Debt reduction/payoff.

[Mykl]

To make that lifestyle change stick you have to come up with a system that works for you.

My system was to give myself a reasonable cash allowance every month, which covered non-essentials like entertainment and eating out. This gave me a visual "here's what I have to blow on whatever..." in the form of pile of cash. This worked great for me because I was always terrible at tracking receipts and using debt/credit cards I never really paid strict attention to what was going out.

After that, what was in my checking account was strictly for bills, fuel, food, and paying off debt. Every penny left over in my account was applied towards debt. It's a great feeling once you see that snowball in action and you're throwing big chunks of cash towards paying stuff down. Then you get the credit cards paid off, then the titles for the vehicles come in the mail, then.... the house is paid off.

Then you're free.

 

[cjcride]

Too much debt is like having too many drinks. Both will put your life out of control. Step one is recognizing the fact that you do not need another drink/debt.

 

[SatinSilver]

Originally Posted By: bustednutz
All that debt accumulated thru the course of approx 10 years. Whether it was moving expenses, new furnishings, a couple new bathrooms in the house, some TV's, restaurants, buying a car for my cancer stricken dad, braces for the kid, vacations, etc...


I didn't think you had any kids?

Originally Posted By: bustednutz
I like many of you are a bachelor. 42, never married, no kids. Sure I've been in many relationships but never walked down the aisle.


This one also:

Originally Posted By: bustednutz
OK, so last month the wife bought a brand new Mazda 2.
Its the Sport model in an automatic.
Well this weekend we decided to take a road trip to NYC.

 

[cutter]

When I started becoming serious about paying off my debts, I sunk every last cent each month into paying it off. Bank balance down to nil. Every month. Did that for about a year and a half, and I'm currently living debt free with all extra money going straight to my Vanguard account.

It's the same mentality as losing weight, the difficult part is sticking to it.

 

[Vikas]

I don't quite understand the point of "coming clean" on an anonymous internet forum. I am not familiar with AA meetings but don't you have to use your real name rather than calling yourself b1gd1c4 as you introduce to your fellow AA folks?

 

[supton]

I was always good at tracking receipts; even in college I tracked, so I could balance my checking account.

I forget when I heard about giving yourself an allowance, but it was a good idea then and still a good idea now. Keeps me from eating out during the week with the guys. It does have to be a decent amount--at one point we tried $10/week but it was a joke. $20/week seems to get us by.

It's also nice to know off-hand what it costs to drive per mile. Nothing like knowing a trip to the mall will cost $20 in fuel and depreciation and tires to make you rethink going to a sale so as to save $2.

I wish I could write more checks and/or pay for things in cash rather than credit. For some reason those hit home harder than swiping a card. Probably because whatever cash I have on me is "mine" while the credit card is "family" and somehow not quite as mine... or at least a bit less personal.

 

[Bob5150]

Originally Posted By: cutter
When I started becoming serious about paying off my debts, I sunk every last cent each month into paying it off. Bank balance down to nil. Every month. Did that for about a year and a half, and I'm currently living debt free with all extra money going straight to my Vanguard account.

It's the same mentality as losing weight, the difficult part is sticking to it.


This is basically what my wife and I did, except our extra money goes to our only debt: the mortgage. We are aiming to pay that off in 15 years.

We starting paying down the lowest balance first, and rolling that money into the next lowest after each one was paid off.

 

[Win]

Originally Posted By: JerryBob
Is that $22k credit card debt? I wasn't clear from your post. If so, can you do some sort of consolidation or HELOC loan? A good forum, with very direct and brutally honest people is bogleheads.com.

John Bogle was found of, and CEO of Vanguard.com for many years. He has a rather religious following.


Converting unsecured debt to secured debt, on your dwelling, is an extremely poor idea, imho.

 

[Win]

Originally Posted By: TrevorS
....
Lol. Older folks (who saved) make up the majority of millionaires because of time and stock market gains. They don't have electronics because they're old!....


They're millionaires because they went out and made money, not because they sat around worrying about the cable bill.

 

[bustednutz]

Originally Posted By: satinsilver
Originally Posted By: bustednutz
All that debt accumulated thru the course of approx 10 years. Whether it was moving expenses, new furnishings, a couple new bathrooms in the house, some TV's, restaurants, buying a car for my cancer stricken dad, braces for the kid, vacations, etc...


I didn't think you had any kids?

Originally Posted By: bustednutz
I like many of you are a bachelor. 42, never married, no kids. Sure I've been in many relationships but never walked down the aisle.


This one also:

Originally Posted By: bustednutz
OK, so last month the wife bought a brand new Mazda 2.
Its the Sport model in an automatic.
Well this weekend we decided to take a road trip to NYC.


How nice of you to delve into my past posts. Well if you're looking for clarifications allow me to give them to you.
Not married, but in a long term relationship of 11 years. I refer to her as "the wife" I take care of her 13 yr old daughter as if she were my own and she looks to me as her own dad after all these years.
It hasn't always been easy and we went through a seperation period as well. But if you don't mind, I'd like to keep this post on the topic it was intended for. Perhaps another day you'll tell me all about yourself and how you structure your personal life.
Thank you.

