Personal Finance Advice via Seth Godin...

Straight forward, simple take on debt. Well put.

If I could only share one piece of personal finance advice to grads or to just about anyone, it would be this:
Only borrow money to pay for things that increase in value.

It's a short list: your business, your house and your education, mostly. Stocks if you're smarter than me. That's pretty much it.

If you have credit card debt, you're in big trouble. Your bank account has a huge leak in it, and it's getting worse. Hence the urgency.

If you have credit card debt, that means that every time you spend money (even cash), you're borrowing money to do so. And so, if you're going out to dinner or buying a new pair of shoes, you've just broken the single most important rule of personal finance. You're spending borrowed money on stuff that is decreasing in value.

This is an emergency. It's an emergency because every single day you wait, the problem gets worse. A lot worse.

My suggestion: Go to defcon 1, and do it immediately. Shift gears to live well below your means. That means:
No restaurants
No clothes shopping
No cable TV bill
No Starbucks

It means:
Take in a tenant in your spare bedroom
Carpool to work
Skip vacation this year

Eat brown rice and beans every night for dinner. Act like you have virtually no income.

The result? You'll save $5,000 to $20,000 a year. Send all of it to the credit card company. Do this until you're debt free, the faster the better.

There. Now you're rich. Now you get interest on your savings instead of paying the bank. Twenty years from now, this emergency action will translate into perhaps a million dollars in the bank, depending on how much you earn and how serious you are.

You can thank me then.

(found via fatwallet.com)

Comments...

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1. I realized that instead of just paying off my credit card debt exclusively, I'm going to do some money toward stocks and some money toward credit card debt, instead of just doing all of my money toward debt. That way, if my investments beat my relatively low interest credit cards (like 9% apr) then it's a net profit for my long term money (if my money beats 9% a year, which I'd be shocked if it didn't.) Good post though, and i'm glad more than one person in our peer group is worrying about the cash money.

6:10PM on Jun 14th 2008 by Randall

2. 10% may be a bit steep unless you're 100% stock. Even then, that's over a 30 year period assuming the market we've enjoy over the last century continues.

Using data since 1926, a stock/bond allocation of 80/20 can "expect" 9.7% yearly return over a long period of time.

If your debt is high, and is more than say 7 or 8%/year, probably best to pay it off as quickly as possible :) (tax considerations aside, aka mortgages/etc)

1:57PM on Jun 15th 2008 by Alex Rudloff

3. Yay! You're rich and you eat beans and have a boring-ass life!

Fantastic advice except that I bought one of those recommended things and it went down in value. Seth Godin doesn't live in Michigan apparently.

11:42AM on Jun 18th 2008 by Mike

4. I am a former pro athlete and former financial advisor. Which really doesn't mean crap. I was still broke. Lucky 13 months ago I was heading out the door because my financial debt had pushed my wife to the limits. She didn't want to work through the mess that we had gotten into. She just wanted out. So she took the high road and I took the low. I started a total makeover of my life and debt. Emergency fund of $1000.00 came first. Then I began to take on the credit cards of over 12,000. I took one trip, which I paid cash for. And that was it. I put my nose to the grind stone and was able to cut my expenses and pay of all but $800.00 on my last card. I was paying over $900.00 a month in credit card debt. That was just credit cards! Then I handled the car payment. I actually paid it off in two months. So I now own everything but the house. I am thinking about investing now and growing some of my money. I breath a lot easier at night knowing I am close to being debt free. in the short 13 months I have cleaned up over 32K in debt. Now my money goes to things I enjoy mostly me. I will never make the mistake of abusing credit again. Get rid of the cards they are killing your future. I just booked a week in Maui. It is the first trip me and my 9 year old daughter have ever been on. I can't believe how stupid I was.
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http://geneticfreakofnature.blogsppot.com

6:27PM on Jun 23rd 2008 by Greg