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[vintage]

The point of my last post with the 125K house is that it was paid for in 66 months (5.5 years).  If you then sold that 125K house and bought a 250K house, then you would borrow another 125K, make the same payments and in another 66 months be debt free again!  With the smaller loan, much more of the payment goes to principle.  You are out of debt, with a 250K house in 11 years.  Not 30, not even 15!  The difference is that for 5.5 years, you sacrificed a bit.  You ended up in the same place, actually better and faster!

Yes, you could do this.  But this still doesn't make you financially secure.  At the end of the 11 years, the couple still doesn't have anything saved for retirement!  Do they come out ahead in the long run?  I couldn't live that way. 

Clean, it seems to me that what makes you feel secure is to own your home free and clear.  Great, fine, good for you.  What makes me feel secure is to have liquid assets.  I would rather have $200,000 in easily liquidated assets and owe $200,000 on my mortgage than own my home free and clear and have nothing in the bank.  I don't think either one is a bad financial position to be in (so long as you have an income).  In either scenario, you have the same net worth.  It's about what makes you feel secure and comfortable. 

[clean]

Damn!  I reread some of my posts and the spell check makes me look like an idiot!  unemployment became "um employment" ... What the hell is that?


Random,
I did not mean to ignore your post. Congrats on paying off your mortgage.  I had heard of the book you mentioned but had not read it.  In fact, Ive been 'converting' costs to hours of work since I had my first job making 3.50 an hour!  



Earlier someone wrote about student loan debt as being "good debt".  Well perhaps it is.  Again, in hindsight, we will know for sure.  BUT how many of us know of a student that took out a big loan, but then did not graduate?  They have the anchor of debt, but not the earning capacity to pull it.  How many of us know of a coworker that has a house payment's worth of student loan payments, but is making little more than a public school teacher.... they earn 1/3 of what they borrow for student loans... Was that a good idea?  This has been discussed in other areas, and at least a few posters said that it was for them the right decision.  They may not make more than a factory worker after making the debt payment, but their working conditions are a lot better than the factory worker.

So, in many cases, I think, we wont know for sure if the debt was "good" or "bad" for a long time.  Does this mean that I dont think that you should borrow for a house?  NO, but keep it within reason.  Dont let the house or any other debt, alone or totally own you.

Again, I like the idea Random pointed out.  How many hours of work does it take to buy X?  Is X worth that much of my life?

A few other questions to ask:
Can I afford to operate it?  (IF someone gives you a puppy, you dont have to take it... they like to eat too and some vets charge more than 'people' doctors!)
Do I have a place for it?  (I have the computer that I did my dissertation on.  It is collecting all the dust that otherwise would be the table it sits on).
Will I use it?  ( how many of us are using a treadmil or exercise bike to hold our laundry?)

Good night!

clean

[clean]

Vintage,

Clean, it seems to me that what makes you feel secure is to own your home free and clear.  Great, fine, good for you.  What makes me feel secure is to have liquid assets. I would rather have $200,000 in easily liquidated assets and owe $200,000 on my mortgage than own my home free and clear and have nothing in the bank.

Ok, You have answered the question.  Your answer is "I WOULD borrow on my house to invest in the stock market (or whatever)". 

No problem. 

I don't think either one is a bad financial position to be in (so long as you have an income).  In either scenario, you have the same net worth

Yep.  And I need a lot less income because I dont have to make the house and car notes. 

I think that we are spending a bit too much time on house payments. 

I admit that I am debt free, including the house, but I also admit that I am at the fringe.  I dont advocate that everyone must be here.  Certainly not before you have paid off all the other debts and begun saving for retirement.  Also, if you know that you will need to replace something, or adopt, or whatever else, then I would not say, "wait 5 years before you adopt".  You dont need a paid for house for that.  You dont need a paid for house if it means that you end up having to go back in debt to buy a car.  But I am saying that a car is just transportation.  A $4000 one gets you there just as fast and reliably as a $24,000 one, and it will not lose anywhere near its value. 

I dont think that Eddie would advocate that you mortgage the next 4-5 years of paychecks to buy an asset GUARANTEED to drop in value at least 50% before it is paid for!

A challenge:

1. Write down every dollar that you spend next month
2. Grocery shop only with cash... NO food purchases on credit cards

ANY TAKERS?
Tell us what you find... check in often!

[clean]

Something has been bothering me about my last posts and I just figured out what it was.  There has been too much focus on the house. I guess that I posted the link to Dave Ramseys baby steps, and/or presumed that everyone knew what they were. 

That could explain some of the confusion about the stand on mortgage debt. 

