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Yes, with the caveat that only past income can be known, future income is uncertain. The risk can be minimized by considering how stable your field is and how likely you could find equal employment elsewhere should something happen to your job.
I certainly would not advise oil workers in North Dakota to buy the most house they can qualify for. Once the oil is gone they are headed straight to foreclosure.
OTOH, most white collar workers with advanced degrees have much more stable income.
Right. It's lovely that one of the quotes is from someone that has always had enough income to pay his debts but many if not most Americans will face an income crisis at some point and expensive cars and houses aren't the easiest to just dump onto the market in a crunch.
Boils down to risk tolerance and personal philosophy.
Until fairly recently, I was usually way leveraged. Now I'm cash basis on everything except real estate, where I owe about half the value of a pair of homes. No way will I pay extra on 3.8% mortgages when I can buy great investments with higher dividends that tend to grow over time. But apart from that, don't want the debt.
I think there's a huge difference between buying more than you need (the Range Rover/Audi) because you can borrow the money and going without something you're going to purchase anyway because you don't want to borrow(riding a bike 20 miles to work because you can't pay for the car in cash).
There's opportunity cost to consider, as well. Let's say you're planning to buy a used car. You've got a good income but no cash savings beyond your emergency fund so you adjust your budget to save $833 a month so you can pay cash for a $10,000 car a year from now.
But then you find out that your friend, who's going through a divorce, has a car that fits your needs perfectly that he'll sell for $6,000 because he needs cash fast. At 8% (maybe he could do better, but it's a small, short-term loan so the rates will be higher than normal) he would pay just over $200 spread out over the course of a year to borrow the money in order to save $4,000 a year from now. That seems like a pretty good use of debt to me, and possibly even better if you already have a car that you will be selling that's worth more now than it will be a year from now. Not to mention the fact that you will have an additional $300 a month available in the budget.
There's opportunity cost to consider, as well. Let's say you're planning to buy a used car. You've got a good income but no cash savings beyond your emergency fund so you adjust your budget to save $833 a month so you can pay cash for a $10,000 car a year from now.
But then you find out that your friend, who's going through a divorce, has a car that fits your needs perfectly that he'll sell for $6,000 because he needs cash fast. At 8% (maybe he could do better, but it's a small, short-term loan so the rates will be higher than normal) he would pay just over $200 spread out over the course of a year to borrow the money in order to save $4,000 a year from now. That seems like a pretty good use of debt to me, and possibly even better if you already have a car that you will be selling that's worth more now than it will be a year from now. Not to mention the fact that you will have an additional $300 a month available in the budget.
Although in Jeo123's example you'd not have extra money, quite the opposite. A car is more expensive to own than a bike, barring extreme cases.
Of course I think the best answer is move close to work and rent a room while saving the cash, but if you are married or have a family that may not be practical and biking can be impractical in hot weather.
If I had paid more in points I could have, but I went 3.625%
Quote:
Originally Posted by mizzourah2006
I got 3.375%.
3.625 here (Jeo and I tied! I don't think I paid more points either). Only Mizzourah beats the 3.5%, but the point is, it's really not unheard of.
I am consumer debt free though. All I have is the mortgage. Although after I get my emergency fund where I want it, the mortgage is next. I plan on paying extra on the mortgage an paying it off in half the time (make payments on my 30-year mortgage like it was a 15-year mortgage). Should be easy, it's just a few hundred dollars more a month. I save more in my emergency fund per month than I would need to pay off the mortgage early (I could pay the mortgage early and still save a few extra hundred a month).
Although in Jeo123's example you'd not have extra money, quite the opposite. A car is more expensive to own than a bike, barring extreme cases.
Fair enough, my point was really based on a subject that already owned or used a car and was looking ahead to replacing it, but I didn't make that perfectly clear.
Buying now might still result in savings vs. riding a bike for a year, though, depending on the subject's lifestyle. You'd have to weight the cost of ownership (fuel, R&M, insurance, parking fees if appicable) vs. cost of non-ownership (purchase and maintenance of a bike, public trans fares in bad weather, delivery charges, rental fees for trips out of town).
And remember, I'm talking about a significant discount buying now rather than a year from now, not buying now or a year from now at or close to the same price.
I don't mind debt as long as the effective interest rate is below the long-term after-tax returns of relatively conservative investments. I have debt: a mortgage and a 0% credit card balance transfer. The latter I have the funds to pay off anytime I want although it'll start charging interest in a year.
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