Hoglovers Quest to Destroy Debt

[quote]analog_kid wrote:
rainjack wrote:

The best part of being debt free is the giving. Just the other day we were in our favorite all-you-can-eat pizza buffet and we saw a family that included 6 little kids. The parents were worn out - and you could tell that this was a special treat for both them and the kids. We gave them a $100 bill and told them to enjoy the day. Never knew their name.

OP - Change of plan. Follow rainjack around so you can eat for free.
[/quote]

…and bring some more kids along.

[quote]rsg wrote:
analog_kid wrote:
rainjack wrote:

The best part of being debt free is the giving. Just the other day we were in our favorite all-you-can-eat pizza buffet and we saw a family that included 6 little kids. The parents were worn out - and you could tell that this was a special treat for both them and the kids. We gave them a $100 bill and told them to enjoy the day. Never knew their name.

OP - Change of plan. Follow rainjack around so you can eat for free.

…and bring some more kids along.[/quote]

See, that could be combined with the babysitting plan, too. Mo’ money, less expenses.

Good luck on the quest to pay off your debt. I have paid off all of my legal fees from a divorce and student/car loans. I hope to have my credit card paid off at the end of next month. What a great feeling it is.

I would urge you to think hard about paying off your mortgage early (if you have one). I never understood the logic behind such a plan, as it really just puts a lot of your money into a poor investment vehicle (your house) that you cannot access without taking a loan from the bank. I think I made a mistake refinancing my mortgage from a 30 year note to a 15 year note when the interest rates dropped about three years ago. Now I am making payments that are just shy of double what they used to be. But to what end? Sure my house is almost paid off, but I just put $90k into the walls of my house that I could have put into the stock market or even a bank account. Plus, I could have written off the interest on my tax return. The only way I will ever get that money back is to sell the house or get loan (which I will not do). Unless you have serious cash flow problems, I think that you are better off with a long mortgage than paying off your house.

Best of luck.

[quote]VanderLaan wrote:
Good luck on the quest to pay off your debt. I have paid off all of my legal fees from a divorce and student/car loans. I hope to have my credit card paid off at the end of next month. What a great feeling it is.

I would urge you to think hard about paying off your mortgage early (if you have one). I never understood the logic behind such a plan, as it really just puts a lot of your money into a poor investment vehicle (your house) that you cannot access without taking a loan from the bank. I think I made a mistake refinancing my mortgage from a 30 year note to a 15 year note when the interest rates dropped about three years ago. Now I am making payments that are just shy of double what they used to be. But to what end? Sure my house is almost paid off, but I just put $90k into the walls of my house that I could have put into the stock market or even a bank account. Plus, I could have written off the interest on my tax return. The only way I will ever get that money back is to sell the house or get loan (which I will not do). Unless you have serious cash flow problems, I think that you are better off with a long mortgage than paying off your house.

Best of luck.

[/quote]

reall? I’ve never head of a house as being a ba investment. I mean, what are the odds that your home will lose value? Are you sure you didnt just over stretch yourself with your mortgage payments?

I am not overstretched by any means. I am just starting to think that there are better investments out there than a house. Of course one needs a house, but what do you really gain by paying it off early? Sure my house has gone up in value by about 3-4% annually. But my property taxes go up too. In comparison, the long-run average for the stock market is about 10%. So should I stick my money in my house or the stock market?

I realize this is a simple example, but I am coming around to believe that a house is something that you should buy to live in and not as an investment. I bet there are lots of real eastate speculators in Miami and California that are probably thinking the same thing.

I am curious what others think about this.

The idea of attacking the debts individually and then rolling the amount saved from the now missing payment is good, with the idea of getting rid of the highest interest rate first. The only caveat I have with that is to also look long and hard at the balance. If you are within a few payments of knocking out a debt, despite its interest rate, then I would consider that too. Reason being that the monthly minimum can then roll into the highest interest rate, unless of course there is another that is real close.

I have to be a bit envious about your married life. Hell I wish I could find a girl who looks at the big, long-term picture instead of the “to hell with tomorrow” attitude.

[quote]VanderLaan wrote:
Good luck on the quest to pay off your debt. I have paid off all of my legal fees from a divorce and student/car loans. I hope to have my credit card paid off at the end of next month. What a great feeling it is.

