Personal Finance Blog by Debit versus Credit

Merry Christmas To All And To All A Debt Free Life

December 24, 2008 | Filed in: Miscellaneous | 1 comment

If you like this post then please consider subscribing to my RSS feed. You can also Subscribe to Debit versus Credit by Email and have new posts sent directly to your inbox.

It’s my favorite time of the year once again. I’m out of school until next semester and right now all I have to worry about is going to work and making money. I still have a job and I don’t have to worry about losing it either so to be completely honest with you, my life is going pretty well.

While things are going well for me, I am not naive enough to believe that everyone else in the World is having a merry holiday season. I know things are rough out there for a lot of people, and while I’m counting my blessings that right now I’m not facing a lot of difficulties I’m still concerned for others’ well-being.

I’m especially concerned that people are getting themselves into unnecessary debt this Christmas season, just to pay for the most extravagant presents they can think of for their kids or their significant others. While it’s nice to give and receive the best presents it’s really not practical to give what you can’t afford to give. Don’t get yourself into debt that you’ll be paying off until next Christmas just to pay for this one.

With that being said I’d like to ask you a question, and be honest with me here.

With any luck the answers are going to come back with very little to no debt taken on this year, but I’m worried that I won’t get the results I’d really like to see. Nevertheless I hope that you all have a Merry Christmas and if you’re not there already make sure you get started on creating a debt-free life for yourself!

Tags: affordability, Christmas, Debt

The Housing Crisis is Not Over

June 2, 2008 | Filed in: Personal Finance | No comment

I came across an interesting article the other day on the Wall Street Journal Online. Cyril Moulle-Berteaux of Traxis Partners LP (a hedge fund based in New York) wrote an article entitled “The Housing Crisis is Over.” He brought up some very interesting points, which I’d like to highlight for you and also provide some commentary as well as my own personal opinion on the points that he’s made.

Mr. Moulle-Berteaux begins his article by mentioning that headlines in the financial as well as the popular press are intensifying. Yet even with all of these cries of doom and gloom he predicts that “April 2008 will mark the bottom of the U.S. housing market.” This article, although posted almost a month ago, caught my eye because of the significance of this statement. What would Mr. Moulle-Berteaux use to back up this statement? How could he possibly claim that we’re at the bottom and won’t go down any more when it seems so obvious that this is quite untrue? Isn’t it?

What the “Bottom” Means

The author reminds us that “a bottom does not mean that prices are about to return to the heady days of 2005. It just means that the trend is no longer getting worse, which is the critical factor.” All things considered this makes his profound statement seem less impossible and even somewhat likely. After all we have been in this housing bust for several years now, shouldn’t it be about time for us to be at the bottom of the bust? It is definitely a possibility, but is it an actuality?

Mr. Moulle-Berteaux’s Argument

The author argued that the same thing that caused this bust is likely to pull us out of it: affordability. According to him during the 90’s and early 2000’s it took 19% of average monthly income to “service a conforming mortgage on the average home purchased.”  For first time buyers he claims that it took 29% of monthly income to purchase a home.  These numbers jumped for non-first-time home buyers and first-time buyers, respectively, to 25% and 37% of monthly income by the year 2006.  Over the past two years (since the previous mentioned point in 2006) Moulle-Berteaux argues that home prices have fallen 10-15% and mortgage rates have come down 70 basis points from their high (a basis point is equal to 1/100th of a percent).  This reduction in home prices has brought the monthly income/mortgage payment ratio back in line at 19% of monthly income for the average home buyer and 31% for the first-time home buyer.  In other words, he claims, “homes on average are back to being as affordable as during the best of times in the 1990s.”  

Essentially Moulle-Bertreaux is arguing that although inventories are at their highest levels ever and that home values are dropping like flies, we have reached a bottom.  He claims that inventories are increasing, but at decreasingly smaller levels and that prices - although they will continue to drop until sometime in 2009 - will not drop at the level that they have heretofore been dropping at.  It’s an interesting argument, and it does make sense but does not seem to be the reality of the situation - at least not yet.

The Market in My Neighborhood

I did a little bit of research for the median home price in Phoenix, AZ as well as the median and average household incomes.  I then used these figures to calculate a percentage of an average mortgage payment (based on a rate of 6.31% APY and the median home price of $210,000 with no down payment) and the 2006 greater-Phoenix median household income of $51,862 dollars.  With these figures I calculated that the average home buyer (based on their income equaling the median income) in the Phoenix area buying a home that’s valued at the median price would have a mortgage payment to monthly income ratio of 38% which is well above the authors claimed percentages of 19% and 31% for the average home buyer and the first-time buyer.

The market in my neighborhood is - based on the authors facts and figures - far above the affordability index that he has created.  So for the Phoenix area at least it seems that the housing crisis is not over… not yet.

How is the market in your neck of the woods?  Does it fall in line with these “averages” that Mr. Moulle-Berteaux has stated?

