Crucial Factors for Identifying “Good Debt”
Debt is an emotionally charged word. No matter where you are on the financial spectrum, it’s likely to stir some feelings inside of you. If you’re a Dave Ramsey fan, debt is a “four letter word”. (Well, it’s literally a four letter word, but that’s beside the point). Despite its often negative connotations, debt can sometimes be used as a tool. Understanding the nuanced difference between harmful debt and ‘good debt’ is crucial in financial planning. The idea is not to shun all forms of borrowing but to make informed decisions about when and why to take on debt. If you’re confused about what is “good debt” and “bad debt”, this article can help you figure it out.
Making the wrong choices about what debt you choose to take on could end in disaster. Before you take out a loan, get a new credit card, or purchase something on credit, there are some things to think about.
~Jennie, Disease Called Debt
The article discusses the concept of ‘good debt’ and how to identify it, emphasizing that not all debt is inherently bad. However, the article points out that before you take on any debt, you should assess whether or not you can afford the payments before taking on more debt. You should examine your finances and use tools provided by lenders, especially for significant commitments like mortgages. Another factor to consider is the long-term benefits of the debt, such as financing a car for commuting or a mortgage for home ownership, as opposed to incurring debt for non-essential short-term gains. No matter where you’re at in the debt cycle, it is important to build a solid credit history so that you can get the best interest rates. If you’re already in debt, the article suggests debt consolidation as a manageable approach, recommending consultation with debt management charities for creating a feasible debt management plan. Overall, the article stresses the need for careful consideration of the pros and cons before incurring any debt to ensure it aligns with one’s financial goals and situation.
An Extended Car Warranty Is Probably Not Worth The Cost
If you own a telephone, I’m sure you’ve gotten an urgent call warning you that your extended warranty is about to expire. The fact that this has to be one of the most common robocalls in the world probably means that the extended warranty isn’t a good deal. (If it were really a good deal, would they need to spam you with ads for it??) But unless you actually tracked all of your auto expenses, it may be hard to determine whether or not an extended warranty is a good deal or not. This very dilemma is what one car owner faced when deciding whether to opt for an extended warranty on a 2015 Range Rover Sport. If you’re curious about how the math worked out, you might want to keep reading.
In simpler terms, if I had opted for the no-deductible warranty, I would have paid $4,500 plus $1,050, totaling $5,550 in maintenance and warranty costs. Alternatively, with the $1,000 deductible warranty, the expenses would include $2,500, $700 for the fan, $1,000 deductible for the water pump, and $1,050 for the vacuum pump, amounting to a total of $5,250.
Sam Dogen, The Financial Samurai
In this article Sam Dogen, aka the Financial Samurai breaks down the detailed costs of his car ownership over an 8 year period. In December 2016, he purchased a 2015 Range Rover Sport with 10,800 miles, opting out of an extended car warranty that was offered for $4,500 without a deductible or $2,500 with a $1,000 deductible. The decision was influenced by the existing manufacturer’s warranty, which covered the vehicle for four years or up to 50,000 miles. Over the years, Dogen incurred totaling $2,950 in maintenance, excluding regular expenses like oil changes, tires, and brakes. This cost is less than potential expenses of the extended warranty he was offered. Dogen concludes the maintenance expenses were cheaper than the warranty costs. He goes on to mention that it is often more convenient to have the work done at a local auto repair place than a dealership. He concludes that purchasing an extended warranty may not be financially optimal, especially for those who keep cars for more than 10 years, as warranties rarely extend beyond this period.
Accounting for Inflation in Retirement and FIRE Planning
A few years ago, there was a commercial for a financial company where everyone on the screen was walking around with numbers over their heads. The idea was that it was how much these people needed to retire. And if you didn’t know “your number” you could talk to one of their wealth planning experts to find out how much you needed to save. But what if you don’t want to pay someone to manage your money? Can you calculate how much money you’ll need in retirement? This is where understanding how to properly account for inflation in your retirement becomes critical. In a financial landscape where inflation is a significant factor (i.e. the 2020’s), calculating your retirement needs can be complex. That’s where this article can help.
Three of our four main components (income, raises, spending & saving) are adjusted by annual inflation. To make the math easier, let’s remove inflation. No more adjustments! But to even out all facets of the equation, we must also decrease the investment growth by the inflation rate.
~Jesse, Our Best Interest
This article discusses the complexities of incorporating inflation into retirement and financial independence planning. Accounting for inflation in your retirement plans is challenging, but is unfortunately necessary as you could overestimate or underestimate your financial needs if you ignored it. The article delineates two approaches to account for inflation: “The True World,” where calculations incorporate real-world inflation and investment returns, and “The Convenient World,” where inflation is excluded for simplicity. In “The True World,” future incomes, raises, savings, and investment growth are adjusted for inflation, while “The Convenient World” uses a simplified approach, discounting inflation but consequently reducing the anticipated investment growth rates. The good news is that you can use either approach to retirement planning. However, if you mix the two world views, your calculations won’t work and you may find yourself without the resources you need in retirement. If you want further details about how to account for inflation in your retirement calculations, or how the “4%” rule of the Financial Independence Early Retirement community works, check out the article.