Debunking the myth of ‘good debt’

Debunking the myth of 'good debt'

Don’t prolong your state of debt by thinking some liabilities are smart to hold.

Think your low-interest mortgage is good debt? Think again. There is some comfort in believing that being in the position of owing money to someone or some company can in some circumstances be “good.” Suze Orman, arguably the world’s most popular personal finance author and guru, explains the supposed difference between “good debt” and “bad debt.” Mortgages and student loans are examples of good debt, while car loans and credit cards are bad. Some debt, like high-interest loans and credit card debt, are certainly worse than others, but rationalizing owing money to others by calling it “good” is a stretch.

When the public is willing to consider any particular type of debt good, the lending industry is the only winner in the long run. For the benefit of our own personal finances, we’ll prosper more by considering all debt bad and striving to eliminate that debt even if we feel it is good.

Don’t fall into the trap of prolonging your state of debt while holding the idea that these forms of owing money are somehow good. Here’s why “good debt” isn’t all that great.

1. Mortgages. A mortgage on a house is a classic example of a type of debt personal finance experts and real estate agents want the world to be at peace with. There is something to be said for mortgages: the reality is that only a small percentage of Americans would be able to afford to purchase a house without access to a loan. The lending industry and the government have historically made it as easy as possible to own a home. We’re not escaping home ownership debt any time soon.

The deeper reality is that the value of real estate increases at or a little higher than the rate of inflation over the long term, but is much more unpredictable over the short term — the length of home ownership most people experience. Some consider mortgages to be good debt because it allows a home owner to be highly leveraged, in a good position for appreciation, but it is risky.

In addition, the tax advantages to paying mortgage interest are frequently overstated. While most taxpayers see an increased refund thanks to the mortgage interest deduction, the benefit can’t compete with not paying interest at all. We’re stuck with mortgages for now, but there’s no solid reason for keeping them around longer than necessary, as one might do with anything called “good.”

2. Student loans. Student loans are an investment in the future; a bachelor’s degree in hand will significantly increase a person’s lifetime income compared with just a high school diploma. Again, the lending industry encourages taking on unnecessary debt, and colleges and universities are complicit.

It is unnecessary to borrow money to finance a college education. In his forthcoming book, Debt Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships, or Mooching off My Parents, author Zac Bissonnette explains how student loans can be more devastating to an individual’s financial condition than a mortgage. Did you know that bankruptcy can eliminate your credit card debt and your mortgage but your student loan will not be forgiven? Even the government will garnish your social security wages if you default on your student loans.

Bissonnette also shows how there is no good reason to borrow money for an expensive private college or Ivy League university when the quality of education you can receive and your earning potential is matched or bested by an inexpensive, local state college. Reconsider the assumption that you pay a higher price for quality.

3. Start-up costs. Whether starting a business requiring an up-front purchase of inventory or have just graduated college and need to buy appropriate attire for a career, some personal finance experts advise the cash-strapped newbie to anticipate tomorrow’s income and pay for your expenses with a credit card or take out a loan today. This, like borrowing money to invest in something without a guaranteed return, is risky.

While it is often true that success requires taking some risks, consider your options for dealing with the worst-case scenario. Unemployment is still at a high level, and many of last year’s graduates are still out of work with credit card balances increasing. Most new businesses fail.

Even borrowing money to finance assets expected to appreciate like a house, a person’s income potential through education, and a career or business carries risks and in some cases can be fully avoided with smart preparation. You may hear some personal finance experts call these types of debt “good,” but they are far from beneficial. At best, they are like other debt but might help improve your financial condition or quality of life at some point. At worst, however, even this debt can devastate your future if not watched, cared for, and eliminated.

U.S. downgrade and your credit cards

U.S. downgrade and your credit cards

Interest rates on cards are likely to be affected much differently than those on consumer loans.

Stocks have kept investors on edge during the past week as the Dow swings from boom to bust. For consumers, it’s a good time to step away from the market mayhem to survey the damage and potential threats to their finances.

One area that is getting short shrift — but shouldn’t — is the impact the Standard & Poor’s debt downgrade may have on credit card rates.