 

[surfstar]

Originally Posted By: Win
Originally Posted By: TrevorS
....
Lol. Older folks (who saved) make up the majority of millionaires because of time and stock market gains. They don't have electronics because they're old!....


They're millionaires because they went out and made money, not because they sat around worrying about the cable bill.


Really? I'm going to be a millionaire in my 50's because of saving and investing vs spending needlessly, whether it be a monthly cable bill or car payment. There are plenty of people who make enough money to become millionaires, but never will because they like "things" (car payments, purses, etc) and don't know how to live below your means.

 

[supton]

Originally Posted By: bustednutz
How nice of you to delve into my past posts. Well if you're looking for clarifications allow me to give them to you.
Not married, but in a long term relationship of 11 years. I refer to her as "the wife" I take care of her 13 yr old daughter as if she were my own and she looks to me as her own dad after all these years.
It hasn't always been easy and we went through a seperation period as well. But if you don't mind, I'd like to keep this post on the topic it was intended for. Perhaps another day you'll tell me all about yourself and how you structure your personal life.
Thank you.


I think you're taking it too seriously. I suspect satin noticed something not quite adding up, and was curious. If I had noticed I would have asked too.

Also: if you're living with someone, can you really claim be a bachelor? Thread drift, sorry, but I'm not sure you can claim bachelor status. Not especially if you paying to take care of her and hers. Not that it is not a noble thing to take care of others, just a semantics thing.

 

[supton]

Originally Posted By: surfstar
Really? I'm going to be a millionaire in my 50's because of saving and investing vs spending needlessly, whether it be a monthly cable bill or car payment. There are plenty of people who make enough money to become millionaires, but never will because they like "things" (car payments, purses, etc) and don't know how to live below your means.


Unfortunately I won't hit millionare until 60 or so; too busy living life in the here and now. 'tis a tradeoff. I'm comfortable with it. Might it have been nice to retire and then have kids? Perhaps. But what kid wants their 60 year old dad showing up to pick them up from school?

 

[TrevorS]

Originally Posted By: Quattro Pete
Originally Posted By: TrevorS
If the net cost plus property tax and insurance is less than renting than yes, why wouldn't you enjoy the deduction?

But you're still paying a $1 in interest just to get 30-35 cents back on your taxes. So, you're losing 70 cents. Wouldn't it be preferable to not have to pay interest and not be losing 70 cents? What I was trying to say is that keeping your mortgage outstanding just so that you can take a tax deduction does not make financial sense.

With that said, I agree that he should pay off his highest interest rate debt first, which probably means credit cards and not the mortgage.


Keeping your mortgage outstanding makes sense if your investments return more than ((1-marginal tax rate) x mortgage rate). Or if you require the cashflow for something eg emergency or upcoming large purchase and can't borrow at a rate similar to your after deduction mortgage rate.

 

[TrevorS]

Originally Posted By: supton
Wouldn't paying off the one that accumulates the most interest charges first be the one? Usually that is the one with the highest rate; but a mortgage is the one that has you paying a crazy amount of money over a 30 year span, so knocking that down aggressively seems to me to make big dividends.

By all means, I'd get rid of the credit card debt first. I'm just not sure that paying off a car in short order is better than socking away money into a mortgage. It's more comfortable to have but one loan. Anything happens, it's one loan. But I'm quite happy now that my mortgage interest is now less than what goes into principle. That is money you don't see again either.

Kinda have to play with scenarios in Excel to find the "best" answer, be it to save the most money or be out of debt fastest. Which I suspect is one and the same but I'm not going to run some tests to see that.


I know this is BITOG but you're making this more complicated than it needs to be.

Paying off the debt with the highest rate first is what gets you out of debt quickest. Period.

You're confusing yourself by trying to think this through in your head. You should put it in Excel and see for yourself but let me ask you this question: If his mortgage was 0% interest should he pay that first because his monthly repayment is the largest? What if it is 0.01% interest?

 

[TrevorS]

Originally Posted By: Mykl
I think when you're trying to decide which loan to pay off first and the interest rates are all fairly close, just go with the one that feels right to you. There is something to be said for simply appeasing one's own sense of security.

Personally, when I was in a lot of debt and I had to pay it all down, I liked going after the accounts with the smallest balances first. It gave me more frequent feelings of accomplishment, which is critical when you're just getting started paying everything down. You get some momentum in seeing how having less debt hanging over you affects you positively and helps to move you forward to the bigger pieces of debt.


I'm not going to do a dnewton on you but how can you say you have less debt by paying smaller balances with lower rates than larger balances with higher rates. Your debt stays the same but your liabilities are in fact greater.

