This is the third and final part of my interview with J.D. Roth, the publisher of the personal finance blog Get Rich Slowly and the author of Your Money: The Missing Manual, which was recently published by O’Reilly Media.
Your Money: The Missing Manual lays out a plan for getting out of debt, making and keeping a budget, and investing for the future. Really, the book is about how your financial decisions play a role in the larger goal of establishing a way of life that’s personally rewarding and meaningful.
(Here’s part 1 of my interview with Roth, where he talks about his decision to learn about personal finance, and about the importance of setting realistic and measurable financial goals. Here’s part 2, where Roth offers advice on curbing compulsive spending and designing a simple but useful budget.)
Mark: What should people know before buying big-ticket things like houses, cars, and vacations?
J.D. Roth: When you make these purchases I think it’s very important to A) do your research so that you know what you’re getting into and B) decide what is affordable for you and your budget and your situation, and use that as a guideline instead of what other people tell you. If you listen to your real estate agent or your mortgage broker, she’s almost always going to tell you that you should buy as much house as you can afford, and she’ll try to steer your towards the upper end of your budget range, and I think that’s a very dangerous thing. We saw with the recent mortgage bubble that when people bought at the top end of their range they got into trouble. I recommend aiming low. Aim for something modest that you know you can absolutely afford. That way if something goes wrong, you have the ability to fall back onto something manageable instead of having to stretch.
Mark: Could you quantify what “aiming low” means?
J.D. Roth: From everyone I talked to, those who are able to keep their housing expenses at 25 percent of their income are so much happier.
Mark: I believe it. One more question. You have a chapter about getting control of your credit cards. Could you summarize your advice on that subject?
J.D. Roth: There seem to be two opposing views on credit cards. One view is that credit cards are great. They’re convenient. They’re a way to get things you can’t really afford. This is the attitude I used to have when I was in my 20s. I saw a credit card as a license to spend, and I think that’s why so many people get in trouble with credit.
The other view is that you shouldn’t use credit cards at all. Credit cards are evil. Credit cards are wrong and there’s no way to use them responsibly because they’re rigged against you. When I started getting out of debt I kind of went over to that side. I was very anti-credit. Now I find myself in a third camp, and this is what I want to encourage readers to get to. It is possible to use credit responsibly and the key is to be very aware of what the terms of your agreement are.
I’m a big proponent of reading your credit card agreement, understanding what the terms are, and then to actually use the credit as if it were cash. For me, when I use credit, I don’t think, “Oh, I can’t afford this so I’m going to use the credit card to buy it.” Instead, I think, “Do I have money for this in the bank?” And if I do, then the credit card becomes a convenience. It’s a tool to put all of my expenses in one place, and in my case I use a credit card that gives me 1 percent cash back so it’s as if I’m getting a 1 percent discount on everything I buy.
The credit card also offers some buying protection, but if I run into a situation where I don’t have the money in the bank, I’m not going to use the credit card to purchase it. I think that’s very important.
After you determine that you can pay cash for an item, you should ask yourself, “Would I pay cash for this item?” If you wouldn’t pay cash for it then why are you using credit?
Mark: That’s good advice. Thank you for taking the time to talk to me, J.D.
J.D. Roth:: You’re welcome.
Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.