Debt

[mshu7]

No problem!

[Holden_C04]

Originally Posted by aabablusaan

You're right; however, I got extremely lucky with my student loan program when I went to Grad School - my rate is 2.1% fixed, even with a total balance of $40,000 for my MBA and MIS. I took out a 30 year loan at that fixed rate with a graduated amortization with flex payment. For the first 2 years after grad school, my minimum payment was $100 a month, and I paid $200 a month. Now that the minimum has increased to $200 a month, I now setup an auto payment of $400 monthly. Given my current schedule, I'll cut that 30 year loan out in about 19 years...still at that 2.1% rate, with interest payments still tax exempt for another year. I love it. This is a debt that I have to be patient with, but is manageable.

My GF isn't so lucky...she's currently in law school, and her rate is 7.1% on a $50K principal, plus undergraduate debt around $70K at a 6% rate!!!

I just learned about Dave Ramsey from this thread, and I think I will go with his plan. I already have the 1K emergency, already have the savings, but I need to cut out some credit cards ($3,000 in debt). Thanks for the Dave Ramsey mention...

Wow, that's a great interest rate you've got. Here in Ontario, the government likes to profit off its student population @ around 8%. Student loans can be some awful nasty things. Its the worst kind of debt you can have, besides maybe credit cards (which don't have the same nasty collection practices - just high interest).

[jnmttu]

We currently have no credit card debt and both of our cars are almost paid off. My wife graduated from medical school in 2005 with just over $100K in school loan debt. Luckily, we consolidated right before the big jump in student loan interet rates. They are all at 2.67%. Currently, we are holding back on other expenses so that we can pay as much on that as possible. As it stands now, we will likely have it paid off in another 4 years. I just couldn't fathom the idea of paying on a student loan for 30 years. Once that is paid off, all we should have at that point is the mortgage. We will only be 31 in 4 years, so I think being debt-free is do-able with the exception of a mortgage. Also, I have always found the comfort I get from paying off debts far outweighs whatever small joys I might get from buying little things with the money instead.

[Grimm]

My grandmother had a good point a few months ago when we were talking about debt. She said young people now want too much right away. She talked about getting married and having very little. I mean you think about how it was 50 years ago, there was even very little "stuff" you could have outside of a radio or TV. Now everyone has to have the latest big screen TV, the latest phone, an Ipod, a big house right away, the list goes on.

To Pennypacker. I say sell the car if you can use your moms. Pay off all the loans. Then that money you no longer have to pay for the car payment will quickly pay off the remaining school loan. Then you should be able to save up enough to buy a nice used car in a couple years and go from there.

I love being debt free (other than our home). When we got married we didn't make a lot so we had two car payments and rent. Then after a couple years we started making more money and were able to pay off our cars early. I also had the fortune of my loving parents forgiving the remainder of my school debt to them so I just had like $12K in loans to the government. Later with no car loans we got the school loans paid off. It's amazing how free I feel with no debt. I'm a tightwad Hollander anyway, but I think being debt free actually helps me make better decisions with money. I know that I can afford things we need or really want, but at the same time I don't want to go back to having more payments than our mortgage so it keeps me in check.

[Pennypacker]

Interesting stories from you guys. Thanks for sharing! I'm envious of those of you with 2-3%student loan rates. Mine is around 6% and that's after consolidation.

Grimm, as usual, grandmothers are right. And although we have more stuff nowadays and all the technology in the world, studies have shown that levels of happiness are lower than they were in the '50s and we have a higher rate of depression and suicide as well. Maybe part of the reason is the way in which a lot of people are getting all these things they have--through debt, contributing to even more stress and financial worry. I commute to work each day by train and almost everyone's "plugged-in" with an iPod or blackberry or blackjack, etc. and they all look miserable.

By the way, I just heard on the news that 18% of people have taken out loans on their 401k. Yikes!

[Pennypacker]

I like Dave Ramsey's approach. It's interesting that he is a proponent of paying off one's mortgage as soon as possible based on what I've just read in Total Money Makeover. Yet, the book I read prior by Ric Edelman (The Truth About Money) suggests getting the biggest mortgage you can afford and keeping it as long as possible--the idea being that you're not tying up your cash in the house, but instead investing it at a much higher rate than the mortgage interest. I don't know what the right answer is, but I think, psychologically, it must feel nice to know you actually *own* your home once that last payment is made.

[mshu7]

My view on the mortgage issue is that if you have this big mortgage and you lose your job or something else happens, what do you do then? I think is ultimately why you don't want to have any debt. Think of how much you could do if you didn't have a mortgage payment!!!

[Grimm]

Originally Posted by Pennypacker

By the way, I just heard on the news that 18% of people have taken out loans on their 401k. Yikes!

