Balancing Duty, Life, and Wealth
with John Johnson
Good debt versus bad debt
Editor's Note: One of the critical factors to officer survival is keeping focus. And while bringing the job home is no good, bringing what’s going on at home to your shift on the streets can be downright dangerous. Statistics (and intuition) tell us that Police officers can have strained relationships, and as is discussed during the Emotional Survival segment of the Calibre Press Street Survival Seminar, family finances can be a significant factor in a person’s home life. PoliceOne has asked John Johnson – a third generation, 20-year police veteran with family and friends in law enforcement throughout the country – to address financial issues that affect people in law enforcement. PoliceOne members may remember that in addition to being a full-time officer in Suffolk County, New York, Johnson is also the owner of Balanced Financial Solutions, a company that was featured in the July 2008 article “Entrepreneurship in Blue,” by Hannah Simon. Johnson tells PoliceOne in that article: “When I started as an officer, my department did not educate me about insurance…I was only 23, and never thought I needed it.” Johnson also said in that article that he believes it to be important for officers to think of safety in terms of financial well being.The following is Johnson’s debut column on PoliceOne. We present this column – and others like it in the future – not as sage financial wisdom on which you should base your investment portfolio, but as a common sense reminder that just as there are appropriate strategies, tactics, and WILL TO WIN for surviving the street, there are also some sound practices for winning in your off duty life as well.
For many of us, our new position in law enforcement is our first “real job,” replete with real money, and real benefits. Unfortunately, some of us spend more money than we should, and get ourselves (quickly) into debt. But debt is not necessarily evil. Understanding the concept of good debt versus bad debt can lead to better choices on how you spend and how you save your money.
The concept of good debt is a fairly simple one. Anything that will be worth more than the initial loan at the loan’s end can be considered good debt. A mortgage on a home is a good example. Historically over long periods of time, real estate appreciates in value. After all, it’s the only thing that they can’t make more of. Depending on your income and other factors, the interest on mortgage loans and real estate taxes can be tax deductible. Improvements to your home may also be tax deductible, so hold on to those receipts! The interest on a home improvement or home equity loan may also be tax deductible.
This may be a better way of financing a major purchase such as a new car. The interest on auto loans generally isn’t tax deductible. But many people have gotten themselves into trouble by taking too much equity out of their homes with equity loans. I have an associate that took so much equity out of his home that when he needed to sell it, the cumulative value of the loans was worth more than the current market value of the home. As always, talk to your tax advisor before making any decisions.
If you are unsure about how much mortgage debt you can handle, many banks incorporate mortgage calculators into their websites. Bankrate.com has one of the most comprehensive loan and mortgage calculators I’ve come across. It’s great for auto and home equity loans too.
An education loan can be another example of good debt. Taking and paying for classes that will help increase your income can be thought of as good debt. I’m not saying don’t take that philosophy class you’ve dreamed about all your life, but earning a degree in a field related to your profession usually means that you’ll make more money over your lifetime.
Remember, taking on so much good debt that you can’t pay it is not good, and in fact, essentially becomes bad debt.
There are many things that can be interpreted as bad debt. Generally speaking, it’s debt on something that decreases in value over time. You’ve heard that a new car can be worth much less as soon as you drive it out of the dealer’s lot. I know many of us love our cars, but realistically, cars are consumable items. Just like a paper cup, you use it and dispose of it – albeit after a much longer period of time than a person possesses a paper cup. Unless you purchase a rare or exotic car, you’re financing a depreciating item, which can substantially raise the overall cost of the vehicle. So that seven-year car loan is a bad idea.
This concept of financing consumables also applies to credit cards. Think about the things you have purchased over the years with your credit card – vacations, clothing, that romantic dinner at your favorite eatery, and that new flashlight from that police equipment catalog that arrived in the mail. Have any of those items increased in value? I don’t think anything I’ve purchased with my credit card has made me money. And credit card debt can be deadly. I’ve seen interest rates at more than 20 percent. If you pay $100 a month on $5,000 of credit card debt at 15 percent interest, it will take you six and a half years to pay it off, at a final cost of around $7,900. And that’s if you don’t make any more purchases with that card. If you use your credit card, try to pay the full balance each month. This will help keep you out of financial trouble and boost your credit rating scores, which allows you get better terms and interest rates for financing your good debt. About.com has some objective advice on how to deal with credit card companies.
What do you do if you get into trouble? Get help as soon as you need it. I have friend who came to me for help when he was $38,000 in credit card debt. He and his wife were addicted to the cable TV shopping channels. Bankruptcy was the only answer in his situation. Don’t wait so long that this becomes your fate too. There are many reputable debt-reduction firms out there, but there are plenty of scammers too, so you have to be careful and conduct the due diligence to protect yourself.
Credit counseling organizations often arrange for debts to be paid through a debt management plan. You deposit money each month with the credit counseling organization. The organization uses this money to pay your credit card bills, student loans, medical bills, or other unsecured debts according to a payment schedule they’ve worked out with you and your creditors. Creditors may agree to lower interest rates or waive certain fees if you are repaying through a DMP.
The Federal Trade Commission website describes these plans in detail. But remember, anything that seems too good to be true usually is. Beware of hidden fees and the people that tell you “you’ll be debt free in no time!” Ask for a recommendation from a friend, family member, or financial professional. But get your debt under control as quickly as possible. It’s almost impossible to live debt-free.
Minimizing your bad debt can save you a lot of money and anxiety over your lifetime while maintaining a manageable degree of good debt can increase your wealth and help you plan for a comfortable financial future. It’s all up to you.