Why I Focus on Debt Freedom over Investing

Over the last few weeks, my wife and I have taken some serious looks at our overall financial state, our happiness with our current lifestyle, and whether or not one of us wants to become a stay-at-home parent.

Although we’ve not reached a consensus on all of these issues, we have agreed on one fundamental fact: all of our leanings point toward debt freedom in the short or intermediate term as the best possible solution for our extra money.

Here’s why.

First of all, there’s a decent chance that one of us will become a stay-at-home parent. That means loss of income in the next year or so, meaning that our surplus money now will dry up. Instead of investing it, we can use the next several months of that surplus to eliminate some debts, thus reducing the size of our monthly budget and making it easier for us to breathe.

Second, it reduces the risk of potential career change. If I ever work up the courage to make a go of it and be a full-time writer, the case for it will be strengthened by a reduced debt load at home. If our debts start eating up a smaller and smaller percentage of our monthly budget, then I’m more and more likely to be willing to make that leap.

Finally, it somewhat reduces the risk in almost every aspect of our lives. Our current debt payments (home mortgage included) add up to over $2,000 a month, and actually make up a large majority of our expenditures in a given month (we spend less on utilities and food and cars combined than we do on those debts). $2,000 each month, floating free in our budget, changes a lot of the risks we face in life – the financial risk of having more children, for example, is a big one on our mind right now.

Thus, we’ve decided to focus primarily on repaying debt for the next year and halt our non-retirement investing plans. Our tentative goal is to pare things down to just our home mortgage within a year, and when we reach that point, re-evaluating things to see where we’re at.

What’s the plan?

First, we figured up all of our debts, and then ordered them by interest rate. Our total debt right now is actually $211,218.92, which is a scary number when you sit there and look at it. Thankfully, that number is all below 8% interest, which makes it somewhat better.

Next, we will make all minimum payments out of our normal monthly budget. This means that from the pay from our “regular” jobs, we’re going to make the minimum payments on all of the debts each month.

Then, we’ve committed all extra income (from side businesses and freelancing) entirely towards this goal. All of that money, once taxes are paid, will get swept directly into debt repayment. Note that this is after minimum payments are made, so this is all directly attacking the principal on the debts.

This will continue until all but the home mortgage is eliminated (which also happens to be our lowest interest debt), at which point we’ll step back and re-evaluate the situation.

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  1. FMF says:

    A few thoughts:

    1. I’m assuming the $211k includes your mortgage. Correct?

    2. As someone who’s been debt free for about 10 years now, I can tell you that all your points are spot on. Add to them the sense of freedom it gives you in all other areas of your finances.

    3. Another reason for debt over investing: GUARANTEED return on your money.

  2. Writers Coin says:

    I can’t wait to get into a mortgage so I can pay it off as soon as possible.

    Not having that set chunk of money devoted to a home/apartment anymore seems like the holy grail. Other than retirement, of course.

  3. alex says:

    Trent,
    Pardon for asking, but what interest rate are you paying on your primary mortgage? I ask b/c it would help shed light on your primary mortgage debt repayment plan.

  4. Mrs. Micah says:

    Sounds like a good plan. The security of not needing to work is certainly worth it. Best of luck with that!

  5. Jennifer says:

    This sounds like a great plan! I am sure you will be able to do it quickly.

  6. jtimberman says:

    Baby step 1: $1000 in the bank.
    Baby step 2: Pay off all debts except the mortgage, smallest to largest balance.
    Baby step 3: 3-6 months expenses.

    Only after those three are completed do you start saving for kid’s college and your retirement (baby steps 4 and 5). Only after the mortgage is paid off (baby step 6) do you start long term investing for wealth building (baby step 7).

    Didn’t you read Dave Ramsey’s Total Money Makeover?

    http://www.thesimpledollar.com/2006/12/09/review-the-total-money-makeover/

  7. Bobby Eff says:

    Thats a good plan and one I would follow, but my company matches up to 6% of my salary, so I would lose that if I don’t put in at least that much. Have thought about giving that up for a year, but this is free money I would be losing.

  8. Peter says:

    This is always a tough decision to make but in the end I think it always comes down to the ‘price of peace of mind.’ It’s different for everyone and it can sway this decision either way.

    As with anything: no decision is the only bad decision. So congratulations on not making a bad decision!

