Debt

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!
 
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.
 
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!!!
 
Pennypacker said:
By the way, I just heard on the news that 18% of people have taken out loans on their 401k. Yikes!
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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.
 
Pennypacker said:
..[some debt is OK if you're]...investing it at a much higher rate than the mortgage interest..
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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" :D
 
Accumulator said:
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.
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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.
 
jnmttu said:
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.
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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.
 
Accumulator said:
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.
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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.
 
aabablusaan said:
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.
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Which book did you pick up? We are reading Financial Peace for the FPU class but I just started reading Total Money Make Over as well this week.
 
aabablusaan said:
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.
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That is basically how we have set up all of our debts. Her student loan is for 30 years and our mortgage is for 30 years as well so if we ever get in a pinch, we have the lower obligation to help soften the blow. I realize that we will pay slightly more interest this way but, like you, it gives me comfort of knowing that if we ever get into a financial crisis we can still make the lower payment and when we can afford it, we can pay it off quicker. With our first child due in April, there is a good likelihood that our financial priorities may shift some, so the lower payment may give us some flexibility there.
 
aabablusaan & jnmttu- You went into debt the smart way- you knew what you were doing and did the proper cost/benefit analysis before you made the decision and you allowed for contingencies.



slick61- Glad to hear you came through that OK. I agree about keeping enough liquid to cover the essentials. And it's nice to see market downturns as buying opportunities instead of reasons to panic- gotta have ready cash for that (at least to do it safely).



pennypacker- Yeah...every time I think my investments are too conservative (friends always seem to be finding the hot stocks and buying/selling at the right moment, or so they say you know ;) ) I remember what my real priorities need to be; it *can* happen to anybody. My maternal grandparents were "overly conservative" too..but then they rode out the depression just fine while so many others didn't.
 
I just picked up Dave Ramsey's Total Money Makeover. I will get through it in it's entirety before buying a car.



I have only just got into it and seen a little bit of his show, but it kinda makes sense though, if I don't buy a car yet, invest and save and buy it in cash... I may not get what I want now, but I will never be paying someone else's salary to pay for a car. It doesn't mean that I cannot have what I want later, even if that later is only 3 or 4 years down the line. Although I still kinda have that feeling to just get what I want now while I'm young and can do it.
 
bumoftheday said:
I just picked up Dave Ramsey's Total Money Makeover. I will get through it in it's entirety before buying a car.



I have only just got into it and seen a little bit of his show, but it kinda makes sense though, if I don't buy a car yet, invest and save and buy it in cash... I may not get what I want now, but I will never be paying someone else's salary to pay for a car. It doesn't mean that I cannot have what I want later, even if that later is only 3 or 4 years down the line. Although I still kinda have that feeling to just get what I want now while I'm young and can do it.
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Amen to that! I too, after reading and participating in this thread, I picked up the TMM and TMM workbook, watched Dave Ramsey last week instead of the O'Reilly Factor and Countdown with Keith Olbermann, and I've made daveramsey dot com one of my daily stops along with Autopia. I especially like the "If you live like nobody else..." line.



I even removed $30 for NXT 2.0, UQD, and an air freshener from my "Detailing" envelope before going to Target this morning!
 
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