Tags: affordability, boom and bust, housing, housing bust, housing market, Personal Finance, Real Estate

The Worst Years of My (Financial) Life

October 26, 2007 | Filed in: Debt | No comment

I have a confession to make. It wasn’t very long ago that I experienced the worst few years of my life, financially speaking. In the latter-half of 2004 I began my adult life full-force, and I hate to admit, but I began it quite poorly. In not very much time at all I managed to get myself in thousands of dollars of credit card debt, which I discovered was a debt that would not easily go away. In my defense I was a full-time college student working part-time jobs to try and pay the bills, but playing the devils advocate it is obvious that I could have done more with the little money I made. I managed my money poorly for a time, but thankfully I’ve been able to learn from those mistakes. I’d like to share just a little bit with you on what I did wrong and, as cliché as it sounds, what I would do differently if I could do it all over again.

It happens before you even know what’s going on… one minute you’re sitting on the Titanic, and the next minute you realize the ship is sinking and there’s not a single lifeboat in sight.

It all actually started out pretty ironically. I told one of my friends in early 2004 that I wanted to save $30,000 by the end of the year 2005. In fact I almost did quite the opposite; I do believe by the end of 2005 I had around $15,000 - $20,000 worth of student loans and credit card debt. It happens before you even know what’s going on… one minute you’re sitting on the Titanic, and the next minute you realize the ship is sinking and there’s not a single lifeboat in sight.

Let the reckless spending begin

I started my freshman year of college in August of 2004 and due to certain circumstances I had no money to pay for my tuition. Doing what I figured was absolutely normal I borrowed some money from my brother to pay for my tuition. I started looking for a job at about that time also, realizing the need to repay my brother, but didn’t find anything steady for a few months. At that point I had applied for and received a credit card which I used to pay for my basic living expenses: gas, food and the like. I expected to pay off my credit card and my brother within a few months from the time I got my job, but instead I kept using my credit card and accumulating debt. I hadn’t done any budgeting and figured out how much I could afford to spend a month, and so I did what so many Americans do; I spent more than I made every single month. Within no time at all I had accumulated around $5,000 dollars worth of credit card debt, and I was beginning to feel as if I were drowning in debt. It was at this point that I began looking for a solution, but the solution I found was not a permanent one.

I wanted to cut down my credit card debt and figured I could take out some student loans to pay it off and then I could start fresh. This worked for a few months, but I still had not disciplined myself to live within my means, and when my lack of discipline was combined with the cost of tuition and books my credit card debt quickly climbed back up to its previous levels. This is when I decided to take on more student loans to pay down my credit card debt again, only this time unsubsidized loans with a higher interest rate. After I had racked up credit card debt and taken out student loans to pay it down a few times I finally realized the error of my ways and decided it was time for me get serious about my finances. To my credit I did fairly well with this at first, but eventually I managed to slip up again… and this time for even more than all of my student-loan debts combined.

New cars are great… if you want to throw your money away

I gave up a lot when I signed those papers, but one thing I regret the most is the amount I could have saved if I had kept my previous vehicle and put the difference between its payment and my new car’s payment into a savings or an investment account.

Yeah I did it, I bought a new car. Not just any new car though… I bought myself a 2006 Mitsubishi Eclipse back in March of the same year. Even though I had managed to accumulate a significant amount of student-loan debt at this point I had not yet made such a large financial mistake as I did when I purchased this car. Once all was said and done I had a loan in the mid to high 20’s and a car worth barely 20 thousand dollars. Viola! Instant 36% depreciation. I gave up a lot when I signed those papers, but one thing I regret the most is the amount I could have saved if I had kept my previous vehicle and put the difference between its payment and my new car’s payment into a savings or an investment account.

After this mistake I had had enough of my idiocy. I realized how poorly I had been managing my finances for the two prior years and I resolved to shape up. I concentrated on spending less so I could pay down my debts and save a little each month. I paid just a little extra on my car each month to try to get the principal balance down. I married a woman who knew how to save. I am proud to say that other than my student loans and my auto loan I am debt free. My wife and I have also managed to save between our 401(k)’s, a brokerage account and an emergency fund enough to almost completely pay off either my auto loan or my student loans.

If I could do it all over again I would have made myself a budget and stuck to it. I still would have had some student loan debts, but looking back I realize I could have avoided most, if not all, of my credit card debt and I could have my original auto loan almost completely payed off by now, had I not traded it in for a car two and a half times more expensive. I believe I would have been able to save a decent amount during that time. I would not have accomplished my goal of $30,000 in savings, due to my small income, but I would have accumulated some wealth if I had done these things. Mistakes are meant to be learned from, and I do believe that I have learned my lesson from these mistakes in my past.

What about you?

What financial mistakes have you made that you are not proud of, and what have you done to learn from them and/or correct them? I’d love to hear what you have to say!

Tags: Accounting, affordability, Budgeting, Debt, Discover, funds, Investing, wealth