a great deal of my readers are anti-debt but still, I wasn’t expecting that.   After all, I am buying an asset with my debt.  I’m buying an account receivable.

The comments against us using credit had two main points that I wanted to address.  One was that we should grow more slowly.  The problem is that we have an agreement with a national company to do the work in our area.  They have taken a chance on us and made us their first priority vendor.  They are our only customer.  It could be suicide to let our competitors back into the picture.  The second point was that we don’t know what our future sales will be.  This is true, but the payroll is based on past work, not future work.  Even if we close our doors the day after taking out the loan, we will still be able to pay off the loan when we get paid.   Yes, there is a risk of default.  But I feel this is a very very small risk.  This is a company we have experience with and know other people who have done work for this company and have been paid in a timely fashion.  Business is not without risk.  I truly believe that the risk/ reward ratio is well in our favor.

What if you a had family member that got laid off and is about to get their house foreclosed upon.  Lets say that they are willing to sell you the house for what they owe, which is half it’s market value.  Would you do it?   What if you had an agreement with someone to buy the house in 60 days for full market value?  Now would you do it?

That’s the situation that we are in.  Not only are we are also helping out family and friends who have been laid off by giving them a job, we also stand to make quite a bit of money.

So here is the question… Is there such a thing as good debt?  Is there ever a situation where it’s ok to take out a loan?  Or is all debt bad, no matter what the circumstances?

pic by: Kevin Dooley

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  • Debt reduction for 2008

    Ok, so I admit that debt reduction isn’t on the top of my list of things to do.  I mean, it IS, but not like a lot of bloggers.  While I think it’s very important, I don’t spend a lot of time thinking about it.  It’s basically on auto pilot, I pay my payments plus a set amount extra and that’s that.

    But even so it’s great to look back to see how much it’s gone down over the year.  So here we go…

    Total payments Amount Paid Off Interest
    House 12,990 4,503 8,487
    Van 5,544 4,413 1,131
    Backyard 1,758 1,758 0
    Car 3,144 2,635 509
    Totals 23,436 13,309 10,127

    I guess I’m happy with that.  Obviously I wish we didn’t have so much to pay towards debt, but I’m glad over half of our payments go towards principal.  It’s crazy that we sent an extra $1,950 towards the mortgage and we still only paid off $4,503.  Wow.  It’s sad how little of your payment goes towards the mortgage balance.  That’s why I force myself to pay extra.  I just can’t stand sending all that money and having nothing to show for it.

    Pic by Morning Glory

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  • July’s Debt

    Well, here we are again. I have July’s debt and last month’s interest earned. We paid $1,905 towards our debt and reduced the total by $1,149. Doing the math, we paid $756 in interest. Blah. But this brings our total debt to $175,550. I am looking forward to getting under $20,000 on the van though. Next month for sure! Here’s the breakdown…

    House 142,433
    Van 20,243
    Backyard 7,623
    Car 5,251
    175,550

    I finally got motivated and added the balances of the savings account to the spreadsheet. We have a total of $20,182 in savings and earned interest of $38.78 in June. A lot of our savings is earmarked. It’s not all emergency fund. But I suppose if an emergency really came it would all be available. I guess you could call it an emergency emergency fund. lol. But $1,800 is saved for Disneyland. We shouldn’t need that much though, but I’d rather have more than enough than run short. Then $3,400 is money we had saved to landscape the backyard but since the loan is at zero percent we figured we would earn interest on our money for as long as possible. Lastly, about $5,400 is in our cushion fund (to steal a term from Mrs. Micah) for when my husband doesn’t get overtime. Again, hopefully we don’t need this whole amount, but it’s there if we do.

    pic by: frankh

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  • June’s Debt

    Well, I have my debt balances for June. Yay. I love watching them go down, down, down. Even if it’s just a little bit. We made debt payments totaling $1,859 and the balances were reduced by $1,142. Which means that we paid $717 in interest. Which is $61 less than last month. So that’s good at least. Our total debt now equals $176,697.

    Here’s the break down…

    House 142,771
    Van 20,649
    Backyard 7,785
    Car 5,492
    176,697

    I was feeling pretty depressed about the debt situation yesterday. No particular reason really, just frustrated with how it doesn’t seem to go down. So I was looking at my spreadsheet and since January our total debt has gone down a total of $6,660. It means we are going to pay off well over $10,000 this year. It’s nice to see that it is going down, even if sometimes it doesn’t feel like it.

    Ok, enough about debt… Lets talk about savings!

    I earned $36.57 in interest. Which is about $2 less than last month. I’m assuming it’s a decrease in interest rates because the balances haven’t gone down. Hopefully soon those rates will be going back up. That would be nice to see.

    Pic by: frankh

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  • May’s debt

    First off, I realized I’ve been making a mistake in calculating our debt payments. I was including our total mortgage payment, not just the principle and interest. So that messed my numbers up, but I’m too lazy to go back and update my past posts. I’ll just start doing it right from now on.

    In May we made a total of $1,853 in debt payments and reduced our debt by $1,075 to $177,840. Which would mean we paid interest of $778. Which seems about right because we pay about $700 a month on our mortgage and about $70 a month in interest on our car loans.

    Here is the breakdown…

    House 143,108
    Van 21,051
    Backyard 7,950
    Car 5,731

    I also added a new section to my spreadsheet that keeps track of the interest I’ve earned. Which is pretty fun. I haven’t included our retirement accounts, I might someday but for right now it’s just our savings accounts. So in April we earned $38.66. Cool! It’s more than I was expecting to have made in one month.

     

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  • April’s Debt

    April’s numbers are in and I have to admit that this is my favorite part of the month. I get to figure out our total debt reduction for the month. Wohoo! And this is how I know I’m a total dork.

    We paid $2,049 in debt payments and reduced our debt by $1,256, which means we paid $793 in interest. That’s $27 less in interest than last month!

    It breaks down like this…

    House

    143,390.78

    Van

    21,445.19

    Backyard

    8,112.03

    Car

    5,967.30

    So this brings our total debt to $178,915.30. Finally broke into the $170’s. Yay! The most frustrating part of debt is how long it takes to come down. It would be more motivating to see results more than once a month.

    I’ve been thinking about how I would like to snowflake this debt but right now I need to snowflake for our bills. I’ve said before how we need to earn an extra $6,000 to make it through the rest of the year. So first I need to snowflake that money before I can start working on our debt. The good news is that my husband has been getting some overtime so that will help immensely.

     

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