When Should you Try to Pay Down Debt?


That is a question that seems to come up a lot so I figure I’d help folks out with some scenarios and when it might be a good time to start thinking about paying down debt, or trying to eliminate debt completely. When should we think about paying down debt? Here are some simple examples of when you should think about paying down debt:

You are using Pay Day Loans

OK, so you have got yourself into a hard place for some reason (although the ads that are out now with the person justifying their use of these services are a bit disconcerting), so now would be an excellent time to put together a plan to get rid of your debts, or maybe you should talk to a Credit Councillor of some kind (there are many not for profit folks out there). This is absolutely time when you should think about your debts, whether you can pay them off, and if you can, start paying them off.

You are carrying Commercial Debt on your Credit Cards

Your credit card is a bad place to be carrying debt, given the rates many charge (especially if they are commercial cards like the HSBC Card, or the Sears card or the like) are really crazy. Figure out why you have all this debt on your credit card, and put together a plan to pay off this debt as soon as possible, this is an excellent time to pay off debt.

Your HELOC is Bulging

That Home Equity Line of Credit was so you could finish your kitchen off, but then it was a good place to put all your credit card debt, because the rate is that much lower, and well you wanted a nice vacation this year, but didn’t quite have enough for it, and now the HELOC is a headache, this is a good indication that you should start paying down your debts. The HELOC can be called whenever the bank wants, so paying it off quicker than the bank is asking you would be a good idea. Another superb time to start paying down your debts.

You only put 5% Down on Your Mortgage

If you still have a very large principle on your Mortgage outstanding, investigate whether starting to pay Bi-Weekly or what rules your mortgage has that allows for over payment. Putting money on your principle early on in your Mortgage is a great investment in your future, as it can either shorten your mortgage period or lower your payments later on in the mortgage. Another great time to start paying down debts.

You have Student Loans

Not sure what the rules are about student loan pay back, I believe the payments have some tax implication (I am about to find out, so please feel free to enlighten me on this one), but maybe figure out if you can pay this debt off faster, it’s never good to have something like this hanging around given the job market these days and such. I would say this would be an ideal time to pay down your debt.

You owe your Uncle Fred Money

Your Uncle Fred loaned you some money when you were just getting started to pay for new tires on your car, but he never really asked for the money back. Uncle Fred is a nice guy, but do you feel right owing him money? Just for family harmony and your own self-esteem this would be a good place to pay your Uncle Back.

You are in Debt

Remember what Debt Free really means? Have you seen an ongoing thematic premise in my situations here. If you are in debt, now would be a very good time to think about paying that debt off, and putting together a plan together so you can end up debt free.

If you are Debt Free, then you can start planning how to save, but since you are Debt Free, I am sure you can plan that without too much prodding by me.

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Let’s DEFINE Debt Free

Given the relative success of my Let’s Define Retirement post, I figured I’d take another swing at a term that I hear a lot these days, and that is Debt Free.

When I use the term Debt Free, I really mean, no debts, owing no one any money (or owing anyone no money, if you prefer).  There must be ground zero and this is it:

Definition: if you owe any money you have debts, if you owe no one any money, you are debt free, simple isn’t it?

Yes, I could have made a crass comment about how one "poke" from debt could deflate this balloon

Yes, I could have made a crass comment about how one “poke” from debt could deflate this balloon

I do not subscribe to the Good Debt, Bad Debt hokum, remember I have said All Debt is Bad more than once. The concept of Good Debt was created by Banks and those who wish to lend you money, so you don’t feel bad (it’s like Ice Cream companies saying that there is Good Obese and Bad Obese).

I felt that maybe I didn’t understand what Debt actually meant, but I looked at Dictionary.com and found Debt defined as:

something that is owed or that one is bound to pay to or perform for another: a debt of $50.

There are other definitions there and I invite you to look it up in your dictionaries, but in my mind that is Debt, well-defined.

From this Debt Free must mean owing nothing or not bound to pay or perform for another: a debt of $0.

I have heard people say that debt free is when your net worth is above zero, which is an optimistic point of view, but a misnomer (in my opinion). My house may be worth $500,000 and my investments may be worth another $50,0000, however if I still owe $200,000 on my house, that does not mean I am debt free, that just means that if you give me enough time I might be able to get rid of my debts, that is not debt free. You still owe $250,000, so you are not debt free.

I am also speaking of all debts, so if your parents were kind enough to loan you $50,000 to help with your home’s down payment, and you have paid all your other debts off, but you have neglected to pay back that loan, you are in debt. This one is really only my opinion (and many families would argue that is not the case), but seriously, if you owe your family money and you have no other debts, what kind of schmuck are you to not pay them back? (look up schmuck in the Joys of Yiddish)

Here is my reader question, is this an incorrect definition of Debt Free?

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Good Debt? Not Bloody Likely

After watching our friend Preet Banerjee have to listen to the “Experts” on a CBC National round table talk about Good Debt, I feel I must rant once again (Preet was his normal, Windsor Knotted sensible self, the rest of the panel drove me spare).

Let me be very clear saying that there is Good Debt is like saying there are Good Car Accidents, read my lips:

All Debt is Bad

I don’t give a crap what these so-called experts have to say, as soon as you start thinking that Debt can be Good, you assume it is OK to build it up, and it won’t hurt you.

