Financial Tip of The Day

[CTR0022]

So many other factors to consider. What is the person's debt to income ratio? If they can easily make the payment then keep the money in the bank and keep making the payments. Are they still contributing significantly to savings every month? Kinda goes with the above question, but if you can easily make your payments and still build savings then its irrelevant to me.

There is really nothing wrong with having debt as long as you weigh the cost of it against your other financial goals. I think alot of people get messed up with thinking all debt is bad and needs to be paid off immediately. That's not always the case.

But there are alot of people that should have never had that $50k car loan to begin with. But people living above their means is a northern topic

[STGS]

So are you suggesting that if I have an emergency fund of $50k and owe $50k on the balance of my truck, I should pay it off? I was taught to save at least 6 months of living expenses before sending extra money to debt payments. I understand the whole paying the lowest balance stuff first and the snowball effect moving forward, but I would not want to pay off some of my debt to give up emergency funds. Money was cheap for the last several years.

Good question and one that gets brought up for debate quite often. If I was in those shoes, $50K in savings and $50K truck debt, I would pay off the truck and then go scorched earth to save money and rebuild that emergency fund to 3-6 months of expenses.

Other options would include selling the truck and buying something less expensive with cash, depending on the remainder of the financial situation.

Lot's of things can go sideways when you have debt. Loss of income, medical issues, etc... Always easier, IMO, to manage those situations when you are debt free.

[STGS]

So many other factors to consider. What is the person's debt to income ratio? If they can easily make the payment then keep the money in the bank and keep making the payments. Are they still contributing significantly to savings every month? Kinda goes with the above question, but if you can easily make your payments and still build savings then its irrelevant to me.

There is really nothing wrong with having debt as long as you weigh the cost of it against your other financial goals. I think alot of people get messed up with thinking all debt is bad and needs to be paid off immediately. That's not always the case.

But there are alot of people that should have never had that $50k car loan to begin with. But people living above their means is a northern topic

The debt to income ratio is always a risky model. Sometimes I refer to it as the payments to income model. The challenge is that the payments don't often go down, but the income certainly can if one loses all or part of their income. That is when those payments can really come to bite you in the butt. Rarely does a paid off car, camper, boat or even a house get repossessed.

[jbw899]

Would you cash out refi your home and invest it all in I bonds? 9 is better than 5 correct?

I don’t think the math works for me on that, at least not enough to make up for the extra risk. Current interest rate is just over 3%. By the time you account for taxes on I bond interest, cost to refinance, and additional interest on mortgage I’d most likely come out behind. I’m also not making extra payments on my mortgage though. I’d much rather invest it.

[Black Ice]

Financial Tip of The Day

I haven't done one of these tips in a while, but another post about selling assets to pay off debt got me to thinking about a scenario I get asked a fair bit from my clients...

Let's say you have $50K in the bank or invested in the "markets", but you also have $50K of automobile loans outstanding....

A lot of people don't feel comfortable eliminating their financial cushion of $50K in the bank in order to pay off debts that are costing them $800-$1,000 per month in payments.

Secondly, some people have low interest rates on those car loans (0-3%) and feel like they can beat those interest rates by investing in the markets, thus they take out notes when they have the cash available to pay for the car in cash.

I tend to ask this question..... If you only had $5K in the bank and had a paid for car, would you go refinance it for $45K in order to put that money into your savings account or invest it in the market. Most people say "of course not", but the end affect is basically the same. $50K in debt and $50K in the market.....

A few people will say yes to the above question, so I ask why they don't do a cash out refi every couple of years on their house in order to capture all possible equity and save/invest that equity. If it is a good plan for 50K, it should be good for $250K.....

Pay off those debts and tell your money where to go each month as opposed to having to service a debt each month.

I finance everything[emoji23]


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[flywise]

Payoff debt, cash is king!

For now

[Dejashoot]

So what about this scenario. A married couple has 0 debt and a reasonably safe jobs. Savings account A has 6 months expenses. Savings account B has your next vehicle purchases covered. You have $350,000 in checking account 1 and about to build a $300,000 house. Do you invest $350,000 from checking account 1 in 6% dividend stocks and get a mortgage at 6% or pay cash for your new house with $50k left over?

[Lights Out]

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[60 Deluxe]

I wouldn't call your advice a financial tip. I'll give some financial advice. Eliminate personal debt. If you are going to take on debt, make it debt that someone else will pay off for you while creating positive cash flow. Skim some of that positive cash flow off for yourself or use it to eliminate the debt quickly. Whatever you do, don't carry more investment debt than you have cash to pay off into retirement. Don't put your home at risk ever. If you lose it because of a deal gone south, you have to start over. Starting over isn't a good idea once you hit a certain age.

[Huntingfool]

I have a total of two loans that I could pay off in the morning if needed. One is home mortgage and the other my truck. Home loan is 2.5% fixed and truck is 1.8% fixed.

My 401K has a guaranteed fixed account at 3.5% and I have several multi-year fixed annuities at 3.5 to 4%. Neither carries any risk.

I will continue with my plan

[nocam7]

I wouldn't call your advice a financial tip. I'll give some financial advice. Eliminate personal debt. If you are going to take on debt, make it debt that someone else will pay off for you while creating positive cash flow. Skim some of that positive cash flow off for yourself or use it to eliminate the debt quickly. Whatever you do, don't carry more investment debt than you have cash to pay off into retirement. Don't put your home at risk ever. If you lose it because of a deal gone south, you have to start over. Starting over isn't a good idea once you hit a certain age.

This is on point. Debt should be used as leverage. Attached is a tale of cash vs leverage.



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[CTR0022]

This is on point. Debt should be used as leverage. Attached is a tale of cash vs leverage.



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What about brother C?

Lives within his means, uses debt wisely, keeps his debt to income ratio in check, doesn't get over extended, only carries low interest debt, has a secure job and makes decent money, pays off debt while also adding good chunks of money to savings and investments every month.

I believe in being that brother

[WyoBull]

One thing a lot of people don't talk about is the peace of mind and low stress level from being debt free. You can't put a price on that but I can tell you the return in terms of overall mental health is huge.
Being completely debt free is the only way I will live.
Most Americans are one or two paychecks away from the wolves intruding the back door. I won't live that way. If I can't pay for it in whole before I walk out the door with it, then I don't need it.

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[Huntingfool]

I will add this: The Ramsey mantra of never having debt or a credit card may be good advice for some folks.

However many wealthy people leverage debt as described by some post on this thread. It just has to be done wisely. If you have the cash to pay off that debt at any time I do not see why being totally debt free is a big deal. (Not to mention I get a pretty nice tax deduction each year on my house mortgage). I sleep really well even though I have some debt.

I use credit cards - on one I get 2% cash back on every purchase and on another I get 4% back on every restaurant we eat at. I pay my balance off in full every two weeks. I also pay every bill with the cards. Pretty efficient way to get a nice discount on most everything I purchase or pay for.

[BRUTE 23]

All the math aside arguing over who can skim 3% out of 50K... there is no better feeling than being debt free. It changes the way you look at the world. I like the freedom and ability to go make more money, or not, as I choose 3-5% on 50K or what ever doesn't change my world.

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