First, some background. The downgrade on U.S. Treasury bonds that was issued by ratings agency Standard & Poor’s — from AAA to AA+ — was widely viewed as a wake-up call to the U.S government and its “drunken sailor” approach to spending (though that might actually be an insult to drunken sailors).

While the Fed says it will keep rates near zero, many economists expect major consumer interest rate categories to eventually rise because of the downgrade, including things like mortgage, auto and student rate loans.

It’s no big secret why. Any consumer with a low credit rating knows that he or she is a bigger credit risk to lenders, and thus must pay higher interest rates for creditors to accept that risk and loan the consumer money.

It’s the same thing with Standard & Poor’s and the U.S. government. A lower credit rating means that global creditors face a higher risk of default when lending money to Uncle Sam. To borrow money — usually through the sale of U.S. Treasuries in the bond market — the U.S. government will have to offer higher rates of return to investors.

But here’s an interesting point. Even if Treasury yields do recover and grow again, your credit card’s interest rates may not follow the script. Why? Let’s look at three reasons:

Credit card rates aren’t tied to Treasury rates. Instead, credit card interest rates are tied to the Federal Reserve’s prime interest rate, which still remains historically low, and should continue along that path. Federal Reserve chairman Ben Bernanke has made it clear the Fed’s rate policy is to keep those rates down, despite what S&P says. That should help keep card rates manageable for consumers.

The CARD Act has a built-in safety net. Government can do something right once in a while. Take the credit card legislation passed in 2009: Inside the CARD Act is a provision that limits how much card issuers can raise rates. The reforms are limited to “current account balances,” meaning card companies can still raise rates on new charges, so be careful of new spending going into the last four-and-a-half months of 2011. But any charges you’ve already made are tied to current rates, which still remain relatively stable. A quick glance at BankingMyWay’s credit card rate search tool shows card interest rates stable between 11% and 20%, with the average credit card rate around 14%.

Standard & Poor’s doesn’t speak for everyone. Right now, S&P is out on its own with its debt downgrade. The other major U.S. credit agencies — Moody’s and Fitch ratings — didn’t go along. And until, or even if they ever do, don’t expect your credit card interest rates to rise significantly.

So call it a cloud with a silver lining. Yes, the stock market is taking a huge hit, but at least your credit card rate isn’t.

20-somethings create their own jobs

20-somethings create their own jobs

In today’s economy, you can’t just wait around for someone to hire you, say young entrepreneurs.

Five years ago, after graduating from New York University with a film degree and thousands of dollars in student loans, Scott Gerber moved back in with his parents on Staten Island. He then took out more loans to start a new-media and technology company, but he didn’t have a clear market in mind; the company went belly up in 2006.

“It made me feel demoralized and humiliated,” he says. “I wondered if this was really what post-collegiate life was supposed to be like. Did I do something wrong? The answers weren’t apparent to me.”

Still in debt, Mr. Gerber considered his career options. His mother kept encouraging him to get a “real” job, the kind that comes with an office and a boss. But, using the last $700 in his bank account, he decided to start another company instead.

With the new company, called Sizzle It, Mr. Gerber vowed to find a niche, reduce overhead and generally be more frugal. The company, which specializes in short promotional videos, was profitable the first year, he says.

Mr. Gerber, now 27, isn’t a millionaire, but he’s paid off his loans and doesn’t have to live with his parents (he rents an apartment in Hoboken, N.J.). And he thinks his experience can help other young people who face a daunting unemployment rate.

In October, Mr. Gerber started the Young Entrepreneur Council “to create a shift from a résumé-driven society to one where people create their own jobs,” he says. “The jobs are going to come from the entrepreneurial level.”

The council consists of 80-plus business owners across the country, ages 17 to 33. Members include Scott Becker, 23, co-founder of Invite Media, an advertising technology firm recently acquired by a Google unit; Lauren Berger, 26, founder of the Intern Queen, a site that connects college students with internships; Aaron Patzer, the 30-year-old who sold Mint.com to Intuit for $170 million; and Josh Weinstein, 24, who started CollegeOnly.com, a social networking site that is backed by a PayPal founder.

