Personal Debt

[Gregmal]

It depends really on what I consider my personal "coverage" ratios. I will borrow money all day at a 5% rate or lower. Give me all the money in the world if that's my hurdle. But I have to have certainty that if shit hits the fan I will be able to repay this. My home? Why would I tie up all the money I had in my mid 20's, in an illiquid asset that I never plan on selling, when I can borrow at 3.5%? Why would I take $50K for my car and forgo that money being invested for the next 5 years, when I can borrow at 1.7%? Heck I am so dedicated to invested that even my snow blower I took 12 months 0 interest financing for. I've seen quotes about never interrupting compounding, or how the more you invest the better off you will be, well I live that to the extreme. The key thing here though, is risk management and being 100% honest about the necessity of what you are buying/borrowing, and whether or not you can afford it.

 

I'm not a fan of being scared of everything. My entire life I've heard people make excuses not to be in the stock market, or not to make investments. More often than not, in fact, almost all the times, those fears are really just excuses and owning businesses and being invested would have worked out for them.

 

Yeah I can understand this approach. But I don't think not following it is because you are fearful. I mean, I see it more as a hedge. For example, say you do have these loans or financed products, phones, lawn mowers etc. How do you handle a down market? To me it's disadvantageous to have a large portion of your capital tied up in monthly payments that need to be met before you can allocate that money to investing opportunities. A good example would be in real estate. If we were to have another housing market crash (hypothetical) if you are young like myself I would doubt that a bank would give out a loan to me if they saw I had tens of thousands of low interest loans tied up in student debt, vehicles, lawn mowers, etc. To me it's not necessarily about being afraid of the worst. But I feel it gives one the ability to be more "risky" when opportunities arise. But both methods obviously work well. And you could probably argue that your method is the better one.

 

I dropped out of college after my sophomore year because I didn't love what I was studying, I had lost some of my scholarships (GPA standard for hard sciences is a bit high...avg mech-eng GPA is 2.8). And the industry was a bit cyclical. So not wanting to be 50-60k in the hole like everyone else I went and worked as a driver for UPS (took a lot of shit for that lol) making 65-85k a year. Paid off my loans in one year and then finished college online while driving. Took me an extra year and a half to finish school, but unlike my friends I'm debt free, have two new vehicles paid off (with 10 year warranties) a steady job and the ability to invest. I think too many people are stuck in the mud when it comes to life flexibility and which paths to take. Especially my generation. People act like if you don't finish college in 4 years or before you turn 22 you're screwed. Thanks for the alternative perspective though Greg.

 

Cheers!

 

In regards to some of your questions, the big thing, to clarify, is not transferring your net worth or assets from a higher quality one, to a lower quality one. So it's not so much having all these monthly payments as being a burden, it is simply delaying what it costs me today, and then paying fractional pieces of it out of future cash earned. I think the mortgage example is a no brainer. It is not unreasonable to double ones money in 7 years investing. So if you could potentially take $500K and turn it into a million while paying your $3000 monthly mortgage out of future earnings... why wouldn't you do that? That $3,000 per month saved gets you $252,000 after the same 7 years(and even if you are investing it you are compounding it from a much lower base). Or the car; if you have $500,000 invested, why turn that into $450,000 to buy an asset that eventually turns into zero when you can fund it with future earnings. The market can crash and blow up and whatever, but that doesn't really harm me as long as I have the ability to earn/work. And not that I'd advocate it either, but as we saw a decade ago, if you can't pay your mortgage the worst case scenario is that it just gets repossessed and then you are free and clear.

 

Regarding banks giving loans in your example, and this is just me extrapolating from what I've seen, but when economies and markets are bad, they don't make new loans to anyone regardless of their financial profile. Or at least its much harder. But, they are much less likely to pull existing arrangements if you are in good standing. As such, I take almost every offer that bolsters my liquidity. I have $25K cards(Amex Blue Preferred) that I use solely on maybe $500 in groceries a month and get 6% cash back. Or the Costco Citi card for 4% gas. Multiple chase freedoms with the 5% back categories. So I have like $200K in available credit and maybe use 1-2.5% of that monthly and pay it in full, and then try to keep my non mortgage and auto related deferred expenses under 10% of that as well. If the market blows up? I can then use all the available credit to play the no interest for 12-18 month balance transfer game.

 

The key driver in my logic is that the earlier you start accumulating wealth, and faster you can get it as high as possible, the easier life and decision making becomes. Returning mid single digits on 5 and 6 figure wealth does pretty much nothing for anyone. Returning mid single digits on a few million? If you are a fellow who can live within their means...You can do quite a bit with that. And if you can get double digits investing 7 figures? The world is your oyster. Either way, grow your pile of cash as early and as fast as possible so that your investing actually matters. Avoid shrinking it at all costs.

[StevieV]

Interesting discussion.  I think personal situations matter a lot.

 

One thing I didn't see mentioned is liquidity.  I don't think you want to pay off your mortgage and all loans at the cost of all liquidity.  You can certainly go broke even if you have no debt.  I can own my house without a mortgage, but if I can't pay my property taxes, I won't keep it very long.

