Managing Debt

[Mr. Blonde]

For the time being, I really don't have that much debt. A few hundred dollars I owe some family from when I was unemployed, some medical bills I suffered while uninsured and unemployed, and some credit card debt. All in all, right around 2 grand. I plan to have most of that taken care of by the end of next month.


I also still have about 8.5 grand in student loans, that i'd like to get paid off in the next year. Along with purchasing a relatively cheap (3-5grand) but reliable vehicle to get around on. That will leave me with, property-wise:

-Books
-Clothing
-Electronics
-Motorcycle
-Truck

And (hopefully, if I pay off my student loans), zero debt.

My dad has told me repeatedly "don't rush to pay off your student loans, about 5-10x per year. I'm not really sure why he says this, other than the low interest rate, so correct me if I'm wrong -- shouldn't I try to just pay those off and get them out of the way? My dad is far from being a financial mastermind, but is this generally shitty advice, or am I just reading into it too much because all of his other advice is generally shitty and poorly thought-out?

I've also just recently discovered this guy: Dave Ramsey Homepage - daveramsey.com

While he seems to harp on donating extra money to the church, which obviously i'm not going to do, he has some pretty sound debt-management advice.



After I'm out of debt, I'm going to start building up some savings and look into buying property somewhere. I've always been averse to buying property due to the permanence of it, but i'm going to start researching into buying property for a temporary home and look more into real-estate investment, aka renting out a property I own, but not living there. Over the course of the next year or two I'm going to merge a lot of nonfiction reading about finance, economics, and investing into my reading.

[DDTempest]

The less payments you have to make, the more of your cash you get to keep. Dave Ramsey's "debt snowball" is probably the way to go, pay off the smallest shit first, then use that extra cash flow to pay off he largest. Your dad is saying to not worry about your student loans because historically they have the lowest interest rates ... but interest rates today are low as shit, and its not like you are getting that money back investing in savings / CDs / stock market right now, so I would say paying off your student loans only has one result: better cash flow.

Also, give yourself a couple thousand dollar "shit happens" fund to pay for any unforeseen expenses, you don't get any bonus points for paying off your loan early if you are flat fucking broke and have to take out another loan to pay for something you could have paid for out of pocket.

The only debt I've ever carried is my mortgage, I pay my credit card bill off in its entirety every month ... makes it a lot easier to not worry about money.

[Orgazmo]

I don't understand why paying off the smallest shit first makes sense (other than non-tangible "victories" of removing a bill from one's life). If the smallest shit has a tiny interest rate, why wouldn't one use the extra cash to chip away at the higher interest stuff?

[Mr. Blonde]

Originally Posted by DDTempest

Also, give yourself a couple thousand dollar "shit happens" fund to pay for any unforeseen expenses, you don't get any bonus points for paying off your loan early if you are flat fucking broke and have to take out another loan to pay for something you could have paid for out of pocket.

Good call. I've already started a savings account that I have my bank set up to move about 20% of each paycheck into -- I'll probably increase that percentage once I pay off some immediate debts and get some basics I've been holding out on.

[DDTempest]

Originally Posted by Orgazmo

I don't understand why paying off the smallest shit first makes sense (other than non-tangible "victories" of removing a bill from one's life). If the smallest shit has a tiny interest rate, why wouldn't one use the extra cash to chip away at the higher interest stuff?

Good question sir. Lets say you the following. To keep it simple, this is without the effects of compounded interest.

Payments:
A. $100 a month on a $5000 total
B. $50 a month on $2000 total
C. $25 a month on $1000 total
D. $25 a month on $500 total

So you are paying $200 a month just to service your debts. In addition to that you have $100 a month in extra money to throw at paying down the debts.

If you spend the first four months throwing the extra $100 at the smallest debt, you will have it completely paid off, freeing up $25 in discretionary income, then you are only paying $175 a month to service your debts, allowing you to put $125 towards debt C.

You repeat this for each consecutively larger debt, the idea is that once you eliminate a debt, you apply its "minimum monthly payment" towards the next debt.

The idea here is to manage your debt by getting out of it, as opposed to the modern American tradition of managing your debt by paying just enough.

[Mr. Blonde]

Originally Posted by DDTempest

The idea here is to manage your debt by getting out of it, as opposed to the modern American tradition of managing your debt by paying just enough.

I guess this is what I'm not getting here. Is there some...like...GOOD REASON to be in debt? I remember reading a while back that it's a good thing for nations to be in debt, and I recall learning a bit about that, especially during the Revolutionary War, but I wasn't sure if, in the financial background, if there is any reason to?

I plan to be in debt only for large, necessary purchases or investments. I see no reason at all why I should wait another 4 years to pay off my student loans.

[DDTempest]

Originally Posted by Mr. Blonde

I guess this is what I'm not getting here. Is there some...like...GOOD REASON to be in debt? I remember reading a while back that it's a good thing for nations to be in debt, and I recall learning a bit about that, especially during the Revolutionary War, but I wasn't sure if, in the financial background, if there is any reason to?

I plan to be in debt only for large, necessary purchases or investments. I see no reason at all why I should wait another 4 years to pay off my student loans.

