Doesn't Anyone Here Want to Be Debt Free???

[disneysteve]

DOESN'T ANYONE HERE WANT TO BE DEBT FREE?

I want to be debt-free, but not if it costs me more money to do so.

My mortgage is a 5.875%. After the tax deduction, the real rate is about 4.4%. Are you suggesting I should pull money out of savings that is growing at 8 or 10 or 12% or more to pay off debt that is only costing me 4.4%? In my opinion, that would be incredibly stupid and short-sighted. My S&P 500 fund is up 9.74% YTD. My International Stock fund is up 20.20% YTD. My Gold fund is up 41.24%. Should I sell those investments to pay off my 4.4% mortgage? Why would I possibly want to do that?

Debt is not all bad. Properly used, it allows you to leverage your money to earn greater returns. If not for debt, how many people would own homes? How many people would have college degrees? How many businesses would never have gotten off the ground?

As for credit cards, I charge everything I possibly can to my rewards card. Why? I can either pay cash and get nothing in return or I can use the card and get something in return. In my book, something is better than nothing. A couple of months ago, we got 10 free nights at Marriott hotels in New Hampshire with our reward points. Would it have been better, in your mind, for us to have paid for all of those hotel nights?

I think some people are overly debt-averse and their finances suffer as a result.

[disneysteve]

Assuming that you work for a living and are not to the manor born, suppose something happens to you (termination, disability, etc.) that reduces or eliminates your earnings?

If I become disabled, I've got excellent disability coverage that would replace my income. If I lose/leave my job, I have more than enough in savings to support me for at least 5 years minimum. Surely, I'd be able to find a new job long before that.

It makes no sense (financially speaking) to live debt-free if it means passing up opportunities to earn far more with your money. I understand, though, that there is a big peace of mind factor in being debt free, even if it costs you money in the long run.

[FinWhiz]

There have been a number of trolls (or at least semi-trolls) recently. Most of the regulars are very responsible with debt.

You will find a split, though, among the regulars. Some prefer to use credit cards, pay them off every month, and rack up rewards. Others prefer to avoid credit completely and stick to a strict cash or debit budget. Either way is fine.

What I personally don't have patience for is people who can't afford the basics and then make frivolous purchases such as luxury cars, 2nd homes, and vacation clubs, and then complain about how their credit is shot. When you tell them they have to make some tough choices and cut their spending and/or sell assets, they don't want any part of it.

Excellent point! There is a young friend of my son's (he is 24) who just bought a BMW, and was bragging about his 956 dollar a month payment. This kid barely makes 12 dollars an hour.

[FinWhiz]

..and it is never a good idea to buy a new car.

[Ima saver]

I guess I am not very smart! I bought a house and my payments were $96 a month. I paid it off very early and have traded up. I have a house worth700K ( I only claim 500K on my networth cause that is the tax appraisal) I also buy new cars once in a while.

[LivingAlmostLarge]

No, but if you can afford a new car what is the HARM? Will you tell a millionaire no?

InDebtInDC, our home is not an investment. I want to never move, have children, have dogs and paint the house. Like I told the other poster, renters are not as careful about houses, nor should they be. I like freedom of owning because I don't have to worry about being kicked out because they need to sell or have family move in.

Homes are not investments they are a place to lay your head. However they are an asset. A very, very large asset in my case and it would be foolish not to consider home equity in my whole portfolio. But because of that I would never want to be house rich and cash poor.

FinWhiz, let me guess you probably are a DR follower with a 6 month EF. And let's say you get disabled or cancer. Can't work for 1 year. What will you do? YOU have to get a job within 6 months or start stretching it, but it could be hard to last 1 year. Let's 50% of it is gone to medical bills, how long will you be keeping your house? Will you touch your retirement savings?

Now Disneysteve has 5 years in the bank cash. He can get medical treatments for say 2 years. And cover 1 year of medical bills. And still have 2 years in the bank.

Sure a paid for home and debt free is nice, but not at the expense of losing it all from one mistake/accident.

If you really wanted to be debt free, you'd save up the mortgage entirely, hold it in a money market account and then pay it off the day you can in full. So NO TRAGEDY can ever hit to take the house away, it's paid in full without risk. That way if you can't work for 5 years you're still set. Then instantaneously your 6 month EF is 2 years. But that's the "risk" averse method! Your method counts too much on nothing happening that is more than 6 months long.

Second, why would I want to be debt free when investing in a Roth IRA and 401k is not maxed out? Sure my mortgage is 4.25% (less than 3% after tax break), but I save 28 cents for every 1 dollar into my 401k. That's a 28% return on my dollar going to my 401k! Hmmm...4.25% or 28%? Which is smarter? If you aren't maxing out your 401k and Roth IRAs you're losing $$$$. Crazy, heck no I'm not about to lose 20% returns on money.