 

In most circumstances, I think having some liquidity and a mortgage is better than no liquidity and no mortgage.

 

 

 

[boilermaker75]

My parents lived through the Great Depression. So their experience greatly influenced me. So, I am debt adverse. I do use credit cards to get the points but I have always paid them off each month. I had a car loan once and hated it. Since then I have always paid cash for cars. I have taken out mortgages to buy houses, but always paid extra capital to get them paid off. I did take out a mortgage on my house in 2012 so that I could loan the money to my daughter so she could buy a place in West Hollywood, which has tripled in value. I could get a much lower rate than she could, if she even could have gotten a loan from a bank at that time. We gift her the mortgage payments each year.

 

Your wife & you are good people, Mike,

 

I hope you'll enjoy your weekend, with the wishes of the best from my better half & I - especially to your wife.

 

Thanks for the kind works John. And thanks for all your contributions here.

 

I hope you and your better half are enjoying the weekend!

[TwoCitiesCapital]

I used to have a 30-year fixed rate mortgage, which is probably the best kind of personal debt you can get in size.  I don’t think I’ll get another one though because: (a) rates have come back up and I don’t see them going much lower, (b) I don’t expect huge returns from my investment portfolio going forward, © the mortgage interest deduction has become pretty useless for me after the recent policy change, and (d) I don’t really need it anyway. 

 

When deciding whether to pay off my debt early, I basically think of it as a “bond investment” with a yield and maturity that matches what I have on the debt.  (So if I have a 4% mortgage with 20 more years to go and I pay it off, I see that as the same thing as buying a 20 year bond that yields 4%.)  The question then is whether I can find other investment opportunities with greater risk adjusted return potential.  If yes I keep the cash and invest it; if no I use the cash to reduce the debt.

 

There seems to be a big dichotomy in the financial industry right now. One side says if you can make a higher return in the market vs what you're paying in loans do that. The other side is saying pay off loans first, regardless of interest rates as it's a guaranteed return and market uncertainty is growing.

 

Personally I took 50k this past year (few weeks ago) and paid off all my debt (student loans 4-6.5%, 2 auto loans 2-3%). Yeah, I could have probably just paid on those loans and potentially got a better return on my money. However it has freed up an additional 1.5k a month for investing. Not to mention the psychological benefit of being debt free. I mean, I'm happy with it. My wife and I already max out Roth IRA's and 401k's and would like to have a kid in the next two years as well as buy a house. So I guess I was prepping a bit for our income to be reduced once she stops working.

 

Who knows, maybe the bull market will rage and continue, but to me it seems like returns will be mediocre in the near term and possible over the next year or two. At least relative to my loan rates.

 

I think you just have to determine what your hurdle is to know which side you fall on for any given decision.

 

I paid off my car in 16 months because the interest rate was 5.8% (I purchased a 15-year old Porsche and didn't have the luxury of 0% loans :/ ). I didn't think I wanted to try to beat a guaranteed 5.8% post-tax in the markets over the next 5 years so I paid off the loan with incremental savings.

 

I don't prepay my mortgage because it's at 3.85% (less consideting mortgage interest deduction) and that's a significantly lower hurdle despite the fact the amount borrowed was 20x that of what I paid for the car.

 

I think the most important thing is to keep a reasonable balance of debt relative to income and to be on the conservative side of realistic when it comes to choosing whether or not to prepay or not.

 

[Fairfaxnut]

Like others on here, my wife and I use our CC's as a cash flow utility to maximize our points accumulation.  Pay off in full every month.  We have no auto loans and a 2.45% mortgage fixed rate for 5 years.  We have 3 cars in which one of them I have registered as a classic car, so I pay 150 a year in insurance for that vehicle.  We tend to keep our operating expenses low while still enjoying nice things in life!

I wish I could get a US 30 year fixed mortgage!  Both of us tend to suck our thumbs regarding debt.  We are paying down our mortgage because we have no clue where rates will be in Canada after the term in done but at the present moment we have over 50% equity in it, but that's based on bloated Canadian real estate values (although I'm in the cheapest area in Canada....Windsor).  My logic is to strengthen our balance sheet and increase our untapped borrowing power to take advantage of a weak economy.  Currently I work as a Maintenance tech for Vistaprint and the wife stays home.  Both my wife and I can work minimum wage jobs to cover our current expenses.....that is until our son goes to school which I think my dividends will cover anyway.  ;)

[james22]

I paid cash for a condo last year just to avoid the mortgage paperwork.

[John Hjorth]

I paid cash for a condo last year just to avoid the mortgage paperwork.

 

James, It feels good to post this here on CoBF, right? [ ; - ) ]

[james22]

Well, it was easy to justify given last year's mortgage rates vs market expected returns, but yeah, it was nice to have the option.

 

It'll feel better to someday post how I just took out a low rate mortgage or HELOC and invested in the undervalued market.

[SharperDingaan]

I paid cash for a condo last year just to avoid the mortgage paperwork.

 

Everytime I try doing something like that, they think I'm money laundering ;D

Definately not the time or place for those used hundreds!