The council, which has applied for nonprofit status, serves as a help desk and mentoring hotline for individual entrepreneurs. People can also submit questions on subjects like marketing, publicity and technology, and each month a group of council members will answer 30 to 40 of them in business publications like The Wall Street Journal and American Express Open Forum, and on dozens of small business Web sites.

Council members assert that young people can start businesses even if they have little or no money or experience. But whether those start-ups last is another matter. Roughly half of all new businesses fail within the first five years, according to federal data. And the entrepreneurial life is notoriously filled with risks, stresses and sacrifices.

But then again, unemployment is 9.8 percent; Mr. Gerber’s in-box is flooded with e-mails from young people who have sent out hundreds of résumés for corporate jobs and come up empty. According to the National Association of Colleges and Employers, only 24.4 percent of 2010 graduates who applied for a job had one waiting for them after graduation (up from 19.7 percent in 2009). What do some people have to lose?

THE lesson may be that entrepreneurship can be a viable career path, not a renegade choice — especially since the promise of “Go to college, get good grades and then get a job,” isn’t working the way it once did. The new reality has forced a whole generation to redefine what a stable job is.

“I’ve seen all these people go to Wall Street, and those were supposed to be the good jobs. Now they are out of work,” says Windsor Hanger, 22, who turned down a marketing position at Bloomingdale’s to work on HerCampus.com, an online magazine. “It’s not a pure dichotomy anymore that entrepreneurship is risky and other jobs are safe, so why not do what I love?”

How to know when the recession is over

How to know when the recession is over

Many Americans just aren’t feeling the impact of the recovery in their daily lives.

Most economists think the recession technically ended a year or so ago, when the economy started growing again after shrinking for five quarters out of six. But a year’s worth of “recovery” hardly feels like it. Unemployment, at 9.6 percent, is painfully high, and companies show little interest in hiring. That leaves nearly 15 million unemployed Americans wondering what to do next.

Overall, Americans have lost $12 trillion in home equity, investments, and other forms of net worth. We’re ready to rebuild and go back to work, but instead of picking up steam, the economy seems to be stalling, possibly headed for a dreaded double-dip recession. The prolonged malaise could cost Democrats dearly in the upcoming midterm elections.

Healing is underway in badly damaged parts of the economy. But improvements have been too slow and subtle for many Americans to notice. Here are six ways to tell when we’re finally entering a recovery that feels like one:

The unemployed people you know start to find jobs. Unemployment is the single biggest indicator of economic health–or misery. Rising unemployment cuts into incomes and spending and spooks consumers, so it’s hard for housing, retail sales, and other key parts of the economy to recover until jobs come back. So far, they haven’t–but layoffs have largely stopped and temporary hiring is picking up, so we’re part of the way there.

Read more “How to know when the recession is over”

Jobless claims rise to highest level in 9 months

Jobless claims rise to highest level in 9 months

First-time jobless claims hit 500K, highest level since November as labor market weakens.

Employers appear to be laying off workers again as the economic recovery weakens. The number of people applying for unemployment benefits reached the half-million mark last week for the first time since November.

It was the third straight week that first-time jobless claims rose. The upward trend suggests the private sector may report a net loss of jobs in August for the first time this year.

Initial claims rose by 12,000 last week to 500,000, the Labor Department said Thursday. Construction firms are letting go of more workers as the housing sector slumps and federal stimulus spending on public works projects winds down. State and local governments are also cutting jobs to close large budget gaps.

The layoffs add to growing fears that the economic recovery is slowing and the country could slip back into a recession. “The rise in initial jobless claims over the past three weeks makes it difficult to maintain confidence in the recovery and suggests the labor market is backtracking,” Ryan Sweet, an economist at Moody’s Analytics, wrote in a note to clients.

Stocks tumbled on the fear of more layoffs and weak job growth. The Dow Jones industrial average fell 185 points in midday trading. Broader indexes also declined.

Jobless claims declined steadily last year from a peak of 651,000 in March 2009 as the economy recovered from the worst downturn since the 1930s. They hit a low of 427,000 in July before rising steadily over the past six weeks.