You'll argue you can invest your entire house payment. Um, yeah, but you can't go back in time and invest in a 401k/IRA. You might have enough to max it out later and then some, but taxable accounts you have to pay taxes annually on capital gains. Retirement accounts you don't. Hence they grow faster. And for Roth IRAs you never have to pay taxes. So you're returns are wider between a taxable and retirement account.

So basically you're losing money paying off your house. Sounded like a great deal before you came here, but now it turns out you're in a losing proposition. Sure be debt free, but see if you ever catch up to someone who has maxed out their retirement accounts and saved outside. Can't be done, no matter what numbers you've used. I have an excel spread sheet which shows this.

[disneysteve]

I guess I am not very smart! I bought a house and my payments were $96 a month. I paid it off very early and have traded up. I have a house worth700K

That's very smart. You bought, with debt, and leveraged your money to build wealth. Each time you traded up, you increased your net worth, even though there was debt involved in the process along the way. Had you never taken on any debt, you wouldn't be where you are now.

[Ima saver]

Well, as I have said before, I bought a house at a very young age, 21. Back then, I did not know much about investing. There were no retirement accounts, no roths, etc.
I bought a nice house and improved it, then sold and doubled my money. I have paid cash for every house since then.
I have enough cash on hand in local banks to live frugally for about 10 years, if my husband should have to quit work. Then I have my IRA's and my mutual funds. I won't starve for a long time.

[LivingAlmostLarge]

Well, as I have said before, I bought a house at a very young age, 21. Back then, I did not know much about investing. There were no retirement accounts, no roths, etc.
I bought a nice house and improved it, then sold and doubled my money. I have paid cash for every house since then.
I have enough cash on hand in local banks to live frugally for about 10 years, if my husband should have to quit work. Then I have my IRA's and my mutual funds. I won't starve for a long time.

There are couple of key things you leave out Ima. Your husband is into building homes. Not typical job. Second you are older than most here so you were not fortunate to have 401k, IRAs till later, yet you still invested money into them. Excellent.

If given the opportunity would you turn down investing in a 401k and IRA to pay off your home now and were again 21?

[disneysteve]

Second, why would I want to be debt free when investing in a Roth IRA and 401k is not maxed out? Sure my mortgage is 4.25% (less than 3% after tax break), but I save 28 cents for every 1 dollar into my 401k. That's a 28% return on my dollar going to my 401k! Hmmm...4.25% or 28%? Which is smarter?

Although I totally agree with you in theory, there is a small flaw in your explanation here. Prepaying the mortgage would save you 4.25%. Investing in the 401K doesn't actually save you 28%. It just delays paying the taxes on that money until you withdraw it in retirement. So the money gets to grow tax-free, but ultimately, you will need to pay those taxes.

[Ima saver]

No, I would never turn down an opportunity to invest in a 401 or an IRA if that opportunity was available to me in the mid 60's.
Neither my huband or I have ever had the opportunity to invest in a 401, but we do have IRA's and also Roth IRA's.
I am a strong believer in mutual funds.

[irmanator]

I am working on it. I have lists on my bedroom wall and each month I get a statement i put the new balance on there so I have a visual of it all going down. This way my kids can see it but no visitors . they are learning some my son saw me paying for something with my debit card and gave me the shame on you look. Had to explain it was not credit.

[LivingAlmostLarge]

Although I totally agree with you in theory, there is a small flaw in your explanation here. Prepaying the mortgage would save you 4.25%. Investing in the 401K doesn't actually save you 28%. It just delays paying the taxes on that money until you withdraw it in retirement. So the money gets to grow tax-free, but ultimately, you will need to pay those taxes.

Right but who knows how it will play out? I may not need to draw on it till much later giving it a long time to grow tax free without losing my 28%. I could just pay 15%?

[ginene]

I do. My mortgage is my only debt but together its the mortgage and the car. My husband has an expensive mustang that I would love to pay off. I dont like to spend money and he is the opposite of me. My car cost me $1000 total where as his car payment is $732 a month. Now he sees how crazy it was to buy that car. 59 months and counting on his car.

My goal is to pay off his car faster and put more money on our mortgage to own it faster.

[InDebtInDC]

I do. My mortgage is my only debt but together its the mortgage and the car. My husband has an expensive mustang that I would love to pay off. I dont like to spend money and he is the opposite of me. My car cost me $1000 total where as his car payment is $732 a month. Now he sees how crazy it was to buy that car. 59 months and counting on his car.

My goal is to pay off his car faster and put more money on our mortgage to own it faster.

Did he buy a GT500 or something? There's really no justification for that car.