AC6 – Debt: How to Avoid Its Trap

Again, I’ve been way too lax in getting a new blog post written lately. In my defense I was plenty busy getting final preparations made for a couple workshops, and then teaching the workshops. Both went fantastically, with great groups of students. Thanks to all of you who were there!

I promise that at some point here I will do some wholly new blog posts to intersperse with the reposting of these older Art Calendar articles. I have plenty of things I want to write about. I’m just short of time it seems. Oh, and one other reason I’ve been short on time is that I finally did get my davidhuang.org site rebuilt and live again! Mind you at this point it is pretty basic, without all the material I used to have. Over time I do hope to get it built back up, but I invite you to check it out and see the new look. It was many days for this tech dinosaur, scratching my head trying to figure out how to do what I wanted with new programs. In the process I learned a few new things that I can bring to this blog site too, such as the “like” buttons you might have noticed at the end of the posts.

Ok, enough preliminaries. On to the article looking at debt, as always, with my updated comments interspersed.

6 Debt: How to Avoid Its Trap

Debt is one of those things that can just build up on you so high and heavy it seems like you are no longer working for yourself and family, but rather are working in service to your debtors.

In fact, it might not just seem like that but also actually be like that. When so much must be spent on interest payments, it is difficult to live on the lean incomes common when starting an art career.

Eliminating the debt you have and not taking on any more can bring you a long way to a reduced cost of living and a more fulfilled life. Interest payments are purely wasteful drains of our resources, offering practically nothing in return.

Often we don’t look at the actual numbers to realize just how wasteful borrowing money is. Here’s one example that shocked me.

As a general rule I automatically refuse any credit card offer. However, I found myself in a conflict between wanting to pay off my home while suddenly facing about $3000 in dental costs. (I can still hear that drill grinding on my teeth.) Anyway, there was a special promotion that would lend me $3000 on a credit card with zero interest if it were fully paid off in 12 months.

This seemed worth looking at, so I read all the fine print. The rules were that I had to pay at least the minimum payment each month: $90. If I failed to pay off the full amount in 12 months, I would then be paying something like 26% interest! If I was ever late with a payment, I would immediately be paying a whopping 31% interest!

Just what does that translate into for out-of-pocket costs? The really fine print stated that if I simply paid the minimum amount due ($90/month) on the $3000 loan, it would take 244 months to pay it off. Some quick math tells me how much that is. 244 times $90 equals a grand total of $21,960!

Scary to note that if I had taken this offer and only paid the minimum monthly amount I would still be paying on this debt all these years later!!

So for the privilege of borrowing $3000 I could end up paying an extra $18,960 in interest payments. That’s what I would call extremely wasteful spending. Granted, this is an extreme example in terms of interest, but sadly I don’t think it is that rare of an offer from a credit card company.

This brings me to some of the schemes I’ve seen encouraging us to take on debt and/or stay in debt. One is what I call the “lower your monthly payment” scam. It’s often just about putting a spin on the wording to make you think you’re saving money. The situation I described above is ripe for this. If a borrower of $3000 paid $250/month for 12 months their entire loan would cost them $3000. That’s actually a generous offer if no other strings are attached. (Often similar “one year same as cash” offers involve placing a lien on your home or some such thing.)

In the “lower monthly payment” scam, you might see wording such as, “Slash your payments from $250 a month to just $90. That’s a savings of $160 a month! Just imagine what you could do with an extra $160 each month.”

On the surface this would seem like a great offer you’d be crazy to turn down. How could saving $160 each and every month be hurting your financial picture? What this sort of scheme does is distract you from the big picture and keep you focused exclusively on your month-to-month struggle to make ends meet. It’s all done with how the “deal” is worded.

With the above example, it’s absolutely true that you would save $160 a month (and here’s the important part) for the first 12 months. In the long run this “savings” will cost you $18,960!

Once you can actually see the cost over the long haul, you must ask yourself if the fulfillment you receive is worth the expense. I highly doubt it will be. Now I’m not saying all offers to “lower your monthly payment” are scams to keep you in debt. Some may genuinely save you money – but you need to look at the total cost, not the monthly cost.

