New Money Rules for Financial Security - #4. Handling Debt

[This post is written and copyrighted by FIRE Finance (http://firefinance.blogspot.com).]

The past decade saw the boom of the "power of leveraging" - a fancy name for debt. Until recently, most Americans put their purchases on their credit cards and personal savings fell to nearly zero. Credit was easy, and people used it to build wealth. Can building wealth with debt be a money rule?

Rule #4: Debt

Old thinking: Borrowing sensibly is a good way to build wealth.

New rule: Borrow cautiously. You have to worry about the other guy's debt too.

Our take: We have always believed in the tried and tested concept of getting rid of debt as the first step towards building solid savings. We have been debt free for the past six years and it's a great feeling.

However we are conservative borrowers. We know that borrowing can be helpful for huge purchases like a house, a car or a college education. Usually we can't afford to save the entire principal and then make these purchases. If we can do that, it's excellent!

If we feel that taking on a debt is stretching ourselves too thin then we'd wait for some more time and build our savings. After that when we choose to borrow, the debt would be considerably less. Why? We added to our savings by not taking on the debt when it was too big for us. So now we need to borrow less :).

In general we try to stay away from borrowing as much as possible. But that does not mean we are not exposed to debt. Our employer might have debt, and we could be affected by it. David Ellison, President of the FBR Funds, says:

.... you have more exposure to leverage than you think, especially now that everyone is trying to unload debt. Perhaps your employer borrowed a lot over the past decade and now needs to conserve cash, so it's laying off staff. Suddenly that HELOC you could easily handle on your salary doesn't look like such a super idea. You can't lean on your investments for help, because many of the companies you owned used leverage to pump up profits, and now they can't borrow, so their earnings and stock prices are falling. And it's harder to shore up your own balance sheet by selling your house when banks are reining in lending and potential buyers are scared to borrow for an asset that may decline further.

Question

What are your views and experiences about debt with respect to keeping your financial security intact in the immediate present? We are looking forward towards your feedback.

Series

New Money Rules for Financial Security
» Rule #1 - Handling Risk
» Rule #2 - Building Cash Savings
» Rule #3 - Earning Potential
» Rule #4 - Handling Debt
» Rule #5 - Home Equity
» Rule #6 - Diversification
» Rule #7 - Retirement

Image Source(s): iStockPhoto

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