#38 Use good debt wisely, get rid of bad debt completely.

Most people have some form of debt.  Credit card debt, student debt, mortgage debt, car loan, family loans, investment loans, payday loans, rotating lines of credit, and consolidation loans are probably the most common types of debt.  People typically use debt to buy something when they don't have the money for it at that given moment in time.  We as a society don't often save up for things before we buy them, but rather buy them and then pay back the loan over time... that's just the way most people do it these days, particularly younger people just starting out who have no savings to begin with.  The problem with debt is that if taken on for the wrong reasons, or if handled irresponsibly, it can make your life more difficult rather than easier.

But not all debt is bad.  We are quite comfortable taking on large amounts of debt but we only take on what we consider to be "good debt" and that brings us to defining good debt vs bad debt.  We use a fairly simple definition but it has some room for subjectivity.  Good Debt results in a better longer-term fiscal situation for our family as a whole.  Bad Debt results in a worse fiscal situation.

Another way of looking at it would be asking the question:  Does the cost of paying the interest plus the principle make up for it FINANCIALLY in the long run?

Here are my thoughts on what are good types of debt and what are bad.

Credit Card Debt - Bad Debt.  Interest rates are too high and most people use credit cards to buy things that depreciate over time.  If you don't pay your credit card off quickly, the interest will eat up a lot of your money.

Student Debt - Generally Good.  Assuming you are using the the associated education to make more money than you would without the education, then yes Student Debt can be Good.  Once you're done your education, I advise to pay off student debt quickly.  I would however challenge people taking "basket weaving" classes whether those types of diplomas/degrees are worthwhile for the money and interest that they are required to pay back, often for years and years. 

Mortgage Debt - Generally Good Debt.  It allows you to choose where you live and how long you live there by owning property.  Its debatable whether a home is an investment, but the benefit of being in control of where you live and knowing that rent wont be going up every year can help you budget your money more easily.

Family Loans - Generally Bad Debt.  Owing a family member may make sense in some cases, but I'm not a fan of owing family simply because its awkward and usually one side feels they're not getting the treatment they'd like. 

Investment Loans - Good Debt.  If you can make more money on the investment than you are paying for in interest costs, this is definitely good debt in my books.  We regularly use investment loans as part of our investment portfolio.

PayDay Loans - Definitely Bad Debt.  Essentially legal loan sharking. 

Rotating Lines of Credit - Depends on the usage, but I would bet most people are using it for consumer spending.  If you use it for investing purposes, then a Line of Credit can be good debt.

Car Loan - Bad Debt.  New Cars depreciate like crazy the first few years.  Buying a car may be a necessity, but we prefer to pay off car loans very quickly or don't have a loan at all.

Consolidation Loans - Bad Debt.  Usually the lesser of the evils of loans in that consolidation loans usually have lower interest rates than other high interest loans such as credit cards or some car loans. The downside is that this often still consumer debt, just at a different rate.  Pay it off.

Kim and I both had student loans in the 10s of thousands of dollars, which we paid off within a few years once I started working. At present, we have an investment loan and we will be buying a house next Spring which will mean we will have a mortgage again.   Both of these loan-types will help better our financial situation and so we are quite comfortable having them and generally not in a hurry to pay them down.  We have no other types of debt at the moment and we intend to keep it that way.  Whenever we've had other types of debt, we've work very hard to pay it down as soon as possible.  By only having debt that helps our financial situation and doesn't hurt it, it means we don't fuss over our debt as much as other people, and we know that by paying the debt off, we aren't merely pouring our money down the drain, or lining the pockets of others.  We obviously need to make sure that the amount of good debt we have remains at a manageable level that we can be expected to be able to cover with our monthly income.  That is where budgeting comes in.  

Rule #28 Pay No Bank Fees.

Nickel and Dime: verb. To drain or destroy bit by bit, especially financially

People complain about banks and their fees ad nauseam.  You know what I mean.. "The greedy banks are being greedy."  "I'm getting screwed by the banks in fees."  Blah blah blah.  But these folks do very little to change the fact that they're paying all these fees.... You know what I call these people?  Whiners.  Don't be a whiner.  If you don't like paying bank fees then stop paying bank fees.  

Here are some strategies we use to avoid paying any bank fees or make it so the benefits of membership outweigh the fees (as is the case in a Credit Union).

1. Use/Join a Credit Union.  Simple eh?  Well some people have been with the same bank forever and yet there are Credit Unions all over the place that you can join and get reduced rates on fees and quite often they offer profit sharing that returns some of the profits to members/shareholders.  We've been members/shareholders of a Credit Union for about 11 years and we've gotten back more in profit-sharing annually than we've ever paid out in fees.

