Them's the basics.
Andy Paterson writes: Love the show. Love the no bull, straight shooting approach.
My question: I am very fortunate in that my company has just paid out a nice bonus. I stand to get about $7,000 (net). Currently my wife and I rent a townhouse (960/mo heated). We have three teens and we'd love to get back in the real estate market using the 7K as part of a down payment.
I'm concerned that we still have about 15K in credit line debt. We can easily make the payments - our monthly take home income is about $4,200. We are looking at a home that's about $225,000. With home prices and interest rates down, I'm afraid we might not get a better chance. Should we whack down the debt or maintain our payments and go for the house?
Gail Vaz-Oxlade: Andy, gawd, what a tough question. In any other market my answer would be an absolute 'PAY DOWN THE DEBT'. But you're right about the current market. However, I'm still loath to tell you to move into home ownership when you're walking around with debt.
You say that you can easily make your payments, but if you have enough money to live on why are you going into debt on your credit cards? Hmmm. What to do...what to do... If it were my money, I'd whack it against the debt and then bust my butt to rebuild it fast (extra jobs, selling stuff, cutting costs, and you won't have the debt repayment any more either, right?) for the homeownership goal. Good luck.
Sarah and Tim write from Mississauga: Hi Gail, Til Debt is required viewing in our home. Both my 11 and 15 year olds will even watch reruns ;) We're debt free and loving life!
Question: What do you think of the US strategy to spend their way out of the current economic downturn? What do you think of our government's strategy by comparison?
Gail Vaz-Oxlade: Sarah and Tim -- Does our government have a strategy? Hmmm. As for the U.S. focus on spending it's way out of a recession, it was spending that got us into the mess they're in. Regardless of what The Spurts are saying about what happened it boils down to a very simple thing: people were spending more money than they made, they were saving nothing, and they had used more credit than they could ever afford to repay. Even as the U.S. slid into the hole at the end of last year, the pundits were saying, "buy, buy, buy."
The only way for us to have a financially sound foundation as an economy or as individuals is to balance what we spend with what we make, and create real wealth - not that stuff that can disappear into the ether with the flip of a switch. I've been saying for a long time that "equity" is just another word for "borrowing potential", and I'm quite tired of being told I'm richer than I think. We're not.
We're in deep doo doo and until we come to the realization that the only way to be safe is to have enough money saved to give us some options, we're just going to be rationalizing our Desire to Acquire. I do believe that when the crap hits the fan, as it has now, it is the government's job to spend the money it hasn't been spending on infrastructure (yes, it's time to fix what's broken) to keep employment levels at the reasonable level so people can earn money to buy food.
And I do believe that the rapacious interest rates lenders have been using to buoy up profits should be tempered with the desire to help people turn their personal situations around. The fact that lenders can borrow money at 0.5% but are lending it to qualified borrowers at 16% is ridiculous! I can't believe that the pay-advance loan industry is still getting away with the outrageous interest+fees crap it's been pulling for so long. That being said, individuals have a BIG responsibility for keeping their financial house in order. No one makes a body go out and buy a big-screen TV, and while a vacation is often described as a "need", it is not. So we're going to have to learn to live within our means.
Cecilia writes: First, I would like to thank you for your words of wisdom and guidance in the world of money management! How I wish I had paid attention earlier...sadly I am a late bloomer!