 

SD

[sarganaga]

I don't see a problem with having a home mortgage if it's affordable, really affordable; same with a car loan, if you're young. It really feels great & is great to be totally debt free though. There is an extraordinary degree of flexibility when you're not worrying about paying things off.

 

 

[Castanza]

I don't see a problem with having a home mortgage if it's affordable, really affordable; same with a car loan, if you're young. It really feels great & is great to be totally debt free though. There is an extraordinary degree of flexibility when you're not worrying about paying things off.

 

Personally I wanted to start with a clean slate. I will probably adopt an approach similar to what Greg previously said now that I'm comfortable with my debt/liquidity and debt/income rations. However, moving forward I won't ever take out another car loan. Mortgage I'll probably opt for a 15 year and aggressively pay it off balanced against investing (depends on rate, term, and total).

[Parsad]

I don't see a problem with having a home mortgage if it's affordable, really affordable; same with a car loan, if you're young. It really feels great & is great to be totally debt free though. There is an extraordinary degree of flexibility when you're not worrying about paying things off.

 

Personally I wanted to start with a clean slate. I will probably adopt an approach similar to what Greg previously said now that I'm comfortable with my debt/liquidity and debt/income rations. However, moving forward I won't ever take out another car loan. Mortgage I'll probably opt for a 15 year and aggressively pay it off balanced against investing (depends on rate, term, and total).

 

Do whatever lets you sleep at night!  There is no one way to behave with your money, nor is there just one way to make money.  You also have a life to live and other responsibilities...so each person should do what they feel is right for them and doesn't stress them the hell out! 

 

Some people can continue to function without a worry even if they are in debt to their eyeballs, while many consider bankruptcy or suicide when they get deeply in debt or over their heads.  It's not a fun thing when you are afraid of tomorrow.  So do what is right for you and your mental well-being!  Cheers!

[Lance]

My personal approach is exactly like Gregmal’s, but would reiterate what Parsad said, do what let’s you sleep at night.

 

Thanks

Lance

[bizaro86]

I paid cash for a condo last year just to avoid the mortgage paperwork.

 

Everytime I try doing something like that, they think I'm money laundering ;D

Definately not the time or place for those used hundreds!

 

SD

 

LOL. I suspect by cash he meant "bank draft." At least that's what I do...

 

I wonder how a real estate conveyancing lawyer would react to a briefcase full of hundreds. I suspect if you filled out the correct paperwork it wouldn't be an issue, although he/she probably wouldn't appreciate the chance to deposit a few hundred k in cash into their trust account.

[Parsad]

I paid cash for a condo last year just to avoid the mortgage paperwork.

 

Everytime I try doing something like that, they think I'm money laundering ;D

Definately not the time or place for those used hundreds!

 

SD

 

LOL. I suspect by cash he meant "bank draft." At least that's what I do...

 

I wonder how a real estate conveyancing lawyer would react to a briefcase full of hundreds. I suspect if you filled out the correct paperwork it wouldn't be an issue, although he/she probably wouldn't appreciate the chance to deposit a few hundred k in cash into their trust account.

 

They were doing it here in Vancouver, until they cracked down on the money laundering.  Basically, it was the service providers (lawyers, accountants, consultants, etc) that would take a cut to deposit the money into their trust accounts.  Then the money went into high-priced real estate, cars and luxury items.  They would ship the cars and luxury items back to China and elsewhere, sell them and cash out with clean money. 

 

Vancouver has more luxury cars per capita than anywhere else in the world.  No one blinks twice when they see a Bugatti or McLaren driving down the road.  Range Rovers are like sushi restaurants here...every corner has one.  Housing is getting hit in a big way since the crackdown...high end houses are selling for 50-70% of previous highs.  They just began cracking down on car dealers, and now there is talk they will be going after the luxury goods category. 

 

The first place they tackled were casinos...high rollers would come in with $1-2M in a briefcase, buy chips or play high stakes Baccarat, lose 5-10% and then cash out in clean money.  The maximum is $10K in cash now, and one of the newest, most posh casinos (the Parq), nearly went bankrupt after just 3 years because gaming revenues dropped off so much.  They just received a lifeline in financing about a month ago.  Cheers! 

[fareastwarriors]

I used a margin loan from IKBR to put a downpayment for an investment property. I'm still paying it off, slowly. No regrets. 

[rkbabang]

I paid cash for a condo last year just to avoid the mortgage paperwork.

 

Everytime I try doing something like that, they think I'm money laundering ;D

Definately not the time or place for those used hundreds!

 

SD

 

LOL. I suspect by cash he meant "bank draft." At least that's what I do...

 

I wonder how a real estate conveyancing lawyer would react to a briefcase full of hundreds. I suspect if you filled out the correct paperwork it wouldn't be an issue, although he/she probably wouldn't appreciate the chance to deposit a few hundred k in cash into their trust account.

 

This is funny because someone I know just went through something like this.  She was selling her house and was under agreement with a Chinese couple that owns a few restaurants. Evidentially the couple planned to buy the house with cash so they showed up at their bank with bags full of about $500k in cash.  Before the closing the IRS starting investing them and froze their accounts.  So the house is back up for sale again.