Sort of related to the “lower your monthly payment” scheme these days I also frequently see or hear advertisements that tell you a price only in terms of a monthly payment. I’m not talking about monthly service things either. I mean for consumer goods. This is really common with car dealers. Not that long ago I was someplace where they were playing commercial radio and I heard an ad for mattresses. I did a double take, wondering for a moment if this was some sort of joke. I don’t even remember the advertised monthly cost for the “great deal”. I only remember it was for 72 months! A 6 year loan to buy a bed just seems crazy to me! I wish I had paid enough attention to remember what the monthly payment was so I could calculate out the actual cost. My general rule is that if someone is only advertising the monthly payment for an item it is likely way overpriced.

Another scheme I’ve seen grow in recent years is the “home equity loan.” I believe this used to be called a second mortgage or “betting the farm.” The general wisdom used to be “don’t bet the farm.” These days the constant barrage of advertising makes it seem like you are a fool if you don’t “unlock the equity in your home.”

When I first saw these ads I couldn’t believe anyone would go for them. Who would take out a second mortgage on their house to have a vacation in the Bahamas or spruce up the kitchen? Now it seems to have become so popular that not only do the ads push the idea at you, but also respected friends and neighbors, who have taken out such loans, present it as though it’s a good idea. Our homes have come to be viewed in terms of monetary value, a sort of savings account we didn’t realize we had.

From my perspective, the real value of my home is the shelter it provides me from the elements, the spaces it offers to create my artwork and live in, and all the psychological benefits provided by securing these things. No way am I going to risk all that for a vacation or some new countertops and a coat of paint! My house is not a revolving bank account. It is my home.

When you take out a home equity loan, you are essentially selling part of your house back to the bank and agreeing to repurchase it with interest. It’s a scam to keep you from ever paying off your home and thus it keeps you in debt. In this way it’s really a clever twist on the “lower your monthly payment” scheme. If you paid off your home instead, you would stop making those interest payments and suddenly find you have much more available money on hand.

I do have to note that some in the FIRE movement, who already have a good handle on how to manage finances and pay off debt, have advocated getting a home equity loan set up and readily available to draw from if needed. Then they utilize it as their emergency fund, only to be used if really necessary. This then allows them to take the money that was in their emergency fund and invest it elsewhere to earn a higher rate of interest. This does sound like a clever way to work the system, keeping liquidity available if really needed by using the equity in your home. This approach is quite different than borrowing the money for consumptive spending. In the ideal world you would never even borrow the money, just have it ready and available if needed. This isn’t something I’m doing, nor do I plan to do it, but I can see the wisdom in it.

A couple of years ago, when I was still making mortgage payments, my bank tried another scheme I thankfully haven’t seen since. I hope this means no one took them up on their offer. Here’s what it was. In order to give me some “extra spending money” for summertime vacations and recreation, they were willing to allow me to skip a monthly mortgage payment Naturally there would be a small fee for this added onto the next month’s payment. The fee itself was really quite large in proportion to my monthly payment, but that isn’t even where the real cost was. What they would do is extend the term of my entire loan out another month. I never did calculate what that scam would have actually cost me, but it would have been huge for just getting a few hundred dollars of “extra disposable income” for a month.

Once again it is through clever spins on wording that they are attempting to sell me something which is clearly a poor financial choice. Upon later reading the loan agreement from this bank, I could see that they had simply reworded what would happen if you missed a monthly payment anytime. The fees and penalties were the same! What they were doing was actively encouraging people to miss a payment. Another way to view it was that this bank was trying to get me to take out a long-term loan equal to one month’s mortgage for no particular reason at all. That scam so irked me that if it had been easy and inexpensive I would have taken my home loan to another bank. However, since I knew I was going to pay off the loan soon, it wasn’t worth the closing costs to refinance.

I wish I could say this “skip a payment” scam went away, but sadly I see it more and more. So I’m guessing far too many people go for it. I’d recommend you seriously think twice and calculate the full cost before ever doing so.

Banks make a great deal of money collecting interest on debt. It is in their best financial interests to get you to borrow as much money as they can. I suggest being very wary of all bank offerings. Read the fine print and consider the total end cost.

