Page 42 - 8 February 2013

DEBT
When, if ever, is it acceptable?
Debt doesn’t have to be a four-letter word. We can use debt to our advantage if we don’t abuse it.
Billy Peterson, CFP ® Peterson Wealth Services, Inc. 877-470-4002 www.petersonwealthservices.com
by Billy Peterson
If you grew up in the baby boom generation you most likely heard early and often about avoiding debt and keeping plenty of cash on hand. After
all, baby boomer parents experienced the Great Depression and the aftermath was undoubtedly life changing. I heard about it from my grandparents
who learned how to get by with next to nothing. Unemployment was 20% or higher in some places, businesses were closing down, people were losing their homes and their cars. It was real and it happened without a precedent so the country’s leaders didn’t have experience to draw from. We eventually pulled through but not without a few scars.
In the Great Depression, Americans dealt with poverty and eventually inflation—both of which were devastating. They learned to save money and take
on little to no debt. Basically they grew up with the idea, ‘pay cash for everything and don’t trust banks or investment firms.’ Sound familiar?
The “boomerang” generation (named so because they left home for college or to start a family only to come circling back after losing a job or overpaying for a home which they eventually lost in the real estate collapse) has had to learn the hard way about debt and its evils. It was the “me” generation. If the parents had a $300,000 home, then the kids wanted a $400,000 home. Their friends bought one without a hitch and the bank will give them the money, why wait? NINJA loans were the new way to achieve home ownership. No Income, No Job, or Assets—Loan Approved.
Fast forward to 2013: Did we learn anything from the two different generations? I hope so. I hope we learned that borrowers have to have some skin in the game and lenders need to be much more careful before doling out cash for speculative purchases. Somehow everyone involved in real estate began assuming that real estate went up perpetually and never lost value. But also, one thing I see too much of now is people swinging back too far the other way. They are unwilling to let go of cash—unwilling to invest in new ideas or businesses. Further, banks are so overly strict now on lending (some of which is due to the late-to-the party government policy which should have been enacted before the dam broke)
that accessing capital is like an act of Congress...errr, maybe not quite that bad.
Our recent recession, although scary and unset- tling, was nothing close to the level of the big one in the late 1920s and early 1930s; although I’ll go out on a limb and predict it will be documented as the worst
recession over the next 30 years. Fortunately, we had hindsight as a guide so our policy makers and federal officials acted swiftly to stimulate the economy, rescue financial institutions that were critical to the nation’s survival, and promote a degree of confidence in the American people. However, we still saw people tighten their belts, cancel vacations, and compete
for jobs that were dwindling by the day. Companies are still clinging onto cash and refusing to invest in new equipment or business lines, largely because of uncertainty surrounding our economy but equally because our politicians held us hostage by refusing to agree on tax policy, spending plans, and debt limits. This opens up a political land-mine that I would love to talk to you about another time, but for now, suffice to say, we were not in a good place psychologically.
If you didn’t inherit a fortune or win the lottery, don’t fret. You too have the opportunity to become financially independent by following some basic advice. It won’t happen overnight but it can make
a huge difference in your life over the long term.
To pursue future wealth there are a few important behaviors to instill. As legendary racehorse trainer Blane Schvaneveldt used to enjoy asking me, “How do you become a millionaire?” He always answered his own question: “Make a billion and then buy some race horses.”
For you non-billionaires, here are my tips for deal- ing with debt:

it will be in our lifetimes. Purchasing a home is a dream for most people. The rule of thumb is to make sure you put at least 20% down. Thirty-year fixed loans in the 3-4% range will probably look like a dream a few years from now. If you haven’t refinanced and your loan is at 5% or over, you may want to consider looking into it. If you haven’t funded an IRA or Roth-IRA (if eligible) I suggest you consider it. If you can make more on your investments than the rate on your mortgage, you are money ahead.

without using a loan. Financing a vehicle is a con- sumer loan and is not deductible. If you absolutely must finance a vehicle, consider utilizing a home equity line for the cash. They are generally tax deductible and the rates are usually less than the mortgage rate. Consider getting a home equity line
40 SPEEDHORSE, February 8, 2013
FINANCIAL FORUM