I would urge you to think hard about paying off your mortgage early (if you have one). I never understood the logic behind such a plan, as it really just puts a lot of your money into a poor investment vehicle (your house) that you cannot access without taking a loan from the bank. I think I made a mistake refinancing my mortgage from a 30 year note to a 15 year note when the interest rates dropped about three years ago. Now I am making payments that are just shy of double what they used to be. But to what end? Sure my house is almost paid off, but I just put $90k into the walls of my house that I could have put into the stock market or even a bank account. Plus, I could have written off the interest on my tax return. The only way I will ever get that money back is to sell the house or get loan (which I will not do). Unless you have serious cash flow problems, I think that you are better off with a long mortgage than paying off your house.

Best of luck.

[/quote]

This is a good approach as long as the market does well…

creditboards.com

[quote]VanderLaan wrote:
I am not overstretched by any means. I am just starting to think that there are better investments out there than a house. Of course one needs a house, but what do you really gain by paying it off early? Sure my house has gone up in value by about 3-4% annually. But my property taxes go up too. In comparison, the long-run average for the stock market is about 10%. So should I stick my money in my house or the stock market?

I realize this is a simple example, but I am coming around to believe that a house is something that you should buy to live in and not as an investment. I bet there are lots of real eastate speculators in Miami and California that are probably thinking the same thing.

I am curious what others think about this. [/quote]

I basically agree with you in that it doesn’t make sense to pay off a mortgage early, but there are some advantages to it that I want to point out.

First of all, the fact that your house appreciates at 3-4% annually is irrelevant to this. Those gains are all yours regardless of how much you have invested in your home.

If the interest rate on your home is high, prepaying is a good idea as you are essentially getting a gaurunteed rate of return equall to the interest rate on your home. Where else can you get a gaurunteed return of say 7%?

If you have a more reasonable rate, your return for prepaying is obviously lower, but a gaurunteed return of 6% is still pretty good. Even bonds returning 6% have some risk. Of course, if you are getting a tax deduction for the interest, this becomes less. Another thing to consider is the lack of liquidity of your home.

My advice would be (if you haven’t already) to make sure you have an 80/20 loan to value so you can get rid of private mortage insurance. If you have PMI, pay down your loan as fast as you can to get 20% in your home. This should be your #2 priority behind paying off the credit cards. If you already have 20% and your interest rate is low, don’t worry about prepaying.

As for the student loans, be sure to check the rates on them as they may be low too. If they are low then there is no reason to pay them off early either. Just invest as much as you can in an S&P 500 index fund instead. Do this first with IRA’s and 401k’s, then with taxable accounts.

Well-managed debt is not a bad thing, its the credit card debt that you should worry the most about.

[quote]tedro wrote:
Well-managed debt is not a bad thing, its the credit card debt that you should worry the most about.[/quote]

Being debt free is more than a numbers thing. You can do all sorts of analysis, and justifications for maintaining debt. Even Ramsey is not against home debt simply because you are owing money against an appreciating asset.

But -

The psychological aspect of paying off the mortgage 20 years early cannot be quantified. Now you own 100% equity in your home. But if you are not looking to flip - what does it matter? I plan on living in this house until I die, so it is not a financial investment as much as it is a shelter that I no longer have to pay a banker every month to live in.

Anyone that wants to maintain liquidity in their home equity needs to find a different place to invest. That makes about as much sense as buying whole life insurance.

I know what works for me - and debt is slavery. There is no justification for having debt. But that is just my opinion.

[quote]rainjack wrote:
I know what works for me - and debt is slavery. There is no justification for having debt. But that is just my opinion. [/quote]

When you look at it from this point of view it all comes down to personal preference and risk tolerance. I don’t mind having debt at all because my debt is well managed. Paying the bank every month doesn’t bother me either because I know it allows me to make other investments that I wouldn’t be able to make if I was paying off my mortgage early, you obviously see things a bit different.

To each his own, but one thing I think we will agree on is that the OP needs to realize all of the pros and cons of paying off a mortgage early and then make his own decision.

[quote]Zap Branigan wrote:
This is a good approach as long as the market does well…
[/quote]

Over a 30 year period the S&P 500 has never averaged worse than 8.5% a year. Over the long term there is a very good chance the market in general will do good.

Hoglover here’s how I got myself out of (bad) debt. I still have my very low rate student loans but I don’t care about that.

Instead of following conventional wisdom and paying off whichever debt had the highest interest, I paid off the debt with the lowest balance. I had 4 credit cards and a car to pay off, all at disgusting rates. I owed the most on the car but had I opted to pay it off first, I wouldn’t have finished as fast as I did. All told, I think I got everything taken care of in about three years. I had some setbacks along the way including a horrendous dental bill but shit happens.