In a past article I wrote about housing and the strengths of buying your own home rather than renting. I’ve since heard of a new type of home loan being pushed; I can’t believe anyone would accept it, but it appears to be getting quite popular. It’s called an “interest only” loan. As I understand it, you borrow however much in principal and only have to pay the interest on that principal each month. This is the ultimate “lower your monthly payment” scam in that your monthly payment is only the interest. Unless you pay extra, you will never pay off the loan. There’s no way to even calculate the total cost of such a loan because the cost doesn’t end. If you buy a home with an interest-only loan, you are essentially renting with all the added costs of home ownership added to it. The crazy thing is people don’t even seem to be using this type of loan to “lower their monthly payment” but rather to buy a way more costly house than they could otherwise afford. I guess the thinking goes, “since you only have to pay the interest on the loan, you can borrow much more.”

I still think I must not be fully understanding what an “interest only” loan is about. The whole thing just doesn’t make sense to me.

To reiterate what I was advocating in my previous housing article, I recommend buying the most minimal home that will meet your needs, with the smallest loan possible. Then once you have paid off that house, all the money you would be spending in interest can be quickly saved up to purchase the home more fitting to your dreams with cash. You may find your dreams don’t actually center around the large beautiful home in the trendy neighborhood, but instead on the activities of your life, such as making art. Find what really brings you happiness and spend your money and energy there.

It is my opinion that credit cards are a dangerous thing to possess. What a credit card provides is a very easy way to borrow money.

From what I’ve seen what gets most people to accept their first credit card (and always keep at least one) is fear. That fear I usually expressed in the phrase, “I like to keep a credit card in case of an emergency.” I have a feeling this fear is played up and used to sell more credit cards and cell phones than any other reason.

In the early days of cell phones the sales pitches were all about, “what happens if your car breaks down, or you child gets hurt at school?” They were trying to justify and sell their product through fear.

I’ve never used a credit card. I don’t even have one. They certainly are convenient at times. In fact, it seems almost indispensable as an artist who must continually order supplies from far-off states. However, I’ve found a debit card works just as well, without dangling the carrot of easy borrowing in front of me. Haven’t I ever run into some financial troubles? You bet I have.

A credit card can be an easy solution, but it isn’t necessarily the best solution. We are creative people.

One of the skills an artist learns is creative problem-solving. I will apply this first. I see borrowing money and incurring debt as a solution of last resort. I will enter it only with extreme reluctance and lengthy consideration.

Credit cards seem specifically designed to encourage easy and impulsive purchases. Heck, isn’t that why we accept them in our art fair booths or galleries? It’s so easy to borrow money with a credit card, usually with the good intentions of paying it all off when the monthly statement comes in.

I’ve only heard of one situation where a credit card seemed to be the only option in an emergency. It involved someone stranded in a foreign country with no money and no plane ticket to return. However, I hear stories all the time where credit cards have created financial emergencies because they are so easy to abuse and rack up enormous amounts of debt.

In this updated section I feel obligated to note that something often called credit card churning is a major thing for many in the FIRE (financial independence retire early) movement. I’m not going to get into it all here, but basically these are people who already have a strong control over their money and won’t fall into the debt trap. They have found ways to take advantage of bonus sign up offers, points, and travel miles to use credit cards for paying for normal spending they would do anyway and get money back or free travel. While I hear that some can make hundreds of dollars to thousands a year doing this it’s not something I care to mess with personally.

If you’re already in debt (and I believe it’s a very rare few who aren’t), how can you get out?

I am in debt. It’s a carefully considered debt, but it’s debt all the same. This is what I’ve been doing to eliminate it.

I’m quite happy to report that not too long after this article was originally published I was able to become fully debt free! I have remained that way ever since and have no intention of taking on debt again.

