Stay Out of Debt Unless Absolutely Necessary

1)Stay out of debt unless absolutely necessary (four exceptions)

a)Just about no one can pay cash for a house
b)Medical bills come whether you have money or not
c)Borrowing for school (with and only with a goal) is OK. Scholarships and work study grants are better.
d)Starting a new business or expanding an existing business. Keep that cash flow positive

I haven’t written a good rant about debt for a while. I think it is time to revisit that subject. Quite a few years ago I wrote a list of ten basic financial rules for young couples. I wrote this list before “all this” happened in the past 19 or 20 months. My number one rule, stay out of debt unless absolutely necessary, remains unchanged. However, some of the exceptions are probably in need of a closer examination.

Right now, depending on your location, it might not be a good time to take on debt in order to buy a house. In many areas, the cost to rent has dropped below the cost to own. Housing prices, again depending on the area, may be close to a bottom, but in some areas they are still dropping. Homeowners who need to sell into such a situation due to loss of a job or transfer to another area of the country are finding themselves underwater, that is to say they owe more than the house is worth and have to come up with cash to cover that balance at the time of sale. In many cases that is impossible and they must decide between mailing the bank a jingle letter, wrecking their credit, and in some states opening themselves to law suits or toughing it out in an area with no jobs and hoping for the best before their savings are exhausted. One of my neighbors was transferred to another area. He could not sell his home, so he rented it out for less than his mortgage payment. Unfortunately, a few months later he lost his job. He was fortunate enough to arrange a short sale with his bank. He managed to limit his losses. The financial loss and the damage to his credit rating will take years to repair—once he finds a new job.

One of the new things I have discovered while writing this blog is just how dangerous educational loans can be to the future of our young adults. Borrowing for school is not OK, unless you are pretty certain a job waits for you upon graduation. With 10% unemployment, guaranteed jobs are few and far between. They seem to be pretty well limited to health care and certain technical fields. If you are working towards a degree in Chemical Engineering or looking for a B.S.R.N, more power to you. Otherwise think twice before taking on a student loan. Not even bankruptcy provides a remedy to this problem. Even without a job, even with a decree of bankruptcy, those student loans remain on the books.

Greece is facing a major financial crisis caused by debt. Portugal, Spain, and even the United Kingdom are facing lower bond ratings. Debt is still sending tremors through the world’s financial system. If a second destructive wave whips through the market for government debt, much like the first wave that took down some of the world’s largest banks and brokerage houses, experts believe it will be triggered by default in some small subprime economy, like Greece. Remember, a relatively small number of subprime real estate loans nearly froze the credit markets of the entire world.

Experts predict that within two years the U.S. deficit will exceed 100% of the Gross Domestic Product. 90% is frequently considered a tipping point. Beyond 90% an increase in debt leads to a decrease in GDP, creating a vicious cycle from which there is often no escape.

Some of the world’s wealthiest and most productive economies are facing similar dilemmas. The Japanese bubble economy of 1986 to 1991 resulted in a deflationary spiral. The government poured billions into “zombie businesses” and make work projects in order to keep their economy from collapse. Although this resulted in what the Japanese term, “the lost decade,” their economy did avoid the complete destruction of a major depression. Now there is a price to pay. The Japanese are saddled with enormous debts and an aging population. The birth rate in Japan has dropped below replacement levels. Unlike, the United States and Western Europe, Japan has protected her borders from illegal immigration. The result, fewer tax paying workers must support this debt and an ever growing number of elderly citizens drawing pensions and medical benefits.

Managers of state pension funds are looking to juice their return on investment with borrowed funds. Recently the Wisconsin state pension fund announced the will be able to borrow about up to 120% by 2012. Many financial experts, writing in a variety of publications, find the prospect of our state governments gambling on the future with borrowed money a truly scary scenario. An article in Smart Money magazine, observed, “To properly position pension funds for a variety of economic conditions while achieving the rate of return assumed for actuarial purposes, fund managers would need to invest at least 200% of assets.”

Richard Young adds that in such a situation, “Losing 50% wipes out the entire pension plan. That could never happen, right?”

I think it is time to remind ourselves that God considered the ability to lend money part of the blessing and debt part of the curse. When you find the time, read the entire chapter.

Deuteronomy 28

[1] And it shall come to pass, if thou shalt hearken diligently unto the voice of the LORD thy God, to observe and to do all his commandments which I command thee this day, that the LORD thy God will set thee on high above all nations of the earth:
[2] And all these blessings shall come on thee, and overtake thee, if thou shalt hearken unto the voice of the LORD thy God.

[11] And the LORD shall make thee plenteous in goods, in the fruit of thy body, and in the fruit of thy cattle, and in the fruit of thy ground, in the land which the LORD sware unto thy fathers to give thee.
[12] The LORD shall open unto thee his good treasure, the heaven to give the rain unto thy land in his season, and to bless all the work of thine hand: and thou shalt lend unto many nations, and thou shalt not borrow.

[15] But it shall come to pass, if thou wilt not hearken unto the voice of the LORD thy God, to observe to do all his commandments and his statutes which I command thee this day; that all these curses shall come upon thee, and overtake thee:

[43] The stranger that is within thee shall get up above thee very high; and thou shalt come down very low.
[44] He shall lend to thee, and thou shalt not lend to him: he shall be the head, and thou shalt be the tail.