  9. Bill Long says:

    Wow, Dave Ramsey gives some really bad advice.

  10. Avlor says:

    I applaud you for this step toward your goals. As a stay at home mom w/ only the mortgage as debt, it’s the only way I can be at home.

  11. Matt says:

    I’m getting whipsawed by your investment strategies. You’re investing in the stock market one week and the next you’re not. Wasn’t there a post not too long ago about how you were investing in ten funds to save for your dream home? Is that out the window? I can’t keep up without a scorecard.

  12. I agree with jtimberman on all three points. Although points 2 and 3 may need to be done simultaneously, depending on how much debt there is besides the mortgage. If you lose your job today, you want to have an emergency fund to get you through a few months worth of expenses and if you had to choose, its better to have some debt + more cash in the bank account, than no debt + no cash for immediate expenses. If you’ll end up in the latter category, you’ll have to take out some kind of loan anyway, so you might as well stick with an established debt package (and it’s probably at a lower rate than what you would get being unemployed) and tuck away some money in the emergency fund.

  13. UltraRob says:

    In theory the best long term plan is to invest money as long as your interest rate on debt is low. The problem I see with that is it can limit your freedom to make choices that improve your quality of life. Being debt free gives you freedom. I’m not there but wish I was.

  14. Rick says:

    I’m glad to hear that someone else is doing the samething I am. Wife and I are having our first child this week (we hope) and she plans on staying home to raise the child.

    In preparation, we’ve paid off her debt and we’re just working off mine as well while we are still living in an apartment. So in about 8 months, we expect to have all of our wedding loan and credit card debt paid off. Next we’ll move onto our remaining car note and then our student loans.

    It’s amazing how much hurt you can do to yourself in your twenties before you wake up and realize you are married, soon to be a dad, and the sole income for the family. As usual, I wish I got my house in order earlier.

  15. Mark says:

    I would do the following:

    1) Build a significant emergency fund (12 months) before directing any additional funds toward a mortgage.

    2) Max out 401(k)’s, Roth IRA’s, and college savings plans – getting your full tax advantage.

    3) Then begin paying extra towards the debt.

    This allows you to have a great deal of liquid cash available for emergencies. If you send that money in toward your debt then it is not available for an emergency.

    Perhaps you are already doing these things, but you may need a post to SUMMARIZE your overall investing/debt strategy as many of these posts seem to contradict each other.

  16. Laura says:

    I think that’s a great plan. I got rid of my creditcard debt. I now have to tackle my car loan and student loan. Thanks for your perspective.

  17. !wanda says:

    @Matt: Trent is not running for president; he gets to change his mind.

  18. Aaron Stroud says:

    @ Trent – Good idea. You won’t regret it. Right now, my wife and I are striving to aggressively pay off our mortgage as quickly as possible. Once the mortgage is gone, we’ll have insane amounts of flexibility!

    @ Bill Long – Dave Ramsey has some firmly rooted financial beliefs that work *for a lot of people.* A lot of his callers really do benefit from paying off their smallest debts first regardless of interest rates. Retiring each debt often has psychological rewards that outweigh the differences in rates.

    I will concede though, that his insistence on college funds might not be the best use of funds. College really isn’t as expensive as it’s made out to be and investing for a short term goal (college) when one has a mortgage might be a pretty bad idea.

    @ Matt – That’s the nature of most personal finance blogs. You’re following along with Trent as he learns about investing, but more importantly, how he and his wife’s priorities change as their family grows and they better understand the risks they’re assuming by investing and relying on a two-income household.

  19. MB says:

    Like matt, I’m confused. Why only the minimum payments toward debt with your paychecks? I swear you said last week that you live on less than 50% of your income. And don’t you only have school loans left? And aren’t you saving for the new minivan next year? And didn’t you open a 529 even before your daughter was born? And don’t you frequently say that you’re paranoid about having and saving for a huge emergency fund? And don’t you advise to at least get the match in a 401K? And yes, Matt above is correct: it couldn’t have been more than two weeks ago that you spelled out how you’re saving for the dream house in the country. (which brings up another thing that has me confused: you frequently refer to living in a “rural” area, yet your neighbors have Lexuses and you are saving for a house in a rural area? Reading between the lines, I think you must live in a new housing development in a suburb.)

    I love your blog, but you are confusing me. As Mark says, maybe a summary would help?

