Monday, July 28, 2003

Jul 28 2003

Ahhhh, it’s a new week, and it’s time for a fresh set of journal entries.

Today’s topic: debt. Debt is bad. I think we can all agree about this.

But why is debt bad?

It’s bad because it costs you money. For any kind of debt, you have to pay a little extra money on your debt, namely, interest. For a credit card, the bank charges you every day, depending on your balance and your interest rate. The higher the balance, the more they charge you.

Obviously, this is bad, since you end up paying extra money just to spend money. If you leave $1,000 for a year on a credit card with a 20% APR, your balance will be $1,200 at the end of that year. So, by doing nothing for a year, you end up owing the bank $200.

Say you want to pay off that debt. Great. But you still have to buy food, and clothes, and gas. And when you’re standing in front of a Suncoast display with shelves of your favorite movies imploring you to take them home, will you be strong enough to refuse them?

However.

There’s another side to this debate. It’s possible to be too rigorous about debt.

My sister has an extremely debt-averse friend. One day, my sister noticed that this friend’s glasses were cracked. The friend explained that she wouldn’t be able to save up the cash to replace them for another three months.

But, hey, at least she’s not in debt. The 20% interest on that credit card charge of $100 would’ve built up to a whopping $5 by the time she’d have been able to pay it off.

Debt isn’t all bad. For example, let’s say I decide to buy a $5,000 HDTV plasma screen. I could buy it for cash. Or, I could buy it a couple of months early and pay partly in cash and partly on a credit card. In the time I pay off that $2,000 on the credit card, the interest will only amount to maybe $100. In effect, I’m paying $100 to get this TV set several months early. I’d be happy to do that.

Debt is insidious, but it can be managed, and it can be used well.

(So says the man who is buying almost nothing beyond groceries until he pays off his credit card bill. But still.)

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