Debt Do’s and Don’ts
Money rules for life after the recession
By Mary Lou Sheffield

As the worst of the nation’s economic hardships seem to be behind us, many families are trying to figure out the new rules of personal debt and credit. Lots of financial lessons were learned in recent years, sometimes the hard way. But two SJ finance professors say today’s smart money moves are easy to manage and will keep you secure for years to come.

Both Michael Busler, PhD, associate professor of finance at the Richard Stockton College of New Jersey and Rich Michelfelder, PhD, clinical associate professor of finance at Rutgers School of Business-Camden agree that attitudes toward debt have changed, and that’s a good thing. Here is their best advice for keeping your family financially secure.


Don’t think you have more money than you do.

There’s only one way to control your money, and that is to know what you spend. “If people tracked what they spent every day, just tracked it for a month, they would see there’s probably $400 to $500 a month going out for things that just aren’t necessary,” says Rutgers’ Michelfelder. “For example, you buy two cups of coffee a day for $3. After 30 days, that’s $90 a month. You go out on the weekends and order four alcoholic drinks in a restaurant at $5 a drink, that’s $80 a month. That’s more than $2000 a year. If you want to have a drink, you can stay home and have a beer for $1.”

Michelfelder says to write down everything you spend for one month. It’s not enough to try to record everything at one sitting, because you won’t remember all the little things, like toll both charges or a sandwich at Wawa. “It really isn’t difficult,” he says, “all you have to do is get a receipt for everything. Think receipt everywhere you go. If you can’t get a receipt, write one on a piece of paper.”

Once you have all your expenses recorded, review them to see how your money is being spent, and look for opportunities to save. “Most people will have probably $400 to $500 a month going out for things that aren’t necessary,” Michelfelder adds. “You have to decide whether you want to use your cash for those comfort items or to put yourself in a better financial position.


shutterstock_66651421Do change how you think.

“Americans want to have things now, whether they have the money for it or not. Everybody has it, so I want it to,” says Stockton’s Busler. “It’s not like it used to be. When I was a kid, my father said to me, ‘Look, you want something, you save up for it. When you have enough money, go buy it.’ Today, it’s get a credit card, buy it now, and spend the next three or four years paying it off.”

Busler believes this attitude toward spending has enabled credit card companies to charge unreasonably high interest rates, causing problems for many people.

“This recession has given everybody a good “what for?” You ask yourself: ‘why did I do all this, and look at the bind it got me into. I’m not going to get into this again,’” Busler says. “People learned from this, and I think they’ll be a little more cautious in the future. Many people take the view that if we use the credit card we’re going to pay it down. If that means we can’t watch the latest 3D HDTV, we’ll just have to live with that. They’re also careful what cars they buy. They don’t want big payments. And people are downsizing their houses. It used to be prestigious to have a large, expensive house and the conversation at cocktail parties was I bought my house at this price and now it’s worth this price, and look how big my house is in the nicest neighborhood. But now, people are saying, ‘That got me into a big bind, and I don’t need all that space anyway.’ Maybe everybody’s wising up a bit.

Having said that,” Busler adds, “after a couple of good years, that may change. People may get back to the attitude: ‘good times are here again, I think I can do this.’”


Don’t use credit cards as free money.

“A credit card comes in the mail with $5,000 on it and people think, ‘Hey, I just got $5,000 I can spend. Everybody has a giant flat-screen TV. I can take this credit card, buy one and drive home with it. I’ll worry about paying for it next month,’” Busler says. “What they don’t think about is that they’ll be paying for it for the next three years.

“The problem,” he adds, “is those offers keep coming and building on top of each other, and even though somebody may be overextended, a credit card comes and it looks like free money again, so they just grab it.”

Busler warns against a last-resort method of making a credit card payment: using another credit card. “It’s a very dangerous trap to get into, because you never pay off anything. You just keep mounting debt. You get a new credit card and use the new card to make another card’s payment, you now have incurred two payments. The total debt just keeps building.”


Do make savings a priority.

Both finance professors believe setting up a savings account – and depositing money into it – is essential. “Most people will tell you to have savings equal to at least one or two times your annual salary,” explains Busler. “At a very minimum, save at least a half a year. If you get laid off, you have six months to find a job.