  20. Toby says:

    I’m with Bill Long on that point. Dave Ramsey gives horrible advice. Baby steps 1-3 are okay, but waiting until you pay off the mortgage to invest for a long term? Huh? How the hell are you supposed to take advantage of compounding?!

    UltraRob: “Being debt free gives you freedom.” Yes, if you have no money then being debt free is better than having debt, but the choice being discussed is between diverting extra funds to debt repayment versus investments. Given that scenario, I challenge you to explain how “being debt free” gives you any more freedom than a huge bankroll.

    If you have $200k in the bank and $200k in debt are you more or less free then if you have zero debt and zero cash reserves? I would argue that having the money puts you way ahead of the game. You can take advantage of compounding and you can weather a significant storm using a $200k nest egg. The same can’t be said for paying down debt using your extra money. As Creative Investor pointed out, you may end up having to take out a loan if you find yourself in a bad situation at a rate that you would rather not pay because you didn’t have a big enough cash cushion.

    Furthermore, consider that the ultra-rich still take out loans on things and not because they are leveraged to the hilt. We’re talking Forbes 400 here and these are things they could easily cut a check for (a few mill here, a few mill there, etc.). But they don’t do it because they know that they are better off taking favorable loan terms over paying cash. If they are paying all this interest, I wonder how they got so rich? It wasn’t by following Dave Ramsey’s advice, that’s for sure…

    Dave Ramsey’s debt-phobia is not the only path to “freedom” and “wealth”. Think about it.

  21. Money Socket says:

    I am a fan of no debt, especially when it comes to your personal residence. One thing everyone has to consider is also overall pressure and just the feeling of knowing you have to pay a certain amount each month regardless of your financial situation, whether or not you are employed at the moment, or if your business is doing ok, or if your investments are performing well. With a paid off home, you are essentially getting rid of all those pressures. You are then free to focus on building your business, career or investments. One thing I would leverage on is investment properties. They are investments anyway, with tenants in there so if you leverage, your ROI grows significantly. However I do know a man locally who had a decent career yet managed to build himself a fortune worth over $20M in real estate and stocks. Every time he buys a property he would pay it off and every month’s rental income would be tossed into the stock market. Once the portfolio becomes large enough to buy another property, he will buy another. Then all of that income goes into stocks, so on and so forth. It just keep compounding and if he felt like it, he can buy a property every month now. However he’s decided to do lots of great charitable works. So at the end of the day those are the paths you can take. Leverage for a higher return in exchange for higher risk, or the debt free way, which offers a clearer foreseeable outcome.

    Trent I think you’re making a great choice. Good luck to you and I hope you achieve your goals.

  22. Johanna says:

    @Aaron Stroud – The “following along as priorities change” idea is all well and good, but it seems to be the case here that Trent is changing his long-term goals on a monthly basis, if not more frequently than that. In the absence of clear reasons for such frequent and sudden changes, there’s the very strong implication that he’s not really thinking these long-term decisions through when he makes them and posts about them. And that means his words will carry less weight with those of us who do strive to make well-thought-out financial decisions.

    All of the reasons Trent lists for his marathon debt-repayment plan presumably held true two weeks ago, when he posted about saving for car purchases, or a month ago, when he posted about investing for his dream home. Why didn’t he take them into account when he formulated those goals? That’s what I’m wondering.

  23. Sounds like a wise plan. I’m somewhat surprised you weren’t already doing this. Isn’t becoming debt free a more exciting goal than piling up some money to invest?

    Very similar to my debt plan, though I’m about $50K deeper in than you. :) My worst interest rate is an 11.9% credit card, which I am paying first, and everything else is below 8%- the highest being a student loan in the 7% range (horrible rate for a student loan).

    Best of luck to you!

  24. Mark says:

    @Toby, I completely agree.

    Having $200k in cash/investments and a $200k mortgage is a much more flexible position than zero cash and zero debt. You are then relying solely on future income, but what if that income drys up (job loss, sickness, etc.)?

    If you lose your job you will not be able to take out a home equity loan, so the equity in your home is not liquid. However, if you have $200k in cash, you can make your house payment for YEARS.

    Rich people are rich because they put their money to work for them, they would take the $200k in cash an invest in something (stocks, business, etc.) and continue to pay on their mortgage.

