My sig explained (finally..and it's a fricken' novel) - Page 2

C4M · 02-24-2005, 02:29 AM

Agree with all the good budgeting stuff (and learning the answer to "Who is Dave Ramsey"?).

However, not all credit is bad, as some of you have mentioned above re real estate and investment.

We use our credit card for everything. If I could pay the mortgage payments with the credit card, I'd do that too. Thing is - we offset the bank account against the mortgage, so the higher the balance in that, the less interest I'm paying on the house. The credit card then gets automagically paid on the last day every month, which means that we have the maximum balance applied against the mortgage.

In Australia - this is an offset account. If that emergency money in your bank account isn't earning you as much as your mortgage is costing you, then you might be able to structure better.

Sure - it's a credit card. But when you treat it like cash (and owe a bank 250,000), then you learn quick.

My .02

C!

wizardPC · 02-24-2005, 11:12 AM

@C4M
well, that's...um....interesting....I don't think i fully understand.

So you've got like $10k in the bank and you owe $250k? That I can understand, but if you've got $50k in the bank interest wise I think you'd be much better off putting that towards the principal. I'd rather pay 10% on $200k (20k interest in a year) than 9% on $250k (22.5k interest in a year), unless you are also making a guaranteed hellacious return on that money in the bank.

I'll agree that credit cards are great if you are responsible with them, like I originally was, but most people eventually become irresponsible.

Grimey · 02-24-2005, 12:01 PM

Congrats Wizard on getting things figured out. I read the whole thread and you're now making the right decisions.

I have a horrible spending habit and I'm getting my first Credit Card when I go home this weekend and I hope it will turn out alright for me. It's going to be a real test because I'm now in my first "real" job and making good money but I've finally learned to budget and hopefully won't fall down the same path you did. I plan to NEVER...EVER......EVER hold a balance on any credit card for as long as I live. That's the last thing I want and I never understand why people put things on a credit card and hope to god they can pay it off. Glad to see you've gotten out of that buisness

.

Bugbyte I'm in the same boat as you with the Mac Mini. About $100 short and saving

mbuchman · 02-24-2005, 12:04 PM

Cash is definately the best way to buy things, because as you said, its more painful. I know this is nothing compared to what has been posted so far, but I just got my debit card in october, and in just 4 months, have spent maybe $1,000 or so on stuff I didnt really need. However, I am only 19, and live at home, so I have no debt whatsoever (but the money I spent is my money, not my parents). Thatll all change in 6 months or so when I take out a loan to get a car. Planning on paying half up front (even though I have enough for 3/4 or so), and then using another 1k of it for plates and insurance, then having 2-3k for repairs and any other unfortunate stuff.

And the thing about the credit cards and budgeting money is one of the things my parents do very well. Countless people who have 2 new cars in their garage, 3 story house, live on a lake, have a boat, and a "getaway" house cannot afford it. So when they die, their kids now have all their financial responsibilities. However, if my parents were to die today, I would not have any debt to worry about (just some car payments that I could go into their savings to pay off if needed, but I would sell that one anyway). We are not rich, but not poor either. We may not have the newest of everything, but we still have a 2 story house, 2 car garage, 5 vheicles, and all that good stuff. The way my parents got to where they are was by not getting the huge debt like most people end up getting. I dont remember who, but someone said that its a different story about being in debt to pay off a house or car, but their are still guidelines. If you make say 40k a year, you cannot afford a 250,000 house if you ask me.

Good luck though, sounds like you are on the right track now!

Matt

meddler · 02-24-2005, 05:12 PM

Quote: Originally Posted by wizardPC

@C4M
well, that's...um....interesting....I don't think i fully understand.

So you've got like $10k in the bank and you owe $250k? That I can understand, but if you've got $50k in the bank interest wise I think you'd be much better off putting that towards the principal. I'd rather pay 10% on $200k (20k interest in a year) than 9% on $250k (22.5k interest in a year), unless you are also making a guaranteed hellacious return on that money in the bank.

