Asking the Wrong Questions

I guess this is a pretty appropriate post for Black Friday, the official beginning of the Christmas shopping season. Anytime you find yourself asking, “Can we afford the payments?” you are asking the wrong question. I mean to apply this statement not only to credit cards, car loans, and mortgage payments but also to things like monthly cell phone bills and cable TV.

When you find something that tempts you to enter into a long term commitment to spend your money on a consumable, like cell phone service or become a victim of the power of compound interest remember what Solomon had to say on the subject, “The rich ruleth over the poor, and the borrower is servant to the lender.” You don’t believe me, just ask the Greeks.

Once you have made such a commitment, you are working some portion of your life to bring profits to someone else. Is that what you really want? What if instead of paying $130 a month or more on premium cell phone service you can find a way to live with a more basic $30 a month plan? What if you invested that additional $100 a month in Verizon (VZ)? It is currently paying a 5.5% dividend. In 20 years that would add up $43,563 even if Verizon stock didn’t increase in value by one cent or ever raise its dividend, a very unlikely scenario. Change the way you think. Start collecting things that pay you to own them instead of bills.

When buying a car, unless you are paying cash, ask yourself, “Can I get by with something cheaper?” If you have diligently saved for a luxury, like a new car, go ahead and reward yourself. You deserve it. Otherwise, look for a way to avoid or minimize those monthly car payments.

Even with a house, don’t ask if we can afford the mortgage. Instead, let the primary bread winner or the spouse with the most secure income, ask, “Can I afford this mortgage?” Given the world’s current financial problems, there is no guarantee that neither spouse will lose a job. Children, of course, greatly complicate the one income or two income decision. Finally, Zillow is reporting nearly 30% of U.S. homes are currently underwater. That means, the owner owes more to the bank that the value of the home. If he sells, he must make up the difference in cash.

If I recommend paying cash for cars and buying a house with payments of less than 30% of the primary bread winner’s income, guess what I have to say about going into debt to finance Christmas presents?