So here are the baby steps:
1. Save 1000 in a beginner emergency fund
2. list all of your debts from smallest to largest.  Make minimum payments on all and send every extra dollar to the smallest one.  (Eddie has pointed  out that it should be the one with the highest rate.  I dont disagree, but it is a small order of small, and you get more from the 'thrill of killing' the smallest debt than you save in interest.  Besides, you can always surf the largest debt to an introductory rate card!)

3. After you are debt free but the house, build the Fully Funded emergency fund with 3 to six months of expenses. 

(this is where there is a problem.  Many examples or warnings from other readers indicate to me that they think that we skipped directly to paying off the house and are living on Roman Noodle Wednesday, and 'take out' means eating in the back yard)  This step takes care of all sorts of problems.

How high should this be?  Well, some have argued that we are state employees, so our income is stable.  That would make it a smaller (3 month) account.  I would counter that it is pretty hard to find a university job on short notice, so perhaps it should be longer.  Mine is 5-6 months, but clearly it is up to you.

4. Save 15% in retirement accounts

5. Save for children's education

6. Pay off the house early

7. fully fund all retirement accounts, build wealth, have fun, give a bunch of it away.


Now what about the, "I need to save for a new car"; " We need new furniture." I want a vacation"  "I dont want to teach summer"  Where do those fit in?  After step 3/4. 

So at this point you have set up a budget, paid off the non-mortgage debt and have plenty of money to invest in retirement, save for the next car, can go on nice vacations, wear nicer clothes, see plays, and enjoy life.

Dave Ramsey would not begrudge you these things.  He would only advise that you budget for and pay cash for them.  (if you cannot save up and pay cash, then can your really afford them?)

I hope that this clears up some things.  Being debt free does not mean NOT saving for retirement or having an emergency fund.  It should take care of the general argument Eddie brought up about a Katrina destroying your house and professor A being unable to survive because every dime was tied up in his illiquid house. 

Good night,

clean

[eddie_haskell]

I do, in fact, advocate keeping one's mortgage for as long as possible.  I would, in fact, borrow $100k against a paid for house to invest in the stock market if

1)  I were relatively young, say under 40, and
2)  I had a steady job, and
3)  I did so with a large amount of diversification

I am an advocate of index funds, or passive investing.  Maybe if you wanted to spend a lot of time on it, you could beat the market.  Or maybe you wouldn't.  So I say, be widely diversified and accept the long-run returns on the equities market, which will be higher than that of real estate precisely because of the risk you take. 

Clean is clean.  Clean is good.  Clean's statement that a $250k house is well above the median is telling, and I think Clean is living the Clean life in the rural Midwest.  Conservative financially, is Clean.  I have lived in the rural Midwest and I know that debt is truly evil if it is a crop loan and there is a bad harvest and you lose the farm.  I understand all of that.

But for all of those out there in forum land, if you did not know the difference between the payment on a 15 year loan and a 30 year loan, you do now and if the loan is smaller or larger, the ratio is still the same:  if the interest rate is the same (which it won't be) a 15 year loan has 35.1% higher payments, or put differently, a 30 year loan has 26.0% lower payments.  And if you don't understand why those two percentages are different, you are innumerate and will get taken advantage of throughout your lifetime.  I regret that, but have no immediate solution.

If your employer matches your 401k contribution, you must maximize your contribution, even if you have to borrow to do so, and even if you have to borrow at a fairly high rate.  And put the money in equities, more so if you are young.  One rule of thumb is that your exposure to equities should be 100% minus your age (if you are 30 you should be 70% in equities, if you are 40 you should be 60% in equities).  I think that is too conservative (gasp!) and recommend 120% minus your age.

[eddie_haskell]

Clean said:

"It seems that you and Eddie are of the mind that if we have low 'business risk' like a utility with very stable incomes, then we can and indeed should increase our 'financial risk'."

I do in fact believe this as well.

[case_insensitive]

I agree with clean on just about all points, though I do question (every time I hear it), Dave Ramsay not suggesting debtors pay the high interest loans/cards down first.  However, there is some psychological aspect to paying off each card, for sure.

I am working toward the debt-free state. I have one credit card balance still to work on and my vehicle has 4 payments left. My fiance and I bought a car a few weeks ago for cash. We could have used credit to buy a more expensive car, but instead we pooled our resources, set a spending limit within those resources and bought the best car for the money.  We did buy a new car but it was for cash. The fiance only buys a car about every 19 or 20 years.

I am not currently paying on a mortgage, but I will be in the next 6 to 12 months. I do want to own a home again, for sure. However, once the other non-mortgage debts are paid off, we can pay heavily on the mortgage if we so desire. Having no other debts will be like being free to do lots of other stuff.  We are very much looking forward to that.  Decisions we make right now to limit outflow will pay off in the future with a lot more disposable income.

I have taken extra work to help me get out of debt faster (and pay for the wedding, etc. without using credit).

