The Dangers of Debt

Keith Fevurly, IAR, Integra Financial, Inc. • 12 May, 2020 • May 12, 2020

According to the survey conducted by the Harris Poll as commissioned by the online website, Nerd Wallet, U.S. household debt increased to an all-time high of $13.95 trillion at the end of 2019. This debt includes mortgages, home equity lines of credit, automobile loans, student loans, credit cards, and other household debt. The average U.S. household with revolving credit card debt has an estimated average balance of $6,849 and pays annual interest of over $1,100. So how long does it take to pay off this average balance if making only the card's minimum monthly payments of $20 per month at a prevailing annual percentage rate (APR) of 19%? If you compute this answer on a financial function calculator, a "no solution" is found, meaning that the number of monthly payments is so large that you will never get out of debt!

Even with a relatively modest average credit card balance of $1,000, it will take the borrower almost 100 months or 8.33 years to pay off the card. And the 19% APR is the rate charged for a borrower with a good credit score; those with a poor score pay an even higher rate, sometimes exceeding 30%!

Therefore, it is critical that a good consumer and investor properly manage debt Accordingly, here are some good rules of debt management to follow:

1. If at all possible, pay off credit card debt in full each month. Better yet, do not charge any expense on your credit card for which you can afford to pay cash!!

2.Use credit cards only for convenience (to move money from one month to the next, making the card an interest free loan).

3. With respect to credit cards (and as "a convenience-user" only), shop for a card with the lowest APR and the longest "grace period" possible. Moreover, only keep one general-purpose credit card (such as Visa or Master Card) in you purse or wallet at any time.

4. Use debit card for purchases instead of a credit card.

5. Only incur debt on a purchase or investment if the asset purchase is likely to exceed (the annual investment return) the cost of the debt. For example, If a stock is expected to appreciate at 10 percent, and the interest charged on money used to purchase this stock is only 5 percent, it is preferable to make the purchase. Better yet, buy the stock using a cash account only.

6. Only use debt to buy assets that are expected to appreciate in value and not depreciate. For example, it is preferable to incur mortgage debt on real estate in most areas of the country, but it is generally inadvisable to purchase an automobile using debt, since the automobile is exceedingly likely to depreciate over time!

7. Save for expenses of higher education for you children or grandchildren so as not to have them incur student loan debt.

8. Finally, before retiring, pay off existing mortgage debt. It will do "wonders" for your retirement income cash flow!

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2Q 2024 Newsletter

By Willis Ashby • 08 Apr, 2024

As usual I hope this finds you well. As we welcome spring and having just finished the first quarter, things look good. The broad Morningstar index was up 10.24% through 03-31-24. The large cap companies led the way up 11.08% and the small caps up 5.69%. The S&P 500 experienced 22 “all-time highs” with less than 2% drops in-between. Amazing!

1Q 2024 Newsletter

By Willis Ashby • 11 Jan, 2024

I hope you had a safe and enjoyable holiday season. For the first time since COVID we were able to have our entire family together, including the Australians, it was very nice. I hope yours was as enjoyable. The top news stories of the year were the rapid rise of interest rates effectively slowing inflation without crashing the economy:

4Q Newsletter

By Willis Ashby • 05 Oct, 2023

After the bruising market in 2022 where the broad index was down 19.43%, we are in a better place. Year to date the Morningstar broad index is up 12.81% but down 3.19% for the quarter. That said, we have a lot to keep our eyes on. On the positive side, consumer spending is remaining robust, and the Biden administration passed their TRILLION-dollar spending bill, corporate profits are slowing but still positive, unemployment is a low 3.6% and the Fed again passed on raising interest rates.

Distribution Options for Inheriting Retirement or IRA Proceeds (Beginning in 2020)

By Keith Fevurly • 19 Sep, 2023

Distribution Options...

To Roll or Not to Roll (Rollover IRAs)

By Keith Fevurly • 24 Jul, 2023

Some points to consider: 1) Likely the biggest distribution question that a 401(k) participant asks is: should I rollover the proceeds to an IRA or retain it within the 401(k), assuming the plan sponsor allows that? There is no certain answer to this question, although in the majority of situations, it is preferable to roll the proceeds because of participant control of the account. See Willis, Nick, or Keith to begin the paperwork for a Rollover IRA.

Q3 2023 Newsletter

By Willis Ashby • 10 Jul, 2023

I hope you had a wonderful 4th of July celebration. We have a reading of the Declaration at our gatherings, it is always amazing to me to hear how many people under 30 saying they didn’t understand what was declared and to whom it was sent. After the declaration we (our founders) wrote our Constitution taking the best from the Magna Carta of 1215 and the English Parliament’s Bill of Rights of 1689. We have a lot of issues in our country but when you look at our beginning, it is amazing!

Q2 2023 Newsletter

By Willis Ashby • 13 Apr, 2023

You cannot say we do not live in interesting times; A past president indicted on criminal charges; bank failures; FTX collapse; and high inflation to mention a few. The Morningstar broad index was up 7.40% for the quarter and YTD. Most of this was the rebounding of the large tech companies which had been crushed at the end of last year.

Q1 2023 Newsletter

By Willis Ashby • 30 Dec, 2022

First Happy New Year. I hope you and your families had a pleasant, safe, and healthy start to the year. There are so many things causing headline news and affecting the market: COVID, “Transitory Inflation”, Ukraine, another $1.7 trillion spending bill, FTX’s downfall, snowstorms, Trumps Tax Returns, Fentanyl and the border. It is no wonder we are having a rough market! The S&P was down 19.4% in 2022, the worst since 2008. I think the three things that are most affecting the market are:1) the COVID shutdowns,2) massive government spending, and 3) inflation. The shutdown of an enormous part of our economy during the pandemic, in hindsight, was a mistake.

Q4 2022 Newsletter

By Willis Ashby • 05 Oct, 2022

This is not a pretty quarter or year for the markets. The broad Morningstar index is -4.58% for the quarter and- 24.88% for the year. As I noted a few quarters ago the large-cap growth stocks make up the largest part of the index, so when they go up or down the entire market feels it. The Large Cap Growth section of the market is -40.99%, (Time to buy?). We also know on average every 5 years the stock market loses money. It is the price we have to pay for “investing” and receiving better investment results in the long term. It is interesting to note that with few exceptions there have been no safe harbors. Cash -8%, Gold -8%, Bitcoin -70%, Bonds -15% (depends on the class and type Muni vs Corp vs Govt), so if you wanted to go into the currency market and made a “bet” on the US Dollar rising, you would be very happy; too risky for me. As a reminder, when interest rates go up bonds go down, but the usual result of “stocks go down bonds must rise” is not occurring. This is the time to reflect on how much our accounts have gone up in the last few years and to realize it will do so again. It is just a matter of time! Apple, Google, and Procter & Gamble are not going anywhere, just because the market thinks they are a LOT less than last year really means they were overpriced then and now they are likely underpriced. The S&P earnings are at 8% so why are the markets down? If you strip out energy the number drops to 1% and the market thinks inflation is going to take it away: -no earnings and you get a down market! As much as I do not want to admit it, I agree. We don’t know if wages drive prices or vice versa, but we do know inflation is caused by too much money circulating in the economy. The Federal Balance Sheet in 2007 was $850 Billion, today it is close to $9 trillion. We cannot continue printing and sending out trillions of dollars. The Federal Reserve has said it will continue to raise interest rates until inflation is under control. The economy will likely take a hit but sit tight since it will recover. As a reminder, the market went up 9% in July alone. If you are worried about the markets give us a call, we have been through this before.