Busler stresses that you should have an account with cash available. “Most people don’t have that, because credit is fairly easy to get. People say, ‘well, if something bad happens, I can fall back on my credit. That’s a bad trap to get into. You should fall back on savings. You run into problems if you try to substitute credit for savings.”


Don’t assume your income will increase.

Years ago, the rule of thumb for new homebuyers was to buy a house that was a little more than what you could afford because you would “grow into it,” meaning your ability to earn more would go up, so eventually the mortgage payment would be easy to make. Since the recession, that way of thinking is no longer appropriate, the professors say.

“People assumed they would get an increase in salary every year, and they assumed their job was very secure,” says Busler. “When the financial crisis hit, it changed all that. Large numbers of people became unemployed, couldn’t make their credit card payments, and they ran into trouble.”


Do teach your kids how to manage debt.

When you send your child off to college it’s very likely they will receive credit card offers in the mail – lots of them. Michelfelder stresses the importance of teaching your child to resist the temptation of credit cards.

“Credit cards are a trap, especially when you’re a college student,” he says. “Typically speaking, they don’t have discretionary income, if they have any income at all. That little piece of plastic creates the illusion that you can go out, have fun and pay for it later. That’s a trap.”

Both professors recommend giving your college-age child one credit card to use in case of an emergency. “But you must tell them not to use the card unless they are in an emergency situation. And you have to define what an emergency is. If they are out partying, and they don’t have enough money to pay their share of the tab – that’s not an emergency,” Michelfelder quips. “That is just a situation they shouldn’t be in.”


Don’t keep balances on your credit cards.

shutterstock_2829127Carrying a credit card balance and making monthly payments is one of the worst things you can do with your money, the experts say. “Ideally, you should have little or no balance on your credit card,” says Busler. “If you use your credit card for purchases, pay your balance down to zero at the end of the month. If you keep doing that, you’ll avoid interest payments and you’ll avoid getting into a bind where suddenly you have five credit cards and $35,000 worth of debt costing $700-$800 each month. Stop using them, pay cash for what you need, and work the balances down to zero.”

Michelfelder suggests calling the credit card companies to ask for a lower interest rate. “Call the 800-number on each and every one of your credit cards and negotiate a lower interest rate. There’s nothing to lose.”


Do have a credit card and a loan or two.

Despite the high interest rates of credit cards and the risk of getting in over your head with debt, both Professors Busler and Michelfelder say it’s smart to incur some debt.

“I’m not a fan of getting rid of all your debt. There’s an optimal amount of debt. There’s such a thing as too little, just as there’s such a thing as too much. A small amount of debt can be helpful,” says Michelfelder. “Let’s say you have a moderate level of income. One of the tax deductions you get is mortgage interest. If you have the opportunity to pay off your mortgage and not pay an interest rate of 3.25 percent, or you could put your money in a solid mutual fund and gain in the long run 12 percent, it seems logical to build wealth by putting money into the market. You don’t put it in tomorrow, and take it out in sixth months. You put it in, and leave it there. Earning 12 percent in the long run is better than avoiding 3 percent.

“When I hear people say they pay cash for their cars, I think ‘why?’ You should be using cash to invest in things that generate returns. An automobile loses its value the moment you drive it out the door. You’re better off borrowing for a car, especially in this market when you can find zero-percent interest.  If you have $25,000 to put down on a car, keep your money, put it in the market and finance the car.”

Busler agrees. “In general, if you’re using debt to buy big-ticket items that have good value, like a house, that makes sense,” he says. “It makes sense to take on a mortgage because under most conditions, houses typically go up in value, so when you’re paying off the mortgage you’re building equity in the house. When you take on debt to buy a car, you won’t get all your money back but at least at the end when you pay it off, you have something to show for it that’s worth something. But to incur debt to go out to eat all the time and buy frivolous things, and then carry a lot of debt because every month you make minimum payments, that doesn’t make sense. If you pay it off at the end of the month, that’s fine, but if the balance keeps growing because you keep going out to eat all the time, that doesn’t make sense.

“There are other benefits to having debt,” adds Busler. “It improves your credit rating, and when you go for a car loan or a mortgage on a house you now have good credit. The lender sees that you’re responsible. That’s what you have to learn to be: responsible. Debt is not free money. It has to be re-paid.”

March 2013
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