2. Don't use Bank Machines that are not owned by your bank.  I bank at TD and I will always travel the extra distance to save on the transaction fees.  Never in a bazillion years should would I use a "While Label" machine.  White label machines are the worst! They can take a buck or two from each transaction and then YOUR bank will also charge you a buck or two on the other end.... So if you take out $20, you could pay $2-$4 in fees.  There is nothing like a 20% fee taken out with your withdrawal to erode your bank balance.  I occasionally get caught a couple times a year (usually in a pub) without any money and the bar will have a white machine instead of taking debit payments.  The pub is getting a cut of every transaction so they can squeeze you a bit more.  In this case I will pay with a credit card and then pay the bill off when I get home later that night.  Those Bank Machine fees are easy to avoid if you just make the effort.

3. Maintain the minimum balance to waive the monthly account fee.  As mentioned above I bank at TD. We have an Infinity Account with them that allows infinite TD bank machine transactions along with some other fancy perks all for the monthly fee of $14.95.  Thats about $180 a year.  They will waive the monthly fee if we maintain a balance of $3500 or more.  So that's exactly what we do.  To save $180 on a $3500 balance is about a 5% return on your money.  This is a guaranteed saving... much better than the crappy 1-2% you get on GICs these days... Before you start putting money into GIC and other pay-nothing "investments", why not play by the rules and reduce the amount of fees you're already paying.  Of course it takes some discipline to maintain that bank account at or above the right balance, but thats what managing your finances is all about... Discipline.

4. Use Pay As You Go Overdraft Protection instead of a monthly fee.  I used to pay a monthly fee of $2-$4 (the price rose over time) for the protection in case I wrote a cheque that I didn't have the money for.  Since we now maintain a balance of over $3500, we never use the overdraft anymore and if we do get ourselves in a situation where we are overdrawn, we pay a one-time fee of $5.  It's certainly a better deal than paying for something we're not using.  Add this $2-$4 we're saving on overdraft fees to the $15 we're saving from maintaining a $3500 balance and the savings are beginning to become material.

So there you have it.  Last month we paid absolutely nothing in bank fees so it definitely is possible to use a big bank and yet not pay any fees and it was actually pretty easy to do.  So while other people are moaning about paying their banks what are essentially voluntary fees, I'm financing an extra 12-pack of premium beer from the monthly savings.  Here's mud in your eye!

Rule #4 Never Carry a Credit Card Balance... Ever

"Money is just the poor man's credit card" - Marshall McLuhan.

This one is super easy. Nobody is going to say its a bad idea.... If you do think its a bad idea, you may need your head checked.   Carrying Credit Card Debt to the point where you start paying interest, especially when you have access to cheaper interest rates, is a no-no.  I just did a quick search online and the lowest rate I could find in Canada was about  a 10% annual interest rate.  The majority of the standard credit cards, including the ones we have, charge about 18%.  And if you get a Sears, Canadian Tire, Home Depot credit card, or any other Non Visa or Mastercard, you end up paying 22-28%.  But Ryan, my monthly payment is so low, why should I be fussed about paying it off?  Because its two to five times the interest rate you could be paying if you just got a regular line of credit at 5-7% and moved the balance over.  Or better yet, save your money first and then buy it without having to borrow.  We generally never pay interest on something that depreciates in value (another rule I will write about later) so we almost never carry a balance on any of our credit vehicles.  We view it more as emergency credit.

Okay okay, some people won't save, or want to make purchases before they have the money.  Lets assume you do decide to borrow money to buy something on a credit card and let it ride from month to month. What is the comparison on the amount of interest you pay? Lets say you bought yourself a washer and dryer and it cost $1000, or maybe a hot tub for $5000, or how about a motorcycle for $10000.  Here's what you'd pay in monthly interest for an 18% credit card vs a 6% Line of Credit:

Quite the difference. Remember this is interest... the first 15, 75 or 150 bucks you pay each month on that credit card just goes to servicing the interest...As opposed to the Line of Credit amounts that are one third the credit card rates.  If this isn't a no-brainer I don't know what is.  Use a credit card to buy stuff, and then each month flip the complete balance over to a Line of Credit or better yet pay it off. Easy Peasy.  Don't you feel like a dumb-ass now for buying that motorcycle on credit card and NOT moving the balance over to your LOC?  If you ask me, paying that kind of interest, for consumer items that are worthless within a few years, is the beginning of the death spiral for your finances.

A note about introductory incentives... I once got a card from Sears just so I could get a smokin' discount on some patio furniture. Once I got the bill I paid off the balance and then canceled the card... That card had a 28.8% interest rate.  I kept getting solicitations for opening another card with Sears for years after that... I was in the vortex of their mailing and phone list just for signing up that one time... and I like my privacy... so now I wont even get a card for one of their promos.  They are just looking for a way to rope you into that mega-interest rate.

We use our credits card quite regularly for their convenience - mostly so that we don't have to bring money with us for bigger purchases when out and about, but we always pay them off within a week of making the purchase so that we are in the grace period where no interest is tacked on to the balance... This grace period is something like 21 days but there is nothing stopping the credit card companies from changing that, OR more likely if its not paid off right away I would forget about it and eventually get charged.

In the last 10 years, we have used our credit cards every month, but have not paid 1 red cent in interest on those cards.  We never ever leave a balance on them.  Ever.