Sugar coat this as much as you want:

  • Necessary Debt or Necessary Evil
  • Debt is good for the Economy
  • Leveraged Buying
  • Consumer Debt
  • Mad Money

It’s all fricking bad! One day I will write an NSFW post with my actual wording on this stuff (maybe Preet will let me back on his Podcast and I can do the real rant for this).

Shame on all of those alleged experts on that panel, except for Preet of course.

DEBT SUCKS

Debt Sucks the life out of you.  Learn to hate debt, want to get rid of it, and then you have the right idea, but if you rationalize that there is Good Debt, you can start sliding down a very slippery slope.

Yup, you might have to get a Mortgage, but don’t get comfortable with it, treat it like you would a Cockroach or an Uninvited Guest (fill in your most unfavorite person here), want to get rid of it, as soon as possible.

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Are You Solving the Right Problem?

Over many years of working at High Tech companies and with technology issues many times I have run into the interesting issue and many times (usually in hindsight) my team has realized they were solving the wrong problem.  It’s easy to get too close to a problem and to lose perspective on what the real problem you are trying to solve, and it happens more times than you think.

Here are a few problems that I have run into over the years (financially) where someone came up with great solutions but at the end of it, they were solving the wrong problem:

  1. Credit Card interest rate is too high, so find a credit card with a lower interest rate and transfer your balance over to have to have your debt grow slower (i.e. lower interest rate).
  2. Figure out that your overdraft protection interest rate is actually higher than a pay-day loan, so you get those instead.
  3. It is cheaper to get your car financed through the car dealership than it is through your bank, thus saving lots in interest paid.
  4. You have a high debt load of credit cards and such, so you get a consolidation loan, but you don’t destroy your credit cards.

Can you guess what the real problems were in these situations?

In case (1), why not pay off your credit card, or find a way to pay it off, or better still, don’t build up debt on your Credit Card is the real problem. Your solution is better than nothing, but you aren’t really solving the problem, especially if you keep using your credit card.

Seriously, you think that getting a pay-day loan is a better idea for case (2)? Stop over drafting and never get a pay-day loan is a much better solution, don’t you think?

Why not make a large down payment for your case in case (3) or better still pay cash for a used car that you can afford?

As for (4) consolidation loans can save folks financially, but if you don’t change your lifestyle and continue to build up debt, you will keep getting consolidation loans, and create a bigger problem for later.

Solve the right solution, did I miss any other “solving the wrong issue” problems?

 

 

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I am a Civil Servant

I keep hearing from various media outlets and bloggers how much money is wasted on the Government and such, and inevitably out of these discussions comes statements about the Civil Service, and I now feel that I have the right to comment on this stuff (having worked in both the Private and now the Public Sector).

Let’s go over a few of the more interesting points that some folks seem to have an opinion about:

  • I am  paid by your taxes, but strangely I also pay taxes as well. One media outlet seemed to be implying that Civil Servants didn’t pay taxes, but I can assure you, I pay taxes just like everyone. No free ride here.
  • Pretty much everybody can easily figure out from information readily available how much I make, which is disconcerting, since when I worked for Nortel, people could guess but they couldn’t be sure they knew how much I made.
  • Someone does drive me into work in the morning (these days), but he or she works for OC Transpo, I don’t get limousine rides to work every day (yes, someone asked me that exact question when they heard I worked in the government).
  • Are we all lazy? Let’s not go there on this one, let’s just say I have seen good and bad in both the Public and Private sector, and leave it at that. Some might argue I am a Lazy Sod, so maybe you shouldn’t ask me?

From what I can tell, a lot of misconceptions folks have about Civil Servants (or Public Servants) seems to come from the perks that Members of Parliament get.

The major issue I keep hearing is that I have a “gold-plated free pension”, which is an interesting fallacy, that again comes from the MP side of things. Yes, I have a very nice pension (that many people do not have, so I do realize that having a pension is a great benefit), that was negotiated with an elected government, but is in no way “free” to me. I pay a great deal of money into the Pension Plan, and will more likely have to pay more soon, to keep this privilege, but I did have this same privilege when I was at Nortel (until it all fell apart).

Yes, the taxpayer pays for part of my pension, but that is because they are the folks bankrolling my employer (i.e. the Federal Government), so again, I am kind of paying into that too.

Unlike Members of Parliament, Civil Servants take 35 years to get a “full” pension. Members of Parliament get a FULL pension after 6 years (oh and I don’t think they put much money in on their side either).

A Civil Servants “full” pension can be calculated as (assuming they work for 35 years in the Civil Service):

70% of an average of your 5 best years salary, which is then discounted by how much CPP you will get paid (once you are CPP eligible)  {simple isn’t it ?}

What’s the point of all of this? Just me venting at some of the more asinine commentaries I have seen on the Media and in the Blogosphere lately. If anyone cares to try to refute or ridicule my opinions, have at it, I am prepared to discuss whatever points you like on the topic of the Civil Service and it’s Pension system.

As and addendum a very well written article which helps clarify things is Michael James The Consequences of Keeping Bad Employees which talks about the biggest issue in the Public Service (IMHO).

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