This is the way to go!  Why would anyone want to be in debt rather than not? Makes no sense to me. Frankly, very few folks who are in debt are making wise investment decisions that more than offset the cost of the debt.  For those that can/do, have at it. But those are the exceptions rather than the rule, at least in American society.

[raoul]

There's obviously a lot of emotion in these choices. For some people, the idea of being free of debt just seems to make them feel good about themselves and how they are doing in life. Clean, I think you advice is really helpful--you basically echo Thoreau, who made many of the same points in Walden (think of every expenditure as a choice, consider the time it takes to earn the money to buy a certain thing, etc). However, even your chosen moniker "Clean" shows how emotional this issue is for you (I don't mean that disrespectfully at all, there's nothing wrong with being happy about being debt free). I can't believe I'm citing a self-help guru, but I have to agree with Suze Orman that people should think about money in terms of what makes them happy. That does NOT mean charging up your credit cards willy nilly, but it does mean that if you have to take on loans to get the education you really want, or to buy a house, then that can actually be a good thing--as long as you think about it clearly and have a realistic budget to be able to afford it.

I also think the house price discussion is a little weird. For most people, buying a $250,000 house in not extravagant. My wife and I bought a $300,000 house (which is now worth about $400,000, based on sales in our neighborhood). This is not a McMansion--it's a small (by North American standards) three bedroom house. Our bedroom is so small we can't even fit a dresser in it. We have one child and another on the way, and we will all be crammed into this little house. In our area, renting a similar house would cost about $2,000 a month, so that wouldn't really help either. It's possible that we could buy a $200,000 house if we moved way out into the suburbs. But then we would have to buy another car, our vehicle expenses would increase, and we would be living somewhere we didn't want to live. So the house equation for most people is not, "Should I be virtuous and buy a $100,000 house, or should I be greedy and buy a $250,000 McMansion?" These days, for most people, it's hard to buy any house at any price that is within reach on an academic salary. $300K was definitely a stretch for us, and we are well aware that our mortgage payments prevent us from doing other things we might like to do. However, the only alternative would have been to make the same or even higher monthly payments as rent, or to buy a house way out in the boonies. Living where we do, we can walk to numerous recreational and cultural activities, and I can walk to work, so I am happy with the choice. Anyway, I'm just pointing out that if you really live in an area where $250,000 is an expensive house, then that situation just does not pertain to most people.

[aristotelian]

Clean, your list is extremely helpful.  It's nice to have a clear list of priorities when finances can be so complex.  Here would be my slight revisions:

1.  Build $1-2k emergency fund (I think $1k is a little low).

2.  List all credit card debts, from highest interest rate to lowest interest rate.  Make minimum payments on all cards and put any leftover cash to the card with the highest interest rate.  (I like the "small victories" psychology, but it's an irrational strategy if your largest debt accruing at an outrageous interest rate).

3.  Contribute another $10k to emergency fund.

4.  Max out all employer-matched and tax-advantaged retirement accounts (if your company offers a 401k/403b but does not make a matching contribution, other items on the list should be a higher priority, but if you get a guaranteed match or tax deferral, the free money trumps almost all other priorities).

5.  Buy a used Honda or Toyota.  Look for a car that will last about 5 years, for about $2k.

6.  Save for a down payment on a house.  Purchase house.

7.  Save for kids' education.

8.  Pay off house and other low interest debt as quickly as possible (student loans would be another common item in this category, for example).

9.  Save for retirement by investing in a diverse portfolio of mutual funds, with the goal of having enough invested to live off the profits.  $1 million in investments would be a good target.

10. Upgrade the house and/or car.

[clean]

However, even your chosen moniker "Clean" shows how emotional this issue is for you

Actually, it rhymes with my real name and it was sort of a nickname while I was in PhD school.

Good to know that it was a virtuous choice!

Eddie said"

Clean is clean.  Clean is good.

So, I guess that Eddie has chosen the Dark Side!


Aristotoelain,
Feel free to amend the 'rules'.  It wont offend me, as they were not my rules!

As far as your step 2, I understand and I dont disagree with you.  If I had a big balance on a high interest card, then I would transfer the balance to a lower/introductory rate.  Besides, if you dont have a lot of debt, and it will be paid off quickly, then the rate really wont matter much.  The math says pay it off highest rate to lowest rate, but the "Thrill of Victory" that keeps us in the game says to kill as many as you can, as fast as you can.  For example, if you have $1000 at 18% and 2000 at 21%, it is not enough of a difference to buy a happy meal when it is all said and done, but you can kill the smaller one 2ce as fast as the higher interest rate one.  What do most of us need more?  An "attaboy" or a happy meal?

Keep em comin!