First, stop taking on more debt. As I’ve said, borrowing money is always a last resort for me and only on major things. For most areas of my life, borrowing money is never even a consideration. If I see a great sale but don’t have enough money on hand to buy what appeals to me, I just do without. With interest added on, that sale price is no longer so low. Borrowing money for basic shopping and paying interest just doesn’t seem like a fulfilling use of my resources. Next, I built up that six-month savings buffer I wrote about last time. This, not credit cards, has been the financial key that takes care of my emergencies. I can just pay with cash and rebuild the buffer. As I said before, it can take some time to build this savings – but the security and freedoms it gives you are powerful.

Then each month I look at my total income and total expenses. Assuming I made more than I spent, the difference between the two is what I gained.

This amount used to be called “savings,” but with today’s rewording it’s being called “disposable income” in the hopes that you will dispose of it. Since I already have enough savings to keep me secure, all my extra income each month is paid directly to the principal of my loans. This pays them off much more quickly than taking the loan to full-term, thus getting me out of debt and saving me money I’d be paying in interest. For maximum savings it’s generally best to first pay off the loan with the highest interest rate and work your way down.

If I have higher expenses in a month that take away from my six-month buffer, then I put my extra money into savings until I’m secure again. Then it’s back to paying off debt. At this point I’m down to just my student loan, which is rapidly decreasing. Once that’s paid off and I’m debt-free I expect I’ll be a little giddy with all the extra cash I have coming in that used to be servicing my debt.

I’m able to do all this with my very modest income as an artist. If I can do it, you can – these things aren’t out of reach for anyone.

Debt is a tremendous strain on our resources. Readily incurring it in the pursuit of your dreams may just prevent you from achieving and maintaining those dreams. Eliminating the unfulfilling waste of my energies put toward servicing debt is solidifying my dreams to sustain being an artist. It can help you get there too!

I feel like in this update section I should note that there are two main types of debt, consumptive and productive. Consumptive debt is money that is borrowed to purchase something that gets consumed and used up leaving you with just the debt to repay. It’s generally seen as bad for ones financial future. Productive debt is money borrowed to finance something that should then be producing increased income to both pay off the debt and generate even more money. An example of this might be borrowing money to purchase equipment to expand your business production. Productive debt well spent can be a way to generate more wealth quicker and is generally seen as a positive thing for your financial future (if done right).

For myself, I am a bit of a curmudgeon. I just plain don’t like debt of any type and feel more secure without it. I’m not certain what the future will hold, but for reasons relating to the 3E’s I’ve talked about before I suspect these will be dynamic times to live in, with strong potential for major, drastic changes. Not having debt obligations hanging over me gives me a sense of comfort in knowing I’ll be more able to make sudden shifts as opportunities or needs arise.

A fine case in point at the moment is the COVID-19 outbreak that is just getting going as I post this, and may well get much worse. Several of my galleries have closed for an indefinite period of time. The workshops I have scheduled later this year are still on, but I’m not at all confident they won’t need to be canceled. Not having obligatory monthly payments to service debt has me at greater ease as I go into what is likely to be a period of significant income reduction.

You may feel differently regarding productive debt, being comfortable with the risks involved. However, I’d advise all to be very wary of consumptive debt.

Studio Snippet

Having recently finished teaching two workshops, one on patinas, and the other focused on chasing on a vessel form, I am now getting back to chasing on my own vessels. These two were actually used as examples in class while they were in an earlier stage of development.

If this doesn’t look like my normal chasing station, you are right, it isn’t. Some time ago I started dating someone out here in Arizona where the workshops were held. I arrived early and am staying later to spend more time with her. Fortunately, and probably not accidentally, she is a metalsmith as well so I’ve rearranged a small section of her studio to work in while I’m here. If, as a result of COVID-19, travel bans within the country start before I am to head home I might just find myself here much longer. Things could be getting “interesting” soon… I’m very thankful I’m not staying at hotel should this trip get extended indefinitely. I have great company and a well supplied metal studio to work in!

I’m happy to have a site where I can again allow comments. (I had to shut them off on my old website because the spam was simply uncontrollable!) So please I encourage you to share thoughts of your own. My general rule about comments though is just to play nice. Differing views are fine, but I’m not interested in engaging in or moderating verbal fights. If I feel things get out of hand, by whatever criteria I decide, I’ll just start blocking or deleting things.