Basically I would pay the minimum for each credit card plus enough to cover interest so that the debts didn’t get any bigger. I also paid my minimum payment on the car. I picked the credit card with the lowest balance, and that got X amount extra, which was however much more I could afford to throw at it. After I paid off the first, all the money I paid at it went to the second. Then from the second to the third and so on.

I liked this method because it reduced the number of people I owed money to quickly and it really made me feel good. Also, I think I saved several thousand dollars in minimum charges because had I paid off the biggest ticket item first (the car), I would have been paying the minimums to the credit cards the entire time and it would have taken longer to pay the car off that way.

Anyway, I paid my car off this month and got my title in the mail last week. I did a lot of yelling and cheering.

It might not help you but it could help someone else. If you’re a college kid reading this, be responsible with your credit cards and always make your payments. I didn’t and it was a tough lesson to learn.

[quote]tedro wrote:
Zap Branigan wrote:
This is a good approach as long as the market does well…

Over a 30 year period the S&P 500 has never averaged worse than 8.5% a year. Over the long term there is a very good chance the market in general will do good.[/quote]

8.5% vs ~ 7% mortgage means you are gambling with your house payment to gain 1.5%. Possibly more. It is all a matter of timing. One of my co-workers lost his ass in the bust of 2000. He was trying to talk me into throwing a big pile of cash in the market. I wanted to throw it at my house payment. I urged him to cash out and do the same. He wishes he took my advice.

Stocks seem awfully high today. I get the feeling it might be a good time to pay down debt now. Of course I could be wrong and they could climb to the moon.

Now that my house is mine and not the banks I am much more comfortable gambling my money in the market.

If my house wasn’t paid for I would be taking money out and paying it down.

[quote]Zap Branigan wrote:
tedro wrote:
Zap Branigan wrote:
This is a good approach as long as the market does well…

Over a 30 year period the S&P 500 has never averaged worse than 8.5% a year. Over the long term there is a very good chance the market in general will do good.

8.5% vs ~ 7% mortgage means you are gambling with your house payment to gain 1.5%. Possibly more. It is all a matter of timing. One of my co-workers lost his ass in the bust of 2000. He was trying to talk me into throwing a big pile of cash in the market. I wanted to throw it at my house payment. I urged him to cash out and do the same. He wishes he took my advice.

Stocks seem awfully high today. I get the feeling it might be a good time to pay down debt now. Of course I could be wrong and they could climb to the moon.

Now that my house is mine and not the banks I am much more comfortable gambling my money in the market.

If my house wasn’t paid for I would be taking money out and paying it down.[/quote]

My earlier post was meant to demonstrate that if you are investing for the long haul, the risks of investing in stocks are not that high, provided you make smart investments in something like an S&P 500 index fund. Also keep in mind that 8.5% is the worst it has done. For 30 year periods, over 90% of the time returns have been greater than 9%, and over 80% of the time returns were greater than 10%. So, for the long haul, expecting a 10-12% return is pretty reasonable.

Nonetheless, it all comes down to your personal risk tolerance, but regardless of your tolerance, diversification is still key.

[quote]Carnak wrote:
Hoglover here’s how I got myself out of (bad) debt. I still have my very low rate student loans but I don’t care about that.

Instead of following conventional wisdom and paying off whichever debt had the highest interest, I paid off the debt with the lowest balance. I had 4 credit cards and a car to pay off, all at disgusting rates. I owed the most on the car but had I opted to pay it off first, I wouldn’t have finished as fast as I did. All told, I think I got everything taken care of in about three years. I had some setbacks along the way including a horrendous dental bill but shit happens.

Basically I would pay the minimum for each credit card plus enough to cover interest so that the debts didn’t get any bigger. I also paid my minimum payment on the car. I picked the credit card with the lowest balance, and that got X amount extra, which was however much more I could afford to throw at it. After I paid off the first, all the money I paid at it went to the second. Then from the second to the third and so on.

I liked this method because it reduced the number of people I owed money to quickly and it really made me feel good. Also, I think I saved several thousand dollars in minimum charges because had I paid off the biggest ticket item first (the car), I would have been paying the minimums to the credit cards the entire time and it would have taken longer to pay the car off that way.

Anyway, I paid my car off this month and got my title in the mail last week. I did a lot of yelling and cheering.