In a healthy economy, jobless claims usually drop below 400,000. “This is obviously a disappointing number that shows ongoing weakness in the job market,” said Robert Dye, senior economist at the PNC Financial Services Group.

Dye said claims showed a similar pattern in the last two recoveries, but eventually began to fall again. The current elevated level of claims is a sign employers are reluctant to hire until the rebound is well under way. That’s what happened in the recoveries following the 1991 and 2001 recessions, which were dubbed “jobless recoveries.”

California reported the largest increase in new claims two weeks ago, the latest data available. The state saw a jump of 4,393 in claims, due to more layoffs in services. Georgia has seen claims rise sharply for two straight weeks because of layoffs in construction and manufacturing.

The nationwide increase suggests the economy is creating even fewer jobs than in the first half of this year, when private employers added an average of about 100,000 jobs per month. That’s barely enough to keep the unemployment rate from rising. The jobless rate has been stuck at 9.5 percent for two months.

Private employers added only 71,000 jobs in July. But that increase was offset by the loss of 202,000 government jobs, including 143,000 temporary census positions.

July marked the third straight month that the private sector hired cautiously. Economists are concerned that the unemployment rate will start rising again because overall economic growth has weakened significantly since the start of the year.

After growing at a 3.7 percent annual rate in the first quarter, the economy’s growth slowed to 2.4 percent in the April-to-June period. Some economists forecast it will drop to as low as 1.5 percent in the second half of this year.

The four-week average, a less volatile measure, rose by 8,000 to 482,500, the highest since December. The number of people continuing to receive benefits fell by 13,000 to 4.5 million, the department said. The continuing claims data lags initial claims by one week.

But that doesn’t include millions of people receiving extended unemployment insurance, paid for by the federal government. About 5.6 million unemployed workers were on the extended unemployment benefit rolls, as of the week ending July 31, the latest data available. That’s an increase of about 300,000 from the previous week.

During the recession, Congress added up to 73 extra weeks of benefits on top of the 26 weeks customarily provided by the states. The number of people on the extended rolls has increased sharply in recent weeks after Congress renewed the extended program last month. It had expired in June.

Is it the night time to quit your job?

Is it the night time to quit your job?

Far too many people quit their jobs in frustration, only to find similar (or worse) conditions in their next positions. If you find yourself tempted to quit your job, you’ll make a far better decision for yourself if you analyze your situation calmly and rationally.

1. Never quit in a moment of emotion. Most people have moments—plenty of them—where they want to quit their jobs. Most of the time, the feeling passes. Give yourself a couple of weeks—if the feeling doesn’t lift, then it’s something you can take seriously. But you don’t want to make a major decision in the heat of emotion that you can’t reverse later. And remember, it’s easy to reverse a decision not to quit. But it’s close to impossible to reverse a resignation once you’ve given it.

2. Think carefully about the advantages of your job that you may not find somewhere else. Perhaps your employer gives you an enormous amount of flex time that you don’t think you’d easily find elsewhere. Maybe you have a fantastically short commute that you really value. Maybe you get to do work that you love in a way that’s hard to find. You need to figure out what’s important to you and weigh that against what’s frustrating you. Maybe quitting would be the right decision—but make sure that you’ve weighed all the pros and cons before you do.

3. If possible, talk to your boss about your frustrations. You may find that things can change.

4. Be realistic about what will happen after you quit. If you don’t have another job lined up, how long will your savings last you? In this market, some people are going unemployed for a year or more, so if you resign without another job offer, you need to have a long-term plan.

5. Never quit just to “show them.” Often a desire to quit in frustration really stems from feeling powerless. The employer-employee relationship has such a slanted power dynamic that when your job or manager is making you unhappy, sometimes it can feel like your only way to regain power is to quit—and then, that’ll show ’em. But this is rarely satisfying. Your employer may be surprised at first, but people leave jobs all the time—they’ll quickly get over it. And you don’t want to be jobless just to make a point.

If you do end up deciding to quit, you’ll feel a lot better knowing that you thought it through carefully and deliberately before you took the plunge.