11/22/2005

Tis' the season to be debt free

As we face the upcoming holiday season, merchants see dollar signs, and consumers face an endless array of opportunities to utilize their cash, or plastic. One of my favorite sources for financial advice is Suze Orman, and in her Holiday spending article, she tackles the issue of spending more than you make during the holidays. She mentioned some simple tips to help fight the urge to excessively spend. She brought up the recent policy changes that have raised the minimum credit card payment to 4% of the balance, which is twice what it was, and she also suggested that you simply only buy gifts that you currently have money to pay for. She also demonstrated how if someone used the equivalent amount of money that they would've been charged as credit card interest, and invested it, how much better off they would be. Suze's advice is very practical, and wise regardless of when you are purchasing goods or services, and if people could start incorporating these basic principles into their lives, the financial status for households, and society would be healthier as a result.

4 comments:

Connor said...

Suze always has some good advice. I believe 100% in the concept of not spending more than you currently have in your accounts. This is the easiest way that consumers can dodge those nasty interest rates. I have never thought of investing the money saved by not having to pay credit card interest. That is a brilliant idea. I think that in doing so we would have more well-rounded consumers. This is because not only are the consumers debt free, but they are also studying various investments to see which one is best for them. By having them study those possible investments, the consumers would be more aware of market conditions as a whole. Awareness is key in being an intelligent consumer.

Dr. Tufte said...

This is actually rather idiotic.

I know that sounds harsh - I don't mean it personally, because these opinions are very common.

The distinction that is being missed is whether the purchases are investments or not. There are 2 issues.

1) Fundamentally, there isn't anything wrong with paying for something over the period of time in which you use. You should take longer to pay off a car than you do to pay off a Big Mac. Financial officers of firms think this way, but many personal financial advisors do not give this as advice. By Ms. Orman's logic, most of you shouldn't be paying for college.

2) For personal and macroeconomic reasons it makes sense to assume that your real income will rise through time. It makes perfect sense to borrow from the "future rich you" to finance the spending of the "current poor you".

The point people are trying to make here is that many people are not disciplined enough to do this. That's fine, but that isn't the same thing as saying you should do financially dumb things just to be puritanical.

Matthew said...

Dr. Tufte said that this post was “rather idiotic,” which I somewhat disagree with. I am not positive about what he disagrees with, but I'm guessing it's about buying things on credit. I think what needs to be clarified here is the audience who is being addressed and for what purchases. If you are speaking to a single-mom who works part-time, no, I don't think she should buy a big-screen TV on credit. She doesn't need it and would save a lot of money if she made payments to herself until she had save up enough so she could pay cash. If you are that same mom who wants to go back to school to be more hire-able, she should go for it. Don't use credit for things that don't pay off later.

Dr. Tufte said...

What I think is idiotic is that the position of some people might change about these things if you could lease them.

Consider: 1) buying the big TV with debt, 2) leasing the big TV out of income.

The excessive focus on debt suggests that #2 is better than #1. I hope it is a little clearer why I think this idiotic: it gets worse, since #1 can be viewed as creating a lease internally instead of externally.

The big issue here is the big screen TV, not the way you pay for it.