Is there "good" debt?

Kate of the personal finance blog Kate Spills the Beans questioned in her June 4th post if there is such a thing as “good” debt. Yes, Kate, there is such a thing, and the msn Money article you refer to actually does a good job of clarifying the difference between good debt and bad debt.

Here’s my quick take on the subject. First, what’s bad debt?

New car loan=very bad debt. As they say, a new car decreases in value the second you drive it off the dealer’s lot. Interest from a loan piles on to an already inflated sticker price. So you are paying even more to buy something that will be worth dramatically less over time. Two tips: First, buy a “slightly used” car with 10,000 to 20,000 miles on It. Second, start saving for it now so you can pay cash.

Plasma TV by store credit, 0% interest=bad debt (with a catch). You can avoid the interest that would increase the TV’s true price by paying off the debt within a year, which can be good. But you are committing yourself to those monthly payments, which can be bad. What if you lose your job? What if your car dies and you have to get a new (slightly used, of course) one? Miss a payment and often that 0% interest goes away. You can’t predict the future, but you can plan for it. Plan wisely.

Vacation by credit card=the worst debt. Like the car scenario, adding credit card interest—which typically dwarfs the 5% or 10% interest most people pay on a car loan—substantially increases the true cost of that Caribbean getaway. What’s worse, you have nothing of financial value at the end; at least you can sell or trade in your car to recoup some of its cost. Better make those memories on the white sands count.

Now, what’s good debt?

Student loan=good debt (with a catch). The best investment is in yourself. If financing an education allows you to man the local bank’s drive-thru instead of the fast-food drive thru, then it’s worth the added interest. But watch what you borrow; you don’t need to pay Harvard tuition rates to be something like a teacher. School debt that dwarfs the earning potential of your career choice is not good.

Money to start a business=good debt (with a catch). Like a student loan, this is an investment in yourself. If you have what it takes to succeed in business, the sky is the limit and can be worth borrowing to get started. But also like student loans, be careful. Burdensome debt is a major reason why most businesses fail in the first year.

Mortgage=the best debt. Ok, maybe “best” is a little strong. But unlike a car, a home’s value will most likely increase over time. Plus, if you don’t own a home you’ll probably be paying rent, which can be as much or more than a monthly mortgage payment and leaves you with nothing but your security deposit in the end.

Whether the debt you rack up is good or bad, your goal should be to pay it off as soon as possible. Even good debt is bad if you don’t get eventually get rid of it.

Of big houses and luxury cars

Jonathan Clements' points out in this week's Getting Going column that Americans might be putting less money in savings because they are spending more on their homes and cars. (Thanks to JLP of All Things Financial for alerting me to the article.) I think he's on to something.

I see people who have 5-year, $450 monthly payment car loans, despite large credit card balances and student loan bills. One couple I know is paying off a new truck, in fact, that's worth more than the mobile home they live in.

M and I live in a townhome. About a year ago, we decided to look for a house with a yard in a town with better schools. We even bid on two larger houses that were almost double what our current home is worth (even at the still-inflated housing prices in our area).

Thank the Lord that the sellers took someone else's offer. While we may have had a larger home, I believe the heftier mortgage payment would have offset most of the benefits and created a lot of stress on our lives and marriage.

What's more, M just finished her job as a schoolteacher and is now a full-time mom. She's thrilled, as am I. (The other day she surprised me with brownies! Yes!) Making that choice would have been virtually impossible in a larger, more expensive home. (I plan to write more about how we decided to make this lifestyle choice in a later post.)

Even with one relatively modest income, we're still managing to save through my employer's 401(k). We're probably going to cut back on what we put away for our kids' college funds, as well as for Christmas and vacation. Plus, we're probably going to need a van next year for M, and my car is also making a lot of funny noises.

But to me, saving for the future is a conscious choice. As Clements points out, we need a place to live, and arguably, reliable transportation. But how much of each do we really need today that is worth jeopardizing tomorrow?

"Found" money can take a little bit of looking

Sometimes the answer to a particular money problem is right in front of you. Finding it is often simply a matter of getting in the habit of looking there first.

A friend of mine recently needed a new lawnmower. He saw one on sale at a local dealer, but didn't have the extra few hundred dollars to purchase it. He also didn't have time to save for it. His grass was already tall and the management association overseeing his subdivision readily fined homeowners for shaggy lawns.

