Author Topic: Personal Debt  (Read 8576 times)

coc

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Re: Personal Debt
« Reply #20 on: May 25, 2019, 12:58:40 PM »
Most personal debt is a mistake but a 30 year mortgage at 4.5% pre-tax, with a payment you feel you can make comfortably even if one spouse lost their salary, to me is a no brainer if you feel you can invest even halfway competently (I.e. greater than 4.5% pre-tax over 30 years).

Although I do understand some people want to total assurance of owning outright.


Gregmal

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Re: Personal Debt
« Reply #21 on: May 25, 2019, 01:11:11 PM »
+1.

I have home loan at 2.8% and car loan at 2.1%. Not paying them off - the future dollars are worth less than current dollars. For the equivalent cash, I can buy WFC at 3.75% yield which covers  the interest payment.

If you look at US GDP in current dollars - it is advancing at ~5% year over year

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.

I'm in a similar circumstance to Shalab and agree with others that I'm relatively averse to debt...I get a get good night's sleep every night, no matter what Trump, Trudeau or the rest of the world do.  I have a mortgage at 3.29% and a car loan at 1.9%...other than that no debt...not credit cards, no line of credit, nothing!  And the only reason I have a mortgage and car loan is because of the low interest rates...I have enough in investments, cash, etc to pay the mortgage and car loan off several times over, but am growing it at 12%+ annually. 

I put everything on my card each month that I can to get the points, and then it is paid off in full every month.  The reason...I remember how tough it was in the first few years of Corner Market Capital...I was in debt after a couple of years, burning through what investments I had, and sleeping well each night was tough!  Slowly things started to turn...and I decided I never wanted to be in that position again.  I still live relatively frugally other than the $21K winning bid on this year's lunch and golf with Wayne Gretzky at Fairfax's AGM, and save more money than I spend each month!  Cheers!

That must have been an awesome experience.

Tangentially related note, one of my better investments over the years has been PSA graded Gretzky RCs. The PSA 9's have gone up nearly 10 fold in the past 5-7 years. Not scalable because of the limited supply, but a nice ROI out of what is basically a hobby.

Parsad

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Re: Personal Debt
« Reply #22 on: May 25, 2019, 03:05:14 PM »
+1.

I have home loan at 2.8% and car loan at 2.1%. Not paying them off - the future dollars are worth less than current dollars. For the equivalent cash, I can buy WFC at 3.75% yield which covers  the interest payment.

If you look at US GDP in current dollars - it is advancing at ~5% year over year

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.

I'm in a similar circumstance to Shalab and agree with others that I'm relatively averse to debt...I get a get good night's sleep every night, no matter what Trump, Trudeau or the rest of the world do.  I have a mortgage at 3.29% and a car loan at 1.9%...other than that no debt...not credit cards, no line of credit, nothing!  And the only reason I have a mortgage and car loan is because of the low interest rates...I have enough in investments, cash, etc to pay the mortgage and car loan off several times over, but am growing it at 12%+ annually. 

I put everything on my card each month that I can to get the points, and then it is paid off in full every month.  The reason...I remember how tough it was in the first few years of Corner Market Capital...I was in debt after a couple of years, burning through what investments I had, and sleeping well each night was tough!  Slowly things started to turn...and I decided I never wanted to be in that position again.  I still live relatively frugally other than the $21K winning bid on this year's lunch and golf with Wayne Gretzky at Fairfax's AGM, and save more money than I spend each month!  Cheers!

That must have been an awesome experience.

Tangentially related note, one of my better investments over the years has been PSA graded Gretzky RCs. The PSA 9's have gone up nearly 10 fold in the past 5-7 years. Not scalable because of the limited supply, but a nice ROI out of what is basically a hobby.

I have one too.  Alnesh and I before starting Corner Market Capital, used to collect hockey cards and comic books as kids.  We ended up keeping the important ones...I have a PSA 9 graded Gretzky rookie card...although as we got older, we gave that plus the comic books to my brother...who gave them to his son.  So my nephew now owns some vintage Spiderman, X-Men comics that are worth several hundred dollars each, plus the Gretzky rookie card. 

The lunch and round of golf aren't until November or December based on Wayne's schedule.  But it should be fun for the 7 of us...he said he's bringing his wife, but I'm hoping he might actually bring his son-in-law Dustin Johnson.  Can you imagine...the greatest hockey player of all-time and one of the greats of today's golf!  Cheers!
No man is a failure who has friends!

Gregmal

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Re: Personal Debt
« Reply #23 on: May 25, 2019, 03:46:46 PM »
Lucky kid. Couple months ago one broke $50K.

https://www.ebay.com/itm/1979-O-Pee-Chee-Hockey-Wayne-Gretzky-ROOKIE-RC-18-PSA-9-MINT-PWCC-PQ-/401730414298?hash=item5d88ffa6da%3Ag%3A9rsAAOSwR7xcjHS5&nma=true&si=DxHys7%252BZQwXD9MxOXIrK3becCTI%253D&orig_cvip=true&nordt=true&rt=nc&_trksid=p2047675.l2557

Adding Dustin Johnson to the mix would make it quite the party. The guy is quite wild from what I've heard. And it would certainly make the $21K almost a bargain for that type of experience.

Castanza

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Re: Personal Debt
« Reply #24 on: May 25, 2019, 04:41:08 PM »
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!
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Gregmal

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Re: Personal Debt
« Reply #25 on: May 25, 2019, 05:53:46 PM »
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

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Re: Personal Debt
« Reply #26 on: May 26, 2019, 06:28:54 AM »
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

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Re: Personal Debt
« Reply #27 on: May 26, 2019, 07:03:51 AM »
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

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Re: Personal Debt
« Reply #28 on: May 26, 2019, 08:29:15 AM »
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 donít think Iíll get another one though because: (a) rates have come back up and I donít see them going much lower, (b) I donít expect huge returns from my investment portfolio going forward, (c) the mortgage interest deduction has become pretty useless for me after the recent policy change, and (d) I donít really need it anyway. 

When deciding whether to pay off my debt early, I basically think of it as a ďbond investmentĒ 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.
« Last Edit: May 27, 2019, 08:37:11 PM by TwoCitiesCapital »

Fairfaxnut

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Re: Personal Debt
« Reply #29 on: May 26, 2019, 09:55:18 AM »
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.  ;)