It might not help you but it could help someone else. If you’re a college kid reading this, be responsible with your credit cards and always make your payments. I didn’t and it was a tough lesson to learn.[/quote]

Carnak -

I like the approach you took. That’s the way I’ve been trying to get my wife to approach it but I think she prefers the “highest interest rate” approach. So we’ll see what we actually end up doing.

The thing I like about paying the lowest balance first is that it quickly gets some of the small pesky stuff out of the way and allows you to really focus your energy on the “big daddies”. Seems easier to wrap the mind around.

We’re fortunate in that the major debt we have is our student loans and our house. We don’t have credit card debt, both cars are paid for, so we’re doing better than some. We have a few small medical bills, some carpet we 12 month financed, and then student loans.

We’re ready to roll on it big time baby!!!

[quote]HogLover wrote:
Carnak -

I like the approach you took. That’s the way I’ve been trying to get my wife to approach it but I think she prefers the “highest interest rate” approach. So we’ll see what we actually end up doing.

The thing I like about paying the lowest balance first is that it quickly gets some of the small pesky stuff out of the way and allows you to really focus your energy on the “big daddies”. Seems easier to wrap the mind around.

We’re fortunate in that the major debt we have is our student loans and our house. We don’t have credit card debt, both cars are paid for, so we’re doing better than some. We have a few small medical bills, some carpet we 12 month financed, and then student loans.

We’re ready to roll on it big time baby!!!
[/quote]

Yeah man, every one you get out of the way, it’s a huge mental victory and gets you excited about smashing the others. I can’t tell you the satisfaction I got from paying off citicard & Discover after the harassment I got from them. I had a long period of stagnation with my debts where I wasn’t really able to make any headway and it was a huge downer for me for a long time.

It sounds like you guys are in pretty decent shape. I’m sure you’ll get those babies put away in no time.

Oh, another reason to do it this way is if your big ticket items are fixed costs and you might have months where cash is short, if you’ve already knocked out a couple of the smaller debts, it’s easier to make ends meet. This happened to me a bunch with unexpected expenses and special stuff like holiday spending and trips to see my family.

Lookin good in your other thread by the way!

I agree with the others who advise caution with the stock market. It is very lofty right now and dangerous for those without an exit plan. However, I question why you need to pay down your student loans so bad. I say save like crazy but keep your money. Student loans are cheap money.

My wife and I have about 30K in student loans. We deferred it for years then finally had to start paying. We could easily pay it off with one check but why? The interest on it is 4.25 and in a couple months it will go down to 3.25. Why pay that off early when a CD pays a higher rate?

My guess is, since you are enrolled in a Masters program there’s a good chance you can defer your payments interest free. You may also be able to do this because you have a 2 1/2 year old. If you can, do it. Save all the money you would be putting into the loan and earn interest on it.

In the 18 months it would have taken you to pay off the loan you will have saved that much plus earned extra. You can then pay it all off and keep the difference or you can wait until your deferral runs out and pay the minimum out of that account. In the end the numbers will be way in your favor.

[quote]on edge wrote:
I agree with the others who advise caution with the stock market. It is very lofty right now and dangerous for those without an exit plan. However, I question why you need to pay down your student loans so bad. I say save like crazy but keep your money. Student loans are cheap money.

My wife and I have about 30K in student loans. We deferred it for years then finally had to start paying. We could easily pay it off with one check but why? The interest on it is 4.25 and in a couple months it will go down to 3.25. Why pay that off early when a CD pays a higher rate?

My guess is, since you are enrolled in a Masters program there’s a good chance you can defer your payments interest free. You may also be able to do this because you have a 2 1/2 year old. If you can, do it. Save all the money you would be putting into the loan and earn interest on it.

In the 18 months it would have taken you to pay off the loan you will have saved that much plus earned extra. You can then pay it all off and keep the difference or you can wait until your deferral runs out and pay the minimum out of that account. In the end the numbers will be way in your favor.[/quote]

That’s not a bad idea. I think we currently have it deferred anyway. Why would I be able to defer the loans because of my 2 year old?

[quote]HogLover wrote:
That’s not a bad idea. I think we currently have it deferred anyway. Why would I be able to defer the loans because of my 2 year old?[/quote]

If I remember right, my wife got a one year deferal after she finished school, then when we had our first baby we were able to defer every year for the first 3 years for that. I think that only works if she’s not working, but the terms for every loan are different, so you just have to see what’s available to you.