In such a situation, it would be easy for many of us to pull out our credit cards--an all-too-convenient temptation. We might even have been able to rationalize the decision: better to pay the cost of the mower upfront and maybe pay a little interest, than pay the association's fine each month.

But a wiser choice is to keep that temptation in check. Keep your card in your wallet. Instead, start developing a new habit: actively look for ways to avoid buying items on credit in those times you don't have the cash.

My friend started looking around his house. In his garage, he came across a couple containers of scrap metal he'd collected over the years as a machinist and contractor.

Scrap metal prices, like other commodities, have soared in the last several months--so much so that some folks have taken to (please don't try this at home) ripping guardrails off highways and the tracks from railroad beds to fetch a high price at the scrap dealer. For my friend, the containers of scrap metal yielded enough cash to pay for a new mower.

He had other options: He could have borrowed one from a neighbor. He could have temporarily hired one of the neighborhood kids to cut the grass until he saved up enough for the new machine. He could have gone online or looked in the newspaper for a used mower.

But I was encouraged that he at least took a step in the right direction to hold the line on his existing debt. He and his wife have struggled to keep their card balances from inevitably climbing higher and higher, so this is a very good sign.

Credit card debt is avoidable. You don't have to live under the yoke of a monthly minimum payment that really only serves to keep you at the mercy of the lender.

When you catch yourself reaching for that card to buy something with money you don't have, stop. Think. Get creative. See if there's another way to make the purchase without going deeper into debt. With a little bit of looking, you might be able to find something like scrap metal that is as good as gold.

Paying less, without the effort

Saving money doesn't have to be hard work. In fact, the easier you make it, the more money you'll likely save.

For instance, almost every time I grocery shop, I like to look at the bottom of the receipt for two items:

--"Your total savings" (amount on that shopping trip I saved using coupons or buying on-sale items )

--***YEAR-TO-DATE SAVINGS*** (amount I've saved to that point in the year. I didn't add the asterisks and uppercase letters for emphasis; that's exactly how the text appears on the receipt.)

As of May 31, my family had saved $221.50 at the Stop & Shop, where we do smaller, weekly shopping trips for things like milk and produce. At the Acme, where we place larger grocery orders online every six to eight weeks and have them delivered to our door, we saved $105.91. Total we spent at both stores through the same time period: $1226.17. In all, we saved about 27% of our costs.

I am not a religious coupon cutter. And I don't tend to buy items that I or my family may not eat or use, just because they are on sale, or to see my "year-to-date savings" figure grow each trip. To me, the best way to save a few dollars is to buy or do the same things that I normally do--only, in doing so, find simple ways to pay less for them.

I spend an average of about 10-15 minutes a week clipping coupons from the Sunday paper. Usually I do it while watching TV or having a conversation with my wife, M. I tend to save between $5 and $20 per weekly shopping trip--to me, that's well worth the few minutes of time and the $38/six month-subscription cost of the paper itself. If I miss a week, I don't sweat it.

Applying for and receiving shopping cards from both Acme and Stop & Shop took about five minutes each and was free. I usually find that Stop & Shop reduces price for cardholders on more items we use than Acme.

I purchase most things using a credit card that earns reward points. I pay off the card balance every month, so I'm never charged a cent of interest. Next month, M and I will take the family to Disneyworld for a week. Points accumulated from purchases over the last year and a half will pay for my daughter's flight to Orlando from Seattle (about $400) and a rental car (about $300). So essentially I've saved $650 ($700 minus $50 for two years of membership fees to hold the card) for doing nothing differently than I would have done before.

To me, cutting costs is like dieting. If you go on a diet to lose weight, but eat food and portion sizes that are drastically smaller than what you eat normally, it's most likely a losing battle. Chances are good you'll regain the weight you lose at some point after you stop dieting and return to eating "normally."

If you hate the thought of clipping coupons, chances are good you always will. But that doesn't mean you can't find other easy ways to save a few dollars. Before throwing "junk mail" without a look in the trash, check it for discounts on services you may use in the next couple months, or restaurants you'd like to visit. Buy an Entertainment book and keep it in your car, so you won't forget to check it for a coupon at the fast-food place or popular museum you're heading into. And get a shopper's discount card from all the places you shop at more than once a month.

The point is to incorporate ways of saving money into your existing life as much as possible. Then it will be just as profitable, but won't seem quite so much like work.