    Remember, a mortgage is an asset-backed liability, so the value of your house offsets the mortgage, it is not a drag on your net worth.

  25. MS says:

    Trent, I enjoy reading your blog daily but have been confused as well.

    I was under the impression that you consumer debt was already gone and that you only had the mortgage left…and THAT’S why you were getting into funds at Vanguard.

    And I’m also confused along with MB. I remember you saying once that your neighbors did’nt mind your compost pile…but living in a rural area would mean that you wouldnt have neighbors. Maybe people have different definitions of “rural” and “living in the country”. I think you may live in a tract housing development in a small town…

    Your readers are confused, Trent!

  26. debtheaven says:

    Trent said:
    Thus, we’ve decided to focus primarily on repaying debt for the next year and halt our non-retirement investing plans.

    Is is just my glasses? I see “non-retirement” in that sentence.

    I hope I’m not being rude, Trent, but your post begs the question of how much of that debt is mortgage and how much of it is consumer debt. Are you also paying down your mortgage ASAP?

    Remember also that if and when one of you becomes a SAHP, you’ll save on the childcare I believe you are currently spending.

    Good luck to you and your wife! I think you’re doing a fabulous job. You have questions, you change your tactics, you never tell anybody that your way is the right way or the wrong way, and the readers are all along for the ride. If anybody is unhappy with that, there are plenty of other financial blogs to read. Kudos to you!

  27. Trent Trent says:

    I currently have, in cash, a six month emergency fund and most of the cash needed to buy a van. My wife and I would like a house in the country long term, but in the much, much shorter term, we’re looking at one of us being a stay at home parent. Because that would crunch our monthly budget, we’re looking to pay off our remaining debts, which consist of nothing but student loans and our mortgage – no consumer debt at all. If we can take care of everything but the mortgage before one of us takes the stay-at-home plunge, that gives us a lot more room to breathe in our monthly budget.

    I live on the edge of a very small Iowa town, where I have neighbors, but I also have cornfields bordering my property and a large forest about a tenth of a mile away.

    I think the confusion here is that people can’t distinguish between a one-to-three year goal and a fifteen year goal. You don’t invest in the stock market for a one-to-three year goal.

  28. Matt says:

    I’m starting to think that Trent makes a lot of this up. The “my friend quit his actuarial job to become a forklift operator” strained credulity and now it seems as though he can’t keep his story straight from post to post.

    If he simply changes his mind a lot as he learns his way, what is the value to others in reading about it? We’ll never see the results of any of the choices because they never last long enough to be tested.

  29. Mark says:

    Trent,

    Thanks for some clarification. It looks like you are saying that you are attacking the student loan debt before one of you becomes a SAHP. I thought you were also trying to pay off the house as well, my bad.

    Great site, keep up the good work. Good luck, you guys are in FAR BETTER financial position than most single income households, so I wouldn’t delay being a SAHP waiting for some type of financial threshold, it sounds as though you could do it now and be fine.

    Since you like the day care so much, couldn’t you still send them a few hours a day or a few days a week?

  30. Matt says:

    I see now. The money you make from this blog and other “extra” income is going to pay off the debt, but the other parts of your plan have not changed. It takes a close reading of the post to get that.

  31. Beth says:

    ha, I knew there were going to be tons of posts in response to this.

    I’m reading between the lines to see that maybe a dream home is being deferred in favor of more immediate hopes and plans. If it were my life, I’d definitely choose having a parent home with kid(s) over a dream home down the road.

    I expect that the plans are pretty fluid right now, so I look forward to a big-picture overview of How Things Have Changed soon! Let’s all remember that even though this blog is full of content, it’s still in its toddler stages.

  32. Katie says:

    Perhaps I see an overly-simplistic view of things, but I remember Trent saying that he invested 50% of his “extra money” and put the other 50% of that chunk towards debt repayment a short time ago. I naturally thought this post was a follow-up to that one, explaining that him and his wife were now focusing 100% of that “extra money” on debt repayment, instead of 50/50.

    Perhaps I’m confused, as well.

  33. Oswegan says:

    We are doing the same thing, and let me tell you, it’s painful to suspend the investments in order to eliminate debt. The reason it works is not necessarily a financial math reason, but rather a mental one. It’s all about the focus and intensity that it brings to the table.