Of course if it makes you feel better then who am I to argue but just remember that when you turn simple things like interest rates and debt balances into emotional decisions, the banks win and you lose. All the banks care about is that you borrow at the higher interest rates. Why do you think credit cards are so flexible and come with so many benefits including balance transfer offers and interest free periods? They want you to use them, hope that you overuse them and pay them really profitable interest. Remember, the banks get their money at less than 1%. As soon as you take a balance transfer for a 3% fee and 0% interest for a year, they still come out ahead no matter what.

 

[TrevorS]

Originally Posted By: surfstar
Originally Posted By: Win
Originally Posted By: TrevorS
....
Lol. Older folks (who saved) make up the majority of millionaires because of time and stock market gains. They don't have electronics because they're old!....


They're millionaires because they went out and made money, not because they sat around worrying about the cable bill.


Really? I'm going to be a millionaire in my 50's because of saving and investing vs spending needlessly, whether it be a monthly cable bill or car payment. There are plenty of people who make enough money to become millionaires, but never will because they like "things" (car payments, purses, etc) and don't know how to live below your means.


Exactly. There are many millionaires in this country who have done it through saving and not spending foolishly. Many have had average stock market returns but it typically takes getting into your 50s.

What does help many is the mortgage and home price increases. The mortgage gives you discipline but most people don't realize that as time goes on, that repayment is actually more and more a saving they are giving to themselves.

So at 25 or 30, your mortgage payment is primarily interest, in your mid 40s on it is primarily capital. At that point you are paying the same as 15 years ago, it's mostly adding to your net worth, your salary has increased over time, and you've had years of interest deduction and 401k savings as tax benefits.

Problem is that so many people have done this, a million is not enough anymore and youngsters are at a disadvantage because home values incorporate both the tax benefit and the ultra low interest rates.

 

[99Saturn]

Originally Posted By: TrevorS
Originally Posted By: supton
Wouldn't paying off the one that accumulates the most interest charges first be the one? Usually that is the one with the highest rate; but a mortgage is the one that has you paying a crazy amount of money over a 30 year span, so knocking that down aggressively seems to me to make big dividends.

By all means, I'd get rid of the credit card debt first. I'm just not sure that paying off a car in short order is better than socking away money into a mortgage. It's more comfortable to have but one loan. Anything happens, it's one loan. But I'm quite happy now that my mortgage interest is now less than what goes into principle. That is money you don't see again either.

Kinda have to play with scenarios in Excel to find the "best" answer, be it to save the most money or be out of debt fastest. Which I suspect is one and the same but I'm not going to run some tests to see that.


I know this is BITOG but you're making this more complicated than it needs to be.

Paying off the debt with the highest rate first is what gets you out of debt quickest. Period.

You're confusing yourself by trying to think this through in your head. You should put it in Excel and see for yourself but let me ask you this question: If his mortgage was 0% interest should he pay that first because his monthly repayment is the largest? What if it is 0.01% interest?


Think about the power of compounding interest over the term of the mortgage, IMO that is the seed supton is planting here.

Start a mortgage May 1st 2014 for $200,000, run the total payment over 30 years at 4%/yr.
Take the same mortgage, make an extra payment, 1 year from origination for $1000.
See what the difference is in total cumulative payment over the term of the mortgage.

Then -

Start a car loan May 1st 2014 for $20,000, run the total payment over 5 years at 5%/yr.
Take the same car loan, make an extra payment, 1 year from origination for $1000.
See what the difference is in total cumulative payment over the term of the car loan.

To your point, still not the whole picture, as you have to do something with that savings from the car loan for the next 25 years and see what it's worth at the end of the same time frame.

Extra Pmt Calculator - for those that care to mess around.

 

[Bob5150]

I add $500 to my mortgage payment of $867.22 each month. That should have my house paid off in 15 years (starting from the first payment in June 2013). Should save around $70,000 in interest.

I have thought that I could have bought a nicer house with a garage, but I would rather retire at some point and have less financial stress.

I don't ever plan on moving, so the value of the house doesn't mean a whole lot to me, but getting it paid off will.

 

[TrevorS]

Originally Posted By: 99Saturn
Think about the power of compounding interest over the term of the mortgage, IMO that is the seed supton is planting here.


Irrelevant.

Like I said you're overcomplicated this and missing the simple logic.

When paying off debt, reduce the balances with the highest interest rate first. You will immediately be paying less interest which means you have more left over to reduce the capital.

Simple example.

Car loan $20000 10% interest 5 years left
Mortgage $10000 5% interest 3 years left

Total $30000. Interest payment in total is $2000 + $500 = $2500

Say you receive a bonus of $10000:

Do what you say and pay mortgage off with $10000. Total interest left to pay = $2000 (car unchanged) + $0 (repaid mortgage) = $2000

Pay down the borrowing with the highest rate ie car loan and total interest is $1000 (reduced car loan) + $500 (unchanged mortgage) = $1500

After you pay the interest you have $500 more in your pocket which can then be used to pay down the car loan even faster.