I'll agree that credit cards are great if you are responsible with them, like I originally was, but most people eventually become irresponsible.

The way it works (I use the same system) is that you have your home loan and a savings account linked to your morgage (offset account). All your income (pay, tax checks, gifts, etc) go into the savings account. If you have a loan of $200k and $10K in the savings account, the bank calculates interest on the offset ammount. ($200k-$10k) So the interest is calculated on $190k. So obviously the more money you keep in your savings account the less interest you pay and the better off you are. Here is where the credit card comes in. You live off the credit card to keep the maximum ammount in your savings account for the maximum ammount of time as stated above. You then pay your credit card out in full at the end of every month (or statement date) In essence you are using the banks money to live off and since the money you would usually spend out of your savings account isn't touched you save on interest. I have heard of people who use this method pay off their 30 year home loan in under 10 years. It's true you still have to exercise control, but you have to think that it is your money you are using even though it is a credit card.
Hope that makes a little more sense to you WizzardPC

R32 JUhl · 02-25-2005, 09:21 AM

Quote: Originally Posted by meddler

The way it works (I use the same system) is that you have your home loan and a savings account linked to your morgage (offset account). All your income (pay, tax checks, gifts, etc) go into the savings account. If you have a loan of $200k and $10K in the savings account, the bank calculates interest on the offset ammount. ($200k-$10k) So the interest is calculated on $190k. So obviously the more money you keep in your savings account the less interest you pay and the better off you are. Here is where the credit card comes in.

THAT IS SWEET!!! My Credit Union doesn't offer that.

WizardPC, I read your whole story and knew every thing that you were getting ready to say. My financial situation was identical - only the numbers were different.

And just for the record, work to minimize your biggest expense - your tax bill.

I gotta say though, to all the Dave Ramsey converts, please read "Rich Dad, Poor Dad." There are billions of dollars waiting to come into your hands. The old saying, "Don't work for your money, make your money work for you" can be applied in dozens of ways. Invest a little extra energy and you don't even have to use your own money to make money. I'm 35 and we're planning my "retirement" party. It's a whole lot better feeling when you WANT your company to downsize and offer severance packages than DREADING the word, layoff.

FunkDaMonkMan · 02-25-2005, 04:24 PM

I just turned 18, and the first thing i did was get a credit card.
I make all my purchases on the credit card.
I pay it in full at the end of the month.
I collect 1% cash back

.

R32 JUhl · 02-25-2005, 04:48 PM

Quote: Originally Posted by FunkDaMonkMan

I just turned 18, and the first thing i did was get a credit card.
I make all my purchases on the credit card.
I pay it in full at the end of the month.
I collect 1% cash back

.

GOOD! If you carry the balance over ONCE, cancel the card and get an AMEX. I F'in hate credit cards and credit card companies.

C4M · 02-25-2005, 05:56 PM

Quote: Originally Posted by meddler

The way it works (I use the same system) is that you have your home loan and a savings account linked to your morgage (offset account). All your income (pay, tax checks, gifts, etc) go into the savings account. If you have a loan of $200k and $10K in the savings account, the bank calculates interest on the offset ammount. ($200k-$10k) So the interest is calculated on $190k. So obviously the more money you keep in your savings account the less interest you pay and the better off you are. Here is where the credit card comes in. You live off the credit card to keep the maximum ammount in your savings account for the maximum ammount of time as stated above. You then pay your credit card out in full at the end of every month (or statement date) In essence you are using the banks money to live off and since the money you would usually spend out of your savings account isn't touched you save on interest. I have heard of people who use this method pay off their 30 year home loan in under 10 years. It's true you still have to exercise control, but you have to think that it is your money you are using even though it is a credit card.
Hope that makes a little more sense to you WizzardPC

Big tick. Thanks for the better explanation.

Now that you all understand that, you'll understand what I mean when I say that my buying a 42" plasma for home on credit contributed $600 toward my mortgage repayments (and that's ignoring the compounding effect over the life of the mortgage).