    Good luck with it, we are in the same boat.

    Soon enough though, we will live like no one else.

    ~Oswegan

  34. Rose says:

    We paid off our mortgage last month, and are now completely debt-free.

    There is no greater dividend than the peace of mind that comes from the completion of a goal like yours. Yours is a good plan, and I wish you all the best in achieving it.

  35. Rob in Madrid says:

    I think what were seeing here is Trent “thinking aloud” mulling over various ideas and theories via his blog. Do I invest long term (power of compound interest) or pay off debt. How do I balance the two. What if I do this so on and so forth. It seems I go through the thought pay off debt or save money first battle every week or two. Also the fact that he has no consumer debt only large long term debts allows more freedom in making choices.

    I do agree with Trent on one point, emergency fund should be your main priority. I used to think it was the payments that were killing us but it was the lack of liquidity that was. That on top of spending above the budget, something still struggling with.

  36. jm says:

    “if you had to choose, its better to have some debt + more cash in the bank account, than no debt + no cash for immediate expenses”

    personally I would rather work towards no debt + no cash (beyond an emergency fund and 401K to match of course).

    Why? because if I get into trouble beyond what my emergency fund could fix, I can always take out debt to cover it. That sounds like a bad idea until you take into account that the chance of that happening in the next few years is fairly low, and the chance of me killing alot of debt in that time is fairly high.

  37. Andy2 says:

    To the anti-Dave Ramsey people:

    Perhaps the previous posts about his advise were confusing but his plan is thus:
    1. $1000 emergency fund
    2. Pay down all debt EXCEPT the mortgage, as fast as possible
    3. 3-6 month emergency fund
    4. Invest 15% gross income for retirement
    5. Save for college
    6. Pay down mortgage
    7. I don’t remember this one exactly, but I think it is the Give, Save, and Have Fun step with the extra.

    I think it is a solid plan for anyone. It just works. There is certainly increased risk in the beginning, and he argues that it makes people pay off the debt faster, so they can get that big emergency fund. I can see both points of view, but arguing to get a big emergency fund first so that you don’t have to go into debt if something comes up is like six of one, half dozen of the other. The person is already in debt. So the big emergency fund first means you will definitely be in debt longer. While the $1000 emergency fund first means you might get out of debt quickly, and you might have a large emergency and get back into debt. Also, if you lose your job, a large emergency fund is certainly good, but with the further you pay it down, the less expenses you need and short term jobs might cover them if you have less debt.

    I guess it is just a risk-reward thing. The reward for emergency fund first is the safety of not taking on more debt, but still having debt (which seems to nullify the point). While paying it down with $1000 fund means either get rid of debt quickly, and MAYBE take on more debt. Sorry if this was confusing, I don’t know if I made the point clear.

    Oh, and he does say save for retirement before the mortgage, but just before saving over 15% to retirement, pay down the mortgage.

  38. debtheaven says:

    Thanks Trent.

    I’d just like to ask you something. Is your “dream house” your dream house because of your kids (so they have enough room?) or is it for you and your wife?

    I only ask this because we were so tight in this house at one point not so long ago, with four kids in it full time. Now one is in grad school, one is in college, only two kids home full time. Their rooms are still their rooms, that is our choice, but we can easily see a lot more space in the next couple of years. And we are in a 2000 sq ft home (including basement room for College Student) in a high COLA. Yes, it was tight for a while. But at that point we couldn’t afford to do anything about it. By the time we could (ie now, and even that’s debateable), those birds have partially flown.

    But you know who owns our house? We do. As of last August. Not paying much over (only a bit from time to time, just plodding on.) Not the bank, us.

    If we had upgraded when we wanted to, the bank would still own it today, and for a long time to come.

    Yah, that feels good, lol. I wasn’t a SAHP but I worked PT, 3-3.5 days a week. It worked for us.

  39. vh says:

    What Toby said: yup!

    Mark’s observation (“Remember, a mortgage is an asset-backed liability, so the value of your house offsets the mortgage, it is not a drag on your net worth”) is one of those ideas that’s hard for me to accept 100 percent. If you’ve ever run your mortgage through Quicken’s loan planner “payment schedule” function, you see that if you live in your house for 30 years and pay only what you’re asked to pay, you end up forking over as much or more in interest as the buying price of the house. That is, at 6.5% a $200,000 house will cost you $455,093.50. Plus, o’course, all the cash you have to put into it to shore it up, keep it running, and upgrade it to your taste. Will it be worth that much in 30 years? Only if you were very smart & very lucky in your choice of location. If your neighborhood yuppifies or at least stays stable, good for you; but if like most places it goes downhill as structures wear out and newer, niftier housing gets built…well, tough nougies.