Yeah, friends of ours are in that group. They went through bankruptcy about 8-9 years ago before and they just barely had started a family. They took money once out of his 401k, and then a couple years ago I think they emptied it out (not a loan). His wife's comment to my wife was "we have plenty of time to save". Yeah right, they've been living on a shoe string pretty much since they've been married and they are nearing their 40's and they think they have plenty of time. I knew they hadn't learned their lesson this past year when they finally got out of bankruptcy and she said they were taking their first paycheck after the bankruptcy payments were done and "blowing it all". They just commented recently about going through the Dave Ramsey course, so hopefully that has put at least a little common sense into their heads.

I really like Dave Ramsey and his ideas, but I tell you he gets a little frustrating to listen to sometimes the way he calls people "dumb" or "idiots". I think a Christian be a little more positive and conduct himself a little better.

[Accumulator]

Originally Posted by Pennypacker

..[some debt is OK if you're]...investing it at a much higher rate than the mortgage interest..

That's the kind of trade-off I sometimes think about (when my friends say how nutty I am to avoid debt like the plague) and you can't argue with arithmetic. But as mshu7 pointed out, if something trashes your income stream you're at the mercy of your lenders. And that "something" just might be an unforeseen change in the performance of your investments.

And yeah, just get me going about today's emphasis on immediate gratification, distraction/alienation via technology, and supposed shortcuts to the things that really matter in life. I call my friends' BlackBerries/smart phones/etc. "electronic leashes"...they counter that I'm "urban Amish"

[Pennypacker]

Originally Posted by Accumulator

But as mshu7 pointed out, if something trashes your income stream you're at the mercy of your lenders. And that "something" just might be an unforeseen change in the performance of your investments.

Indeed! That's a compelling argument. Regardless of how "safe" an investment may be, it's still fundamentally an investment and there will be fluctuations. I sure wouldn't want to be on the wrong side in a worst-case scenario. I'm sure lots of mortgage-backed securities were deemed safe not long ago, and we know where those are now.

[aabablusaan]

Originally Posted by jnmttu

We currently have no credit card debt and both of our cars are almost paid off. My wife graduated from medical school in 2005 with just over $100K in school loan debt. Luckily, we consolidated right before the big jump in student loan interet rates. They are all at 2.67%. Currently, we are holding back on other expenses so that we can pay as much on that as possible. As it stands now, we will likely have it paid off in another 4 years. I just couldn't fathom the idea of paying on a student loan for 30 years. Once that is paid off, all we should have at that point is the mortgage. We will only be 31 in 4 years, so I think being debt-free is do-able with the exception of a mortgage. Also, I have always found the comfort I get from paying off debts far outweighs whatever small joys I might get from buying little things with the money instead.

It's good that you want to pay off her loan debt quick... I just had no other option, so I took the 30 year amortization KNOWING that I wouldn't be paying on it until I was 56 years old. I wanted the lower obligation to be able to pay more when able, but pay the minimum when money was tight. However, my current system has worked well for me, and due to the frozen interest rate that will probably beat inflation, I wasn't super concerned with carrying the note for a few years. At this rate, I'll have it done in my late 30's, as I'm 29 now.

The biggest financial windfall for me has been no car payments. Although I currently own two automobiles that have 194,000 and 130,000 miles respectively, I am able to fend off the new car itch by keeping my current cars looking good and running good. Luckily, autopia.org helps with the former! As a result, I'm able to take that $419 a month I paid for the Accord and put it directly into mutual funds, another $300 into the IRA, contribute 10% of my salary to the 401(k), and take the remaining money and put it directly into savings. With a new car note in the $550 range, I'd be in less than ideal shape.

I just bought the Dave Ramsey book tonight...I'm impressed by his website, so I decided to check out the book. Luckily, I learned that I've taken care of some of the baby steps, and even though I won't pay off that student loan quickly, I'm going to see just how far I can take his plan.

[Slick61]

Originally Posted by Accumulator

if something trashes your income stream you're at the mercy of your lenders. And that "something" just might be an unforeseen change in the performance of your investments.

been there... done that. My last job. I actually sat down with my boss before I went house-hunting. He said nothing to worry about. We were the global headquarters & weren't going anywhere.

6 months after I bought my house, the company I worked for got bought out & about 300 of us suddenly found ourselves unemployed. My only solace was that my boss was as unemployed as I was. And this was a small town in the middle of nowhere... not exactly a hotbed for hiring specialized engineers. I had a few phone interviews right off the bat. And then, a LONG dry spell. Luckily, unemployment just barely covered my mortgage, but when it ran out after 6 months, I really started to freak. It took me TEN MONTHS to find another job. Luckily, I had enough of a financial cushion to tide me over. That was 4 years ago. It taught me a very important lesson. I always keep a reserve of cash to at least cover my mortgage for a year. Half of it I keep in short-term investments, the rest I stash in a money market account. You think it can't happen to you... but it CAN.