Corner of Berkshire & Fairfax Message Board

General Category => Personal Finance => Topic started by: Castanza on May 24, 2019, 10:48:48 AM

Title: Personal Debt
Post by: Castanza on May 24, 2019, 10:48:48 AM
Curious what the consensus on here regarding personal debt is and how it should be paid off etc.

Does anyone on here strive to live debt free regardless of having access to low interest rates (sub 4%)?

How have you prioritized paying off debt vs investing over your lifetime?

Any other life lessons or unique situations some of you may have experienced.
Title: Re: Personal Debt
Post by: rkbabang on May 24, 2019, 11:26:27 AM
Only debt I have is my 3% APR mortgage on the house I live in (I have >50% equity).   And I bought my families iPhone X's in late 2017 on a 24 month 0% interest plan.   I was just planning on paying for them, but I figured, 0% interest, why not?
Title: Re: Personal Debt
Post by: stahleyp on May 24, 2019, 11:33:30 AM
I personally never had any long term debt until we bought current house (and married into the other debt). :P

We have student loans, a car payment and mortgage. All rates are under 2% or 3%.

I look at rate charged, any tax deductions available (that's kind of gone by the wayside with the tax changes) and what alternatives are available.

Though I wouldn't have purchased the iphone X even at a negative 2% interest rate. :P
Title: Re: Personal Debt
Post by: SHDL on May 24, 2019, 11:41:19 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. 
Title: Re: Personal Debt
Post by: Castanza on May 24, 2019, 11:58:53 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.
Title: Re: Personal Debt
Post by: rkbabang on May 24, 2019, 12:01:00 PM
I personally never had any long term debt until we bought current house (and married into the other debt). :P

We have student loans, a car payment and mortgage. All rates are under 2% or 3%.

I look at rate charged, any tax deductions available (that's kind of gone by the wayside with the tax changes) and what alternatives are available.

Though I wouldn't have purchased the iphone X even at a negative 2% interest rate. :P

ha.  We've had them for over 1.5 years and still like them.  They will be paid off in Nov and I hope to keep them another 2+ years.

I paid off my student loans when I in my mid 30's, (more than 10 years ago now).  Although I've always had a mortgage.  My wife and I bought our first house when I was 23 and she was 21 yrs old (1st time home buyers, 0% down).  We sold that house for >250% what we paid for it 6 years later. We've up-sized a number of times since then and will probably not up-size again.

I had a car loan once in my 20's, but never again.   And I had credit card debt the year we got married in our early 20's (we put our wedding on our card), but never again.
Title: Re: Personal Debt
Post by: SHDL on May 24, 2019, 12:02:52 PM
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.

Sounds like you made a good choice!  :)
Title: Re: Personal Debt
Post by: Kuhndan on May 24, 2019, 12:22:15 PM
Havenít had any personal debt since 1996. You canít go broke if you donít owe anyone.
Title: Re: Personal Debt
Post by: Gregmal on May 24, 2019, 01:27:32 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.
Title: Re: Personal Debt
Post by: shalab on May 24, 2019, 02:25:51 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.
Title: Re: Personal Debt
Post by: DooDiligence on May 24, 2019, 03:13:39 PM
I'm extremely debt averse after a failed jewelry wholesale business which left me with a smoking hole of unsecured debt. (I'm terrible at selling jewelry.)

This included maxed out LOC's from both AmSouth (now Regions) & Wachovia (now WFC) & a bunch of $25K+ CC's. (and payables to Thai & Italian manufacturers.)

I remember barely being able to sleep at night

I thought about filing for bankruptcy & rejected the idea since I find people who do this to be douchebags.

Went back to work offshore & paid it all off (except for the Italian manufacturer, who I sent a box of his own jewelry which was worth a bit more than what I owed him.)

Also built & paid for a house (2013) & socked away a pile.

Rode the offshore wave for all it was worth & got right!

The only debt I have now is a vehicle loan at 2.14% which will be paid off at the end of 2022.

If I can't pay cash for it, I don't want it (other than a reasonably priced vehicle at an extremely low rate.)
Title: Re: Personal Debt
Post by: thepupil on May 24, 2019, 03:32:10 PM
I am up to my eyeballs in mortgage debt, because I live in a high cost area and just bought a small house (near DC). Itís a 10/1 JUmbo ARM from Wells Fargo at 3.125%, so for the first ten years, I wonít pay extra down and will focus all excess on rebuilding liquidity outside of retirement accounts after down payment. I figure close to  highest incomes in the country + AMZN + limited supply of single family homes, makes it a not entirely terrible bet. plus when your rent gets bumped to $3500 you can justify almost anything if you have a decent 7+ year time horizon.
Title: Re: Personal Debt
Post by: sleepydragon on May 24, 2019, 04:19:12 PM
Itís not about whether YOU want to have debt or not, itís about what your wife wants. :)
I would have a much smaller mortgage if not because of my wife, and now I will soon apply for a big car loan for a Mercedes SUV.
But when I say that to my wife, she says itís because of her that I had to work so much harder and now makes more money.