    I just can’t believe you’d earn that much in the stock market if you put all your extra cash into the market instead of into paying down your mortgage. A mortgage is not “good debt.” It represents a gigantic liability, & it should be carried on your books as a liability. Until your house is paid for, it is NOT an asset! In the current market, only your after-real-estate-agent-commission, after-repair-costs, after-cost-of-finding-a-new-home, after-closing-costs, after-moving-costs, after-fixing-up-the-new-house equity represents part of your net worth — once you subtract all those expenses, not so much of your investment is left.

    However, you can climb out from under a home mortgage either by getting a 15-year mortgage (if you got it at 6%, that $200,000 manse would cost you only $303,788.82, about 10 grand less you can conservatively expect it to be worth after 15 years) and paying extra toward the principal (an extra $100/month toward principal pays off the mortgage in 13.75 years and cuts your buying price to $293,760.36, just about exactly what the house will be worth if it appreciates on average 3% a year. Or by getting a 30-year mortgage and dumping every windfall and every free penny into the principal. Because of the way mortgages are structured, early payments toward principal accelerate the pay-down a lot faster than you’d think. The faster you pay off the mortgage, the more your home equity is worth to you.

    Having managed to shuck off the debt–mortgage, car, credit cards–my theory is, you save some and you use some to pay down principal. Put a certain percentage of your income toward paying down the mortgage (or whatever debt is your current target) and a certain percentage toward saving. Neither will move as fast as it would if you put it all toward one or the other, but over time you’ll build up your savings while you shovel your way out of the mortgage debt pit.

  40. jm says:

    “my theory is, you save some and you use some to pay down principal.”

    I hear that. That is my theory as well…

  41. Sandy says:

    My dream world is to be completely debt free…my husband and I are throwing every spare dollar toward our mortgage at this time, and hopefully, if we stay on track, we’ll be debt free in a little over 2 years, having knocked out the mortgage in 10 years. While we’ve been saving all along, we’ve also been very good spenders, and I had the realization a few months ago, that if we hadn’t gone on our extravagant vacation and a couple of expensive nights out, we could have made serious inroads on our mortgage, and we decided then and there to really try and make it work. We talked to the girls, and told them that we’ll likely be saying “No” to buying things much more so than in the past, but they would still get to do the things they really want to do. They are also old enough to know that college will cost money, and that if we get the mortgage done, there will be more money available to help them during their college years.
    As far as Trent’s dream home in the country, I think everyone should have a dream…currently, my husbands dream is a worldwide cruise on the Queen Victoria, and mine is a retirement where we spend 6 months stateside, and six months in overseas locations (huge numbers of American expats do this.). Hopefully, by getting debtfree, all these dreams can come true…but you have to have a dream!

  42. Katie says:

    Trent & UltraRob: I don’t understand why people think debt free means freedom and mobility. If I pay off my $20k in student loans now that $20k in less liquidity I have. I’d rather have that $20k available for my next venture or as a largely emergency fund.

    Trent: We all know that investing isn’t for 1-3 years, that’s why we are confused. You’re making it sound like you aren’t going to invest at all, rather focus your “savings” on debt repayment.

  43. Karen says:

    Blimey, give the bloke a break why don’t you. Just because he writes a personal finance blog doesn’t mean he’s a guru and expecting us all to follow. Just because he is working his way through things in a public forum shouldn’t mean he cops a bagging for changing his mind!

    @Matt – if you think Trent is making it up, why read it? Even if he making it up, what’s wrong with that? If you read the line under the copyright (the very bottom of the page) you will see it says “This site is for entertainment purposes only. Trent is not a financial advisor and no information found on this site should be construed as financial advice.”

    Personally, I find what Trent has to say interesting, it’s not necessarily going to influence what I do financially but a good way to learn is to listen to others, regardless of whether they are “experts” or not.

