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Money Rules for Life: Borrow Less Than You Can Afford

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Mary Hunt, an author famous for her book and newsletter “Debt-Proof Living,” is known for helping people get out of debt. But that doesn’t mean Hunt believes debt is necessarily bad. It’s all about having the right amount: Enough to build a decent credit rating, but not so much that it swamps your monthly finances.

“We could flat-out ban borrowing money in our lives,” Hunt writes in her latest book, “7 Money Rules for Life”, “but that would be like the proverbial throwing the baby out with the bathwater.”

Hunt’s seventh and last rule extends her well-known thriftiness to the world of credit. Hunt often advise people to buy less than they can afford, and the same rule applies to credit: Borrow less than you can afford, so that you have something in reserve in case of emergency.

Here’s an excerpt from chapter seven:

Given the number of people who lost their homes through foreclosure when the US housing market crashed, setting off the Great Recession, it would be easy to conclude that borrowing money to purchase a home is way too dangerous, fiscally foolish, and to be avoided.

We could take a similar stance on financing a car or taking student loans because automobiles depreciate and there are no guarantees of jobs for college grads.

We could flat-out ban borrowing money in our lives, but that would be like the proverbial throwing the baby out with the bathwater.

I am grateful for a home mortgage. Without it, my husband and I would not have had a prayer of owning our home. And I don’t believe that financing an automobile is evil or that all student debt is toxic. Rule 7 insures you have a safety net when borrowing money.

Borrowing money and the debt that creates should be taken on rarely, and then dealt with swiftly. Debt should be a means to an end. Borrowing money is a financial tool that improves your life if dealt with intelligently, not emotionally.

Rule 7: Borrow only what you know you can repay.

When I use the word “know,” I do not mean with absolute certainty beyond a reasonable doubt know. I mean to know as in having a reasonable certainty based on credible information. Another way to put it would be “borrow only what you have a reasonable certainty based upon credible information that you can repay,” which seems awkward. So let’s stick with “know” in this rule, knowing that we know what it means.

The only way that you can know with a reasonable level of certainty that you can pay off a debt is to have the means to do so in reserve. That goes for every type of borrowing, every kind of debt. This is so important, I am going to repeat it: the only safe way to borrow money is to have a means to pay off the debt in reserve.

Credit Card Debt

Credit card debt is flat-out toxic. If you cannot pay the entire balance every month before the due date, so that you are never paying interest, stop using the accounts. Give the cards to a trusted friend or relative who will hide them for you. It’s that serious!

If you are carrying toxic credit card debt now, determine that you will pay it off quickly (in chapter 13 I will show you how to do this quickly and effectively). There are few things you can do that will burn a hole through your discretionary income faster than paying double-digit interest each month for stuff you bought that you probably don’t even have any longer.

I want to show you just how toxic credit card debt can be. Let’s say that you are carrying a credit card revolving balance of $3,500, at an interest rate of 29.99 percent, and your minimum monthly payment is 4 percent of the outstanding balance. Even if you stop adding any new purchases to that account, it will take you 188 months (that’s 15.6 years!) to be rid of that debt. In that time, you will pay $5,429 in interest. Another way to look at it, $3,500 grows to $8,929 by the time you pay it off. That is the true cost of toxic credit card debt.

As horrific as the foregoing example is, it’s too kind for this reason: the typical person who carries this kind of credit card debt is not likely to go for 15.6 years without adding a single purchase. During that time, something will come up and the cardholder will slip just one more meal, another pair of shoes, or even a well-deserved vacation onto that account, turning it into a lifetime of toxicity.

Credit cards can be seductive with all of the rebates, cash back, and mileage points. The industry has done a great job at making us believe that carrying some toxic debt is not a problem. But it is. And it is very foolish to carry debt because you wanted to get the miles. Or to buy something on credit to get 2 percent cash back. It makes absolutely no financial sense to pay 29.99 percent on an item you can afford to buy outright because you wanted to get 2 percent cash back on the purchase price.

It takes financial intelligence and personal discipline to keep a credit card account active (see chapter 9) without allowing it to become a toxic situation. But millions of people do, and so can you. It requires discipline and a full understanding of how credit card accounts operate.

If you liked that, be sure to check out this excerpt from chapter six.

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