Red alert on cheap DVD rentals

Renting DVDs is a pretty cheap form of entertainment. But watch in your area for a new company looking to make it even cheaper--as well as faster, easier, and better.

Redbox is an automated DVD rental company. It offers $1 per night rentals of new and recently released DVDs through standalone vending machines located in a number of grocery and drug stores, and yes--even McDonalds restaurants. The company is actually a wholly-owned McDonalds subsidiary.

Today, Redbox machines can be found in eight metro regions, including Las Vegas, Denver, and Hartford, Conn. Earlier this year the company began installing their attractive, bright red machines in the Mid-Atlantic Giant and Stop & Shop grocery store chains. Smith's Food & Drug, a West Coast chain, has also signed on to put Redboxes in its stores.

I found my Redbox at the local Stop & Shop. Surprisingly, I didn't notice the trademark big red machine against the wall by the checkout stands. A pink flyer at the bagging station touting $1 DVD rentals caught my eye.

I gave it a try the following Saturday night. While my wife put my infant son to bed, I hopped on my bike and rode the mile-and-a-half to the store.

I was looking for the Clive Owen-Jennifer Aniston movie "Derailed," which came out on DVD just a few weeks before. Sure enough, it was among the fifty or so shown on the Redbox's listing board, which also included recent releases like "Brokeback Mountain" and "The Chronicles of Narnia," and other selections that had been out several months already.

I selected my movie, input some basic information into the machine, and it summarized my order: one movie, one night, for a grand total of $1.06, including sales tax.

At that price, I ended up adding "The Family Stone," knowing full well that M and I would be lucky to get through one movie without falling asleep. But if "Derailed" wasn't any good--you can never be sure with Jennifer Aniston movies--we had another low-cost option. And because Redbox only charges $1 per night for each rental, we could watch "The Family Stone" the following night and still pay half the price of renting from West Coast Video around the corner.

I swiped my credit card and my DVDs appeared through a slot on the machine's side, in pocket-sized cases. The small size was handy, since I was biking it.

Fifteen minutes later, M and I were snuggled on our basement couch in front of the big screen. For the record, "Derailed" was pretty good until the very end. We never did watch "The Family Stone," turning both movies in the next day (through the same side-slot on the machine).

In all, my Redbox experience was terrific--quick, easy, and a tremendous value. As the machines become more popular, DVD availability could be a problem--each machine, according to Redbox.com, holds about 500 DVDs, which to me doesn't sound like much. New releases are added Tuesdays, two days before the weekend, when most people have the time to watch DVDs.

Still, the company plans to have machines in multiple locations, so if a video isn't in your grocery store's machine, you could try the McDonalds down the road. And you can return DVDs to any Redbox--renting from one in Houston for example, and returning it at another in Minneapolis. So look for them at your local airport in the not-too-distant future.

By slashing DVD rental costs, Redbox may have other rental outfits like Blockbuster seeing red. But as my grocery cashier pointed out, there are other ways to see DVDs on the cheap. He'd just watched "Brokeback Mountain" after borrowing it from the local library, which regularly gets a few copies of new DVD releases from Blockbuster for their shelves. And he didn't pay a dime.

Welcome to The Coin Jar!

You probably have a coin jar somewhere--on your bedroom dresser maybe, or in your kitchen. As loose change builds up each in your pocket or purse each day, you drop the assorted pennies, dimes, nickels, and quarters into the jar until it gradually fills up.

When you dump the contents out and count them, you probably get a surprise. Those small bits of change have actually accumulated into something bigger--maybe even much bigger. Enough money for you, or you and your significant other, to have a really nice dinner, perhaps. Or pay for Christmas gifts without a credit card. Or start saving for your child's education.

That's the idea behind this blog. Except instead of accumulating coins, we're accumulating ideas. Little ideas about earning, saving, and spending money that can really add up into something bigger: things like more financial freedom and less financial stress. Ultimately, a little better financial life for you, and your family.

So stop by regularly to see what's in The Jar. I'll make new posts on Mondays and Thursdays, and of course, you can always make your own "deposit" by adding a comment. If you have a question on your own financial obstacles, feel free to send an email to coinjar@yahoo.com, and I'll do my best to provide some guidance. (Note: My full-time job precludes me from giving any investment advice or guidance.) -CJ