    Trent’s Aussie Subscriber
    Karen

  44. Patrick says:

    Trent, you are on the right path here. A coworker of mine (he is about 33 w/ a wife and 3 kids) just paid off his house completely. His wife can now stay at home. It’s amazing how far a decent income can go when you have no debt and your only bills are normal living expenses.

  45. Mariette says:

    Good plan to pay down the debt! It brings such peace of mind. I just wish I hadn’t gotten myself back into debt the second time.

    If there are any burgeoning filmmakers out there, don’t make a film on your credit cards, it’s not worth it. The stories about Spike Lee make it sound glamorous – it’s not, and how many of us are Spike Lee?

  46. alex says:

    I think some of the confusion here stems from Trent never providing any numbers or specifics. I think Trent could provide a little more on the detail side, and still preserve a significant amount of privacy.

  47. Mark says:

    @Alex, I agree, that is what makes a pf blog personal. Many bloggers provide net worth, debt, etc. He also seems tentative to admit how much money this blog actually makes by calling it “side business” income……on the other hand, it is his blog and he can do what he wants, and does write some pretty great content most of the time.

  48. Diane says:

    I liked the Aussie reader and her perspective.
    I enjoy the blog and realize Trent is sharing things with us as he learns.

  49. Debbie M says:

    I’d like to point out that paying off a house does not mean that it is now free or even that it is now really yours. You still have taxes, insurance, maintenance, and repair. Many people lost their homes in the Depression because they couldn’t afford to pay their taxes. (I like to think our laws about that have changed since then, but I don’t actually know.) You can quit paying for insurance, actually, but you probably don’t want to.

  50. claymeadow says:

    When I got my first mortgage about 10 years ago I thought that paying it down to nothing would be best too. No debt was pretty much what I was raised to believe. Since then I have changed to a 30 yr term and the lowest minimum payment. Some of this decision has to do with the fact that we have 4 littles running around so the monthly special case expenses are high and tough to manage sometimes. Mostly though the decision to stretch to a 30yr term mortgage is due to the seemingly high amounts of inflation that are occurring in the States, although I am not an economist. I figure my current payment would be near worthless in 30 years. So none the less the extra money each month is now mostly applied to investments. Plus too, what happens if you pay for a home in full but then have to vacate it for some reason like flood, fire, and so on and it’s not covered fully by insurance?

  51. Kathryn says:

    You can still lose your house for not paying taxes. There’s a case in the papers here where a guy’s losing the house for missing a $2000 payment back in the 90s. (Of course, he screwed up by never taking care of it in all these years, but …)

    Property taxes in our town are very high (about 50% of my mortgage payments per year), so even if (when?) I pay off the mortgage, that only lowers my monthly payment by 2/3, rather than eliminating it entirely.

  52. jtimberman says:

    @Bill Long: Dave Ramsey is a multimillionaire because he follows his own advice.

    Are you?

  53. Debbie M says:

    Thanks, Kathryn. Wow.

  54. Toby says:

    @ jtimberman: That’s hilarious! Dave Ramsey is a multi-millionaire because he is an entrepreneur! Not because he works a 9-to-5 and saves his money diligently. He’s rich because he sells books, cds, dvds, etc. that he’s produced to poor slobs who are trying to get out of debt!

    Implying that his simplistic financial plans somehow made him a multi-millionaire is just plain wrong.

  55. Brian says:

    Trent,
    Your explanation should clear up all of the questions anyone had about this new tactic of speeding up debt repayment. I happen to think you are on the right path. You have done the Dave Ramsey babysteps(except paying of the student loans) but YOU have to do what works for you.

    As I have said before, your site is one of my favorites and I enjoy and appreciate what you cause us all to think about. The dialogues/comments bring out so many ideas and differing viewpoints that can expand all of our minds in dealing with being good stewards.

    Thanks!!!

  56. Karen says:

    Diane – the Aussie reader thanks you.

  57. lorax says:

    @Toby, exactly right. DR is a good marketer/entertainer, aiming at a particular demographic… similar to David Bach and Suze Orman.

    Meanwhile, Trent’s blog does read like a brain dump sometimes. That’s fine. It’s still pretty good. :)

  58. lorax says:

    Also, don’t forget to subtract inflation when looking at those debt interest rates… if we return to high inflation rates, you might actually be “making” money on that mortgage.

