As the saying goes, there are more opinions about debt than there are people. Here’s short quiz to test how much you know about debt.
1. A few years ago, newlyweds Emma and Liam decided to buy a house. Their combined income was $100,000 and the bank said they qualified for a $450,000 mortgage. They borrowed $50,000 from their parents as a down payment and were the proud owners of a $500,000 house. The mortgage payments were a stretch, and all the house costs they didn’t know about in advance added to the financial pressure. Even before Liam lost his job, they were starting to run up their credit cards. By the time Liam found new work at lower pay, their high-interest debt was spiraling out of control. They held on for a while, but eventually declared bankruptcy and lost the house. Where did Emma and Liam go wrong?
a) Emma married a loser.
b) Their cheap parents should have given them a larger down payment.
c) They did nothing wrong. Mortgages are good debt and they were just unlucky.
d) Maybe going into debt for a house isn’t always a good idea. People need to have margins of safety in their finances.
2. Sarah just completed her university degree. Unfortunately, she has a $45,000 student debt. It would have been worse without some help from her parents. She could have lived more frugally at school and during the summers, but she just assumed the great job she’d get after graduation would take care of everything. If she had been more careful with her parents’ money and her summer job income, she could have kept her debt down to only $15,000. Once she starts working, Sarah will pay 6% interest per year. If she pays the debt off at $400 per month, how much longer will it take to pay off $45,000 than it would have taken to pay off only $15,000?
a) 6 years and 3 months.
b) Almost no extra time at all if she can get her parents to pay off her student debt.
c) It doesn’t matter. Student debt is good debt. The more the better.
d) About 10 years and 4 months. Investing in an education is a good idea, but students should still try to keep their student debt to a minimum. The education is good, but the associated debt is still bad.
3. Life is going well for Matt. He has a steady job that covers his rent, food, and other expenses. He’s got some credit card debt, and a car loan. Matt heard that he should have an emergency fund in case he loses his job or can’t work for a while to make sure he can keep covering his loan payments and other expenses. What should Matt do?
a) He should get a line of credit that he can dip into in an emergency.
b) He should just count on his parents to bail him out if necessary.
c) Being in debt is normal. Nervous Nellies should get a life.
d) Owing money on a credit card is a hair-on-fire emergency. He should cut back on spending to pay off the credit card as quickly as possible. Then he should start building an emergency fund and start saving separately for his next car to avoid needing a new car loan.
It shouldn’t be too hard to see which answer I think is right in each case.