[eddie_haskell]

Certainly, Clean, I have looked at the prices of whole life versus term, many times, when I was a registered investment advisor.  I can't recall ever recommending a whole life policy for a client, although if they had existing ones I normally found that surrender was not the way to go.

How about this?  People should save for their own retirement before saving for their children's education.  There are financial aid advantages to be had from doing this as well.

[random]

I think there's also a lot of emotion surrounding houses in general--perhaps that's the forum's been focusing on that.  People have been shown to go to great lengths to buy a house and keep their house (even when teetering on the brink of bankruptcy--I love the work of Elizabeth Warren, bankruptcy law professor, by the way--she co-wrote with Teresa Sullivan and Jay Westbrook "The Fragile Middle Class: Americans in Debt" which was a massive study of people who went into bankruptcy in Texas; there's a popular she wrote with her daughter, called "The Two-Income Trap" which suggests that while cost of consumer goods have gone down, the costs of housing have gone up as families compete to get into good school districts and drive the cost of housing up so that you need two incomes rather than the one to raise a family, which puts families at risk when there's a medical disaster or someone loses a job--two prime causes of bankruptcy, and that having children puts women significantly more at risk for poverty).  Not to redirect this to a housing discussion, but that in overpriced housing markets it may well be cheaper to rent.  While perhaps it may be worth it to have bought a house say two years ago at $300,000 that's risen with the market, it may not for someone to buy it today at $400,000 if it rents for $2000 because at 20% down, the mortgage payments at 6% for 30 years is already $1918 (not including tax and insurance), but if the entire amount was financed then it would be nearly $2400 (not including tax and insurance).  And of course if you're living in a pricey market, you're more likely also to be in a bubbly market and could see the "value" of the house drop significant in the next couple of years.  So you could end up upside-down in your mortgage.  There's no point in buying if you're going to lose it to the bank. We've lately seen huge numbers of foreclosures around the country.  The hedge fund Bear Sterns was in trouble recently from investments in subprime mortgages, and from what I can see the housing bubble driven by cheap credit has been propping up the economy (after the dot.com bust--which wiped out a number of people's retirement funds--remember that?) so that as the bubble deflates further it will have an impact on the stock market as well.  I'm in the UK right now and have been seeing the dollar plummet, making everything so much more expensive (any ideas about how to protect one's savings/investments from the devaluing dollar?).  I suppose in the case of a devaluing dollar it's better to be in debt since you're borrowing more valuable money and then paying it later with less valuable money.  But somehow I really don't like the idea of paying interest, perhaps because I don't really have talent in investing (yes, indexed mutual funds are the way to passively invest--but when the stock-market goes bust, you still lose).  All to say that wish I were better at investing; staying out of debt is a simple plan for me.  From what I read from Warren and others is that the deregulation of lenders has meant a kind of free-for-all predatory lending and so creating a kind of debt-slavery (if that's not too strong a term).  We see it in the rise of credit card debts and the incredible rates that people get charged--and we see that in the way in which subprime mortgages are pushed onto people who can't really afford to buy a house.  This is a long winded (and probably not very articulate) way of saying that housing may well be tied to debt and how well your investments perform.

[case_insensitive]

random, please try using paragraph breaks.

[brunhilde]

Why would anyone want to be in debt rather than not? Makes no sense to me.

No one really wants to be in debt. But the more I read of Clean's argument, the more I think it is about spending and consumption choices, not about debt at all.

Clean, you often argue that we should buy used cars because they are cheaper and still get the job (transportation) done. I understand that and agree it is not smart to go into debt to buy a depreciating asset. But if someone were to make it all the way to step 7 (debt-free, house paid off, good emergency fund, retirement fund built up) and had saved up for a car, would it be OK by your philosophy to buy the brand new-killer hot wheels-macked out car? I'm guessing no, but that's about consumption and not about debt.

[clean]

But if someone were to make it all the way to step 7 (debt-free, house paid off, good emergency fund, retirement fund built up) and had saved up for a car, would it be OK by your philosophy to buy the brand new-killer hot wheels-macked out car? I'm guessing no, but that's about consumption and not about debt

Missed it!  Sure it is fine.  The problem with a new car is not just that it is financed, but also that it drops in value SO MUCH. How much does a new car go down in value in the first few years?  If you ve reached step 7, and have plenty of cash for the car, sure it is ok to buy a new car. 

Im not sure what my car would have cost new, I think that it was more than $28K.  However, by the time I bought it 2 years later, I only paid 16K.  That is a hell of a (negative) return on the original purchaser's investment!  If you have a lot of wealth, losing 12K more or less in 2 years is probably not going to be a big issue.  For me, that is a heap o money!  If your mutual fund lost that same percentage, I bet you'd be looking to lynch your broker!

Clean