I was mostly being sarcastic in saying that modern Americans prefer to finance themselves right up to the breaking point instead of living debt free. Continually paying down debts decreases cash flow causing you to borrow for things you would have otherwise bought outright.

As far as "good debt" ... its been a while since I've read / heard the various arguments for good debt. I'm fairly certain that medical and credit card bills are not among the good though.

[Beebs]

The best example of "good debt" I can think of would be a company raising money through debt (loans or bonds) rather than equity (selling ownership stakes through stocks) if the situation is right.

I don't think there is any good reason to be in debt for it's own sake, unless you have something that is going to return more than the interest costs.

"Good" debt for a nation would be relative, it's not ideal, but it can be needed.

[Orgazmo]

Originally Posted by DDTempest

Good question sir. Lets say you the following. To keep it simple, this is without the effects of compounded interest.

Payments:
A. $100 a month on a $5000 total
B. $50 a month on $2000 total
C. $25 a month on $1000 total
D. $25 a month on $500 total

So you are paying $200 a month just to service your debts. In addition to that you have $100 a month in extra money to throw at paying down the debts.

If you spend the first four months throwing the extra $100 at the smallest debt, you will have it completely paid off, freeing up $25 in discretionary income, then you are only paying $175 a month to service your debts, allowing you to put $125 towards debt C.

You repeat this for each consecutively larger debt, the idea is that once you eliminate a debt, you apply its "minimum monthly payment" towards the next debt.

The idea here is to manage your debt by getting out of it, as opposed to the modern American tradition of managing your debt by paying just enough.

I understand your concept, but I still don't see why that's better than putting all of your excess resources toward the debt that has the highest interest rate. Your money is tied up either way. Would it not be better to have it be tied up in two separate loans with an average rate lower than the rate of just the higher loan?

It seems like this may be a situation where it depends on the rates, balances, and minimum payments.

[DJ FC]

Student loans can be good debt. I still have mine and I make minimum payments. Why would I pay off a 3% loan when I earn 10% on Lending Club?

I'm actively trying to take on more debts as we speak in the form of a mortgage. Debt can be a very useful thing.

[DDTempest]

Originally Posted by Orgazmo

Your money is tied up either way. Would it not be better to have it be tied up in two separate loans with an average rate lower than the rate of just the higher loan?

The idea is that once a loan is paid off, the money IS NOT tied up.

Example:
You have two loans
$1000 with $50 payment
and
$2000 with $100 payment
and you have $1000 cash to blow at one of these loans.
If you pay off the first loan, you have $50 less tied up in payments each month.
If you pay down the second, you still have $150 tied up in payments each month.

The whole debt snowball thing is more about having less money tied up, realizing that your life is easier with that extra cash flow, then you get re-excited about tackling the next largest debt, with the eventual goal of having $0 tied up in payments and keeping it that way.

[Mr. Blonde]

Originally Posted by DJ FC

Debt can be a very useful thing.

Can you tell me more about this?

[Saint DH]

Could you afford to go to college, buy a house or car, etc without debt?

[Mr. Blonde]

Originally Posted by Dirty Harry

Could you afford to go to college, buy a house or car, etc without debt?

If we lived in a nation that actually valued education, college could easily be managed without much debt.

[DJ FC]

Originally Posted by Mr. Blonde

If we lived in a nation that actually valued education, college could easily be managed without much debt.

Not really, it would just be a kind of debt you wouldn't see. College really is expensive. But it also really boosts people's earning potential. So it's OK to accept that you should get to go to college but owe somebody else for that later. Be it through taxes or debt payments.

[DJ FC]

Originally Posted by Mr. Blonde

Can you tell me more about this?

In finance we often choose to call that ugly "debt" "leverage." Leverage (finance) - Wikipedia, the free encyclopedia

Leverage is a way to use idle capital to get more done. Borrowing money is the most basic tool of finance. You borrow money because you can do more with it than the person you are borrowing it from.

[angry pancake]

Originally Posted by Orgazmo

I understand your concept, but I still don't see why that's better than putting all of your excess resources toward the debt that has the highest interest rate. Your money is tied up either way. Would it not be better to have it be tied up in two separate loans with an average rate lower than the rate of just the higher loan?

It seems like this may be a situation where it depends on the rates, balances, and minimum payments.

I'm with gaz on this. In some cases if you look at the amortization of the debts it may be best to eliminate that highest interest rate one first. It's not really coincidental that unsecured store cards would both have the highest interest and the lowest limits (thereby balances). However, if the highest balance has the highest interest rate by an appreciable margin, the snowball method that DDT is repeating is not the best strategy. If in the example, debt A had a 29% interest rate and the others were under 5% then you'd adjust to pay down debt A first.

At best the snowball is a blueprint that fits for some. For what it's worth, Dave Ramsay is a fucking idiot. I used to cringe whenever I heard him go on and on about shit he really doesn't know much about. If I had $100 for everytime somebody, in an adversarial situation, told me "Dave Ramsay" says you can't do that, and then I ended up taking their money from them, I'd have thoughts of shutting down my office and walking away from it all.