I had the money in the bank, but instead of using that, I used one of those Harvey Norman (read: big electronics discount store) 16 month interest free deals.

Net result: I get a TV, and someone else pays for it for a while. I pay the loan out in full on the last day.

Credit can make you money. The trick is to use other peoples money whenever possible, and make sure that the cost of using that money is lower than your return.

C!

R32 JUhl · 02-25-2005, 06:01 PM

Quote: Originally Posted by C4M

Credit can make you money. The trick is to use other peoples money whenever possible, and make sure that the cost of using that money is lower than your return.
C!

Very true! And every dollar of your "expenses" you can tie to mortgage interest is money you don't have to pay taxes on. If someone else is making the mortgage payments, it gets even better!!!

C4M · 02-25-2005, 06:04 PM

Quote: Originally Posted by R32 JUhl

Very true! And every dollar of your "expenses" you can tie to mortgage interest is money you don't have to pay taxes on. If someone else is making the mortgage payments, it gets even better!!!

While that might be true in the US, mortgage interest is not deductible here in Australia. I wish it was (although I also know that if it was, then they'd just take the money off me somewhere else).

C!

Cris · 02-25-2005, 06:21 PM

33775$ to go. It's going to be hard, but keep it up! I can't really give any good advices 'cause I've never had any debts. I guess I'm too young for that. But no worries, there's plenty of time!

R32 JUhl · 02-25-2005, 08:52 PM

Quote: Originally Posted by C4M

While that might be true in the US, mortgage interest is not deductible here in Australia. I wish it was (although I also know that if it was, then they'd just take the money off me somewhere else).

C!

Sorry mate! Yeah, Uncle Sam lets us deduct mortgage interest, over here. And you're right, they get that money from you elsewhere. We have a name for the people holding that wallet. They're commonly referred to as "the Middle Class". They keep the government well funded, while the poor keep the government writing checks. The funny part is, some people are actually convinced that the rich have the role in providing jobs for the middle class. The reality of it is though, not many people who are "middle class" will work as gardeners, maids, or butlers.

So the rich basically keep their money by having the middle class pay them rent on their mortgages. And when they (the rich) need more money, they refinance the mortgage and the renter's monthly checks are no longer "income" they have to pay tax on, because that money is going to pay the mortgage interest. Meanwhile, they've got a big wad of tax free cash their renter is financing for them.

wizardPC · 02-25-2005, 09:28 PM

The thing about tax writeoffs is that the you don't reduce the amount of taxes by the value of the item (interest in this case), you reduce the amount of your taxable income.

Some people think that having a mortgage to pay is a tax benefit. Let's say that you can pay off your mortgage today, but you don't because you think you are getting a tax break by having the mortgage. Let's say you will pay $10,000 this year in interest and you are in the 25% tax bracket. In this case, you won't pay taxes on that $10,000--saving you....wait for it.....$2500 in taxes this year.

Think about that.

You pay the bank $10,000 to avoid paying the government $2500.....hmmmm.....

R32 JUhl · 02-25-2005, 09:35 PM

Quote: Originally Posted by wizardPC

Think about that.

You pay the bank $10,000 to avoid paying the government $2500.....hmmmm.....

Hold on... don't miss the point. You don't want to pay a mortgage on your own home!!! I agree with you. Instead, you want to carry a mortgage on OTHER real estate that SOMEONE ELSE is paying the mortgage on. See the difference? Let's use your analogy:

Mortgage interest = $10000
Rental income = $12000
Taxable Income = $2000 so you're only taxed on $2k

NOW, instead of leaving the equity in that real estate - because SOMEBODY will be happy to pay your mortgage every month FOR you - take the equity OUT.

Mortgage interest = $12000
Rental Income = $12000
Taxable Income = $0
Cash in your pocket = your Equity

There are BOOKS written on this topic and it bucks everything you and I were improperly taught growing up. But it's how the rich keep getting richer - by having the worker fund their cash advances.