Million Dollar Portfolio

Last night I watched the documentary “Maxed Out” on Netflix using their “Watch Now” feature. This is a pretty eye opening documentary because of a few notable things.

First, they focus on not only credit card debt, but other kinds of debts as well including loans and mortgages. They get different points of view with a few different people so there’s a great contrast you can see especially in the housing area.

Second, the stories some of the people interviewed have are simply stunning. Two women who had kids go to college and rack up a massive amount of debt very quickly actually killed themselves because of their debt. Another woman who got deep in gambling debt and credit card debt went missing for months before they found her car in the Mississippi River.

Why Some Debt Is Dangerous

Debt can be dangerous for some people, usually those people that haven’t grown up with any kind of money management experience. Being able to manage your money effectively isn’t just about paying bills and saving money. For some, spending money is as addictive as alcohol or cigarettes can be. The desire to own clothes or gadgets or even high ticket items like cars and jewelry can be a crutch for a lot of people. What happens is these people don’t wait to pay cash for these things. The fact of the matter is we have been conditioned to believe that we MUST buy certain things on credit. The system has been set up such that it’s easier for someone in debt to be approved for credit than someone who has no debt, a great job and has never had a credit card. Why is this?

It’s because the credit companies don’t make money off people that can already pay for things. If you pay your bill on time, and you pay it completely each month, the credit company never makes money off you because you aren’t carrying a balance month to month. That finance charge you see is the fee you pay for being allowed to have a debt outstanding. Furthermore, if you are late in your payment they ding you anywhere from $25-45. Then if you are over your credit limit, they can charge you again…if you are late AND over the limit you get hit hard. That minimum payment you are making isn’t ever going to pay off the debt.

There are countless examples on the web for this sort of thing but if you are in debt (as I am) you have to come up with a strategy to eliminate that debt quickly. Over the last 10 years my wife and I have racked up over $20,000.00 in debt. It got to a point where I just couldn’t keep up with the bills coming in. Primarily this was high interest credit card debt. I decided to do something about it because I realized we were never going to get out of that debt by making minimum payments. I consolidated my credit with a non-profit company who handled the negotiations with my creditors and set me on a plan to have it paid off in 5 years. It’s been 4 years now and we are nearly out of that debt with a much more manageable payment. The benefit of this is that using a consolidation program eliminates late fees and finance charges so you can actually pay the debt off. They accomplish this because any of the cards entered into the program are closed so you can’t use them anymore.

This film doesn’t address consolidation as it mainly focuses on the effects of credit card debt and other debt such as real estate. Their main point is how quickly and easily one can get into debt. See the thing is, credit card companies want you to be late. They want you to go over your limits because that’s how they make the most money. It’s pretty sick if you ask me. This kind of system preys on the weak and the poor because they have no choice if they can’t work or make money some other way.

The comedian Louis CK has some clips in the movie where he talks about the rich and banks. He makes a good point. If you are rich, the bank pays you! You earn interest on every dollar you have in the bank, even checking accounts have interest payments now and the more you have in there the more you make.

Good Debt vs Bad Debt

Not all debt is bad. There’s a difference between good debt and bad debt. Good debts are things like investments in businesses or other investments that over time will pay off and indeed pay for themselves like buying a house. Buying a house is considered good debt because as you pay off the loan, you are building equity which means you are building value. Hopefully, that house will appreciate over time and should you decide to sell it you make a profit. A couple other benefits of buying a house include deducting the mortgage payments from your taxes at the end of the year, and keeping up to $500,000.00 tax free if you sell the house.

An example of a bad debt is buying a car. Rarely does anyone purchase a car with cash. A car is a bad debt because it doesn’t appreciate over time. Cars lose nearly half their value once they are driven off the lot. The reason cars don’t appreciate like a house does is because they deteriorate over time. They wear out and things eventually stop working making the car worthless. Since they also aren’t designed the same way they were in the 50s and 60s, today’s cars just aren’t going to become classics (which usually sell for much more than they originally were).

Another bad debt is buying a so-called “high ticket” item like a plasma TV or stereo system. These items are almost always purchased with a credit card. Think about this, if you spent $1000.00 on credit for an item and make only the minimum payment of $40 a month at an interest rate of 18% which is moderately high, at the discharge of that credit you will have paid $1400 and spent 4 years and 10 months paying off that debt. If you added just $10 a month to that minimum payment, you would have the debt paid off in 2 years and will have paid a total of $1176.00.

minimum payments are designed to make money for the credit card companies, make no mistake about it. If you want to get out of that debt, esepcially if you have multiple credit cards the best thing to do is first of all, stop using the cards. Second, seek consolidation counseling and third, add a little extra to those minimum payments because it really pays off in the end.

Admittedly, I am still in debt. I have student loans and a few credit cards that we had to live off of when I was laid of f a few years ago. We also bought a car in January of 2005 because our old one was just about dead.

I am using the strategies mentioned above and expect to be out of debt in the next 5 years. That may seem like a long time, but it takes time to whittle these things down. Once debt free, I plan on staying that way. I’m going to do this by getting rid of all my credit cards and using only my ATM card, waiting to purchase things until I have cash and not giving into those spontaneous urges to buy on credit. I hope these strategies work for you too.

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