  59. Toby says:

    @ lorax: Thank you! inflation is another reason to consider when trying to decide if one should prepay their mortgage. Being able to acquire an asset today and pay with tomorrow’s dollars (even though they are worth less) is golden.

    As I’ve probably mentioned before, the rule of thumb I like to use is that if you can pay the mortgage off in 5 years, then go ahead. But if it will take longer (esp. 10+ years) then I would invest the money instead as the power of compounding will most likely outstrip the interest costs over the life of the loan.

    Consider this. Say you had a 200k mortgage that was fixed at 7% for 30 years. Now, consider if you had $500 extra a month to put towards a long-term investment or to pay down the mortgage.

    Scenario 1: If you took that $500 a month and invested it and earned an 8% after-tax return (not outlandish at all), you would end up with roughly $680k after 30 years. Your mortgage will take the full 30 years to pay off.

    Scenario 2: Now, if you took the same $500 a month and put it towards the mortgage instead, you would pay off the mortgage early in the 16th year. If you then plowed the entire mortgage payment (including the extra $500 a month) into a long-term investment account for the next 14+ years, you would end up with roughly $570k. You’ve lost over 100k in compounded returns!

    I didn’t even factor in the tax break you get on the mortgage which lowers the effective tax rate on the mortgage (especially in the early years). So for those who will argue that 8% after-tax returns are outlandish, let’s just say the tax break and the taxes on the investments effectively cancel each other out.

    Oh, one additional point. In Scenario 1, by the 15th year you are sitting on a nest egg that is greater than your mortgage. So by the time Scenario 2 pays off their mortgage, Scenario 1 is in a position to do the same if the mood strikes.

    And what about all the extra interest paid on the mortgage in Scenario 1?!? It doesn’t matter! If you can put your dollars to work making a higher return than you are paying on your mortgage, then you will always come out ahead.

    Note that I kept my scenario simple by compounding interest on both the investment account and the mortgage yearly. If you really want to get technical, you can calculate it out monthly, add in inflation and adjust for taxes and tax breaks on captital gains and mortgage interest, respectively.

    Best of luck wrapping your head around that…

  60. Bill says:

    @debtheaven has the right idea – keep the small house, skip the “dream home”

    plenty of our parents’ families raised 4 kids just fine in a 1000 sq. ft., 3 bedroom, 1 bath home.

    now we seem to want 1000 sq. ft. per person.

    those “McMansions” don’t come cheap!

    i was raised in my family of 4 in a 6,000+ sq.ft. home (many rooms not visited except to dust them) – huge utility bills, expensive upkeep

    but we’re raising our family of 4 in 1,400 sq.ft.

    our home is paid off (we’re 40), no debt, one stay at home mom

    mostly because we’ve not been spending the extra $2,000 to $3,000/month other families have to own space they will almost never use (except to dust)

    remember, residential real estate is a poor investment, with a long term real returns of 1-2% annually

    it is easy to get so emotionally involved with the idea of “home” that one makes poor decisions (think of prices paid at the top of the current bubble)

  61. LC says:

    @Writers Coin
    “I can’t wait to get into a mortgage so I can pay it off as soon as possible”

    sounds like you have it backwards. If you want to pay of a mortgage as soon as possible, why don’t you save up now so you can “pay it off” the day you buy it…i.e. pay cash. I think it’s so funny how no one will even dare to consider paying cash because of “I can make more in stocks and deduct the interest so a mortgage is a good investment” and then as soon as they get a mortgage, these very same people dump all they have into it to get rid of it ASAP. Both theories have merit, but I just think the disparity is funny.

    For those of you who say investing is more important, in one way you are correct. But you obviously don’t know what it feels like to be completely debt free. If you have your house paid off, your living expenses now and in retirement could decrease by 20% or more which gives you so much peace of mind and flexibility.

    I don’t think that Trent necessarily thinks of his dream home as a large luxury “McMansion” (although I could be wrong) but more like a comfortable house with more acerage and a nice yard. My “dream/retirement house” is going to be about half the value of our current house, just because of the property values in the area where I want to live once I don’t have to be in the city close to work.

  62. Samantha says:

    We’re in the fortunate position of dealing with just 2 debts: my graduate student loan ($58K at less than 2%) and the mortgage ($300K at approx. 6%). After maxing out the retirement savings, which debt should we attack first, beyond the minimum?

    Thanks,
    Samantha

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