Some people fear debt. However, society runs on debt and not all debt is bad. Bad debt is debt that was accrued for worthless things such as gas, food, gambling, etc. Those things should be covered with cash. Good debt is debt that is accrued for things that have value such as an education a car and/or a house.

The catch is that you can’t get enough credit to go into debt for the things that have value until you artificially put yourself in debt for the things that don’t.

Your parents should have told you to get a credit card when you’re 18 and charge gas and groceries to it and pay it off every month. People that didn’t play this game end up at a car dealership at some point wondering why they can’t seem to get an interest rate below 20%. Because they didn’t play the game when they were young and maybe pay a little bit of interest then, now they get to pay thousands extra in interest for things they actually need.

In 2001 or so (I was about 21) I was looking to buy a car. I went to the Hyundai dealer and expected to get a cheap car and a reasonable interest rate. Instead they wanted to give me a 20% interest rate and they refused to even pretend to bargain. So I walked out. I had access to another car so I drove that for a couple years. In 2003 I saw Honda advertising Civics for about $160 a month with a lease. I walked into the dealership and at first they said I didn’t have enough credit.

What that means is that I hadn’t been playing the credit game long enough. I’ve never missed a payment but my credit card limits at that time were pretty low and I was 23 so I only had a few years of credit history. I also wasn’t making enough. Then I mentioned student loans. I got the car.

I played the credit card game for a few more years never missing a payment and making use of credit cards responsibly. When the lease was up in 2006 I went to a Mitsubishi dealer and walked out with a brand new Outlander with a 0% interest rate. I went from 20% to 0% in 5 years just by being responsible with debt. I was also making middle class income by then.

This is where it becomes obvious that “saving money on interest” by paying cash for everything is really silly. I bought a $20K+ car interest free. I was able to do that because I had spent the previous 6-8 years not paying cash for everything so that I had a strong credit history. I’m sure I spent some money on interest for credit card debt but in the end I saved thousands more than I spent on this one purchase alone.

Credit is a long term goal. You shouldn’t worry about short term interest. You should try to keep it to a minimum but you shouldn’t fear it.

The American dream is to own your own home. You can’t do it if you don’t have credit. A year after I bought the car I bought a $160K home with a 30 year fixed mortgage at 7.125%. That’s not a “great” interest rate but at the time it was about as good as you could do.

The other reason you shouldn’t fear interest is because you can minimize it. For whatever reason a lot of people pay the minimum they owe on things. Especially cars and houses. Unless you have a 0% interest rate you should be paying more than the minimum. The interest rate on my house is good but if I put an extra $100 a month on the mortgage I pay it off 7 years earlier saving around $84,000.

Like it or not you have to play the game. If I hadn’t started playing the credit game early I wouldn’t have the car, the house and the education I have now. The things that make up the American dream. Now that I have all of that I can stop using credit cards. Which is exactly what I’m doing. They are only used for unexpected large expenses.

If I continue the path I’m on I should be debt free before I’m 50. That gives me 15 years of throwing money into savings and investments. There is around $2000 a month I’m putting towards debts. 15 years with $2000 a month going into savings is $360,000 not including any interest earned.

In short, the game is this, build your credit quickly, achieve the American dream of a house, a car and an education, pay off all your debts, save all the money you were putting on debts for retirement. Retire without a house payment. Do whatever you want.

Powerline Blog has a post about Muslim Mortgages. According to Islam it’s forbidden to charge or pay interest which makes it very difficult to buy a house since few people have enough money to pay for a house in full with cash.

Minnesota has come up with a plan: they buy the house and then sell it for an increased amount “interest free.”

The increased amount is equal to the interest that would be charged through a traditional loan. So basically Muslims are being given a simple interest loan when they buy a house but it’s not called interest. It’s just a higher price for the house.

So let’s say you want a $160,000 property. The bank wants 7% interest. They run the numbers and after 30 years you would pay $230,000 in interest for the loan. You add in the original $160,000 and you’ll pay $390,000 over 30 years which works out to about $1083 a month.

With a traditional loan you can save yourself tens of thousands of dollars in interest simply by paying extra on the mortgage every month. With this “interest free” loan you’re stuck paying $390,000 for a $160,000 house. Paying extra will only cut down the time it takes to pay it off, not the overall cost.

If you could get a real interest free loan that would be awesome but this is just silly.

In today’s economy “living within your means” is back in fashion. However, you have to define your “means.” In the most basic terms it means spending no more than you make. If you take home $2000 a month you spend $2000 or less per month. If you have credit cards and want to use them you don’t put anything on them that you can’t pay off by the time the bill comes due. You don’t create debt.

I would define your “means” as the amount of money you can make in either the first 40 hours a week you work or the salary you have from a single job. It’s common these days for both parents to work or for people to work multiple jobs just to pay the bills. Not because they want to, but because they have to.

Any additional money outside a single full time job should be considered “extra” and not factored in when making large purchasing decisions: anything you have to take out a loan to purchase.

The reason for this is simple: you’re killing yourself.

Back in college I was typically working two jobs and I think for at least a short period I was working three. But after a few years I had learned enough skills to consolidate those two jobs into one higher paying job. And that’s the key; you work, you learn you make more money in less time.

If you’re forced to work 80 hours a week just to pay the bills you’re giving yourself no time to get an education and get into a position where you can make more in less time. Because your bills require you work 80 hours at your current skill level you can’t cut back hours to go to school. You can’t cut back hours to get a life.

And if something comes up, you’re already working every waking hour during the week so you can’t go out and earn more money for an unexpected expense. If you’re living off of a salary or 40 hours a week of hourly pay and an unexected expense comes up THEN you can get a second job temporarily to work that debt off.

The first 40 hours are for living. The next 40 hours are for emergencies and extra spending money.

So really your means are not how much you make but how much you can make without killing yourself. Sure you could work 80 hours a week and afford that $300K house but do you really think you can handle 80 hours a week for 30 years?

If you want to work more to earn more money then go for it. But just keep in mind that the more you extend yourself because you have to, the more you’re going to be hurting when something goes wrong.