Title: Re: Personal Debt
Post by: Parsad on May 25, 2019, 01:14:24 AM
+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!
Title: Re: Personal Debt
Post by: John Hjorth on May 25, 2019, 04:16:21 AM
This is indeed a fascinating topic - thank you for taking initiative to start it, Castanza!,

The common denominators [themes?] are pretty clear, based on personal experience in life and your own personal view on risks related to your personal balance sheet not including your stock portfolio:

1. Optimization of funds available for investment, based on your personal preferences about your personal balance sheet ex. your portfolio,
2. While 1. was what made you investors in the first place, in combination with your earnings after tax.

The topic is fascinating, because every tiny personal story as a backdrop makes it easier to understand your posts about investing.

I won't repeat my own personal story, because it is already posted here on CoBF [so you can dig it up], I'll just say the following here:

1. I didn't loose one dime under the GFC on investing as such, however I managed to screw up dearly in other parts of my personal balance sheet, playing a game with maximizing deferred taxes, that I in reality couldn't afford. What happened is proof of that. I should have cut spending instead, in many years before I got in trouble.
2. To this day I think I'm also here on CoBF only because my bank trusted me [instead of just flushing me out in the sewer], combined with that I delivered as promised, and actually changed personal behavior. [In Danish, it's called "taking the spoon in the other hand".]

- - - o 0 o - - -

In short, it's not only in investing, but in all economic aspects of life about not to become the patsy in any situation.

As a former screw-up, I'm now very averse to personal debt. I still remember that feeling like a straying dog coming home by its own will after many hours - wet and dirty all over - in relation to going to & leaving the bank related to my situation. It was not as such just about that nagging & embarrassing feeling of being an idiot [and CPA by education] - more like accepting that I felt like an idiot because I actually was, that being even more nagging and embarrassing! [ : - ) ] The bank did not "take" me "under" in the situation, I think.

So no debt here, except for household expenses not related to automated payments or paid by e-banking, that goes on credit cards, where the balances get paid monthly. The bank got its last DKK owed to it by me now about three years ago.
Title: Re: Personal Debt
Post by: DooDiligence on May 25, 2019, 04:37:07 AM
I may only have 1 feather but this is my tribe.
Title: Re: Personal Debt
Post by: SharperDingaan on May 25, 2019, 05:10:00 AM
Everyday you're going to be bombarded with 'stupid' offers, that are intended to trap the borrower into the debt cycle.
It's not hard to exploit them, but you really need to look at cost versus benefit; most aren't worth the effort.

We run almost all our expenses through a credit card, pay in full before the due date, and collect the points. The banker exists to be exploited, we're very good at it, run all debt/mortgage payments through the cards, and help ourselves to the offers (offfered by their marketing depts versus their branch manager). If we have not earned a free return flight to Europe every 9 months, we've failed.

Banking is built on trying to get the customer to buy as many products as possible. Use 3-4 products on a monthly basis, and we'll give you this/that off. Cheque, Saving, MM Fund (to pay the card from), TFSA; and suddenly there's no banking fees OR minimum balance required. Needless to say, on those rare occassions we actually talk to the banker, it's an interesting conversation.

SD
Title: Re: Personal Debt
Post by: boilermaker75 on May 25, 2019, 05:53:41 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.
Title: Re: Personal Debt
Post by: John Hjorth on May 25, 2019, 10:03:19 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.
Title: Re: Personal Debt
Post by: writser on May 25, 2019, 11:16:42 AM
In general I donít like personal debt but we made an exception for our mortgage. 25 year fixed 2.x% or something like that (from the top of my head) with some added tax advantages as a cherry on the cake. Accelerated payoff possible if we want that for whatever reason. Seemed like too good a deal to pass. Iím reasonably confident I can do better things with that money and our personal leverage is still very modest.

Though if the value of your mortgage is larger than the the value of your savings Iíd probably be more comfortable paying off debt first.
Title: Re: Personal Debt
Post by: coc 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.
Title: Re: Personal Debt
Post by: Gregmal 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.
Title: Re: Personal Debt
Post by: Parsad 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!
Title: Re: Personal Debt
Post by: Gregmal 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.
Title: Re: Personal Debt
Post by: Castanza 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!
Title: Re: Personal Debt
Post by: Gregmal 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.
Title: Re: Personal Debt
Post by: StevieV 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.


Title: Re: Personal Debt
Post by: boilermaker75 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!
Title: Re: Personal Debt
Post by: TwoCitiesCapital 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.
Title: Re: Personal Debt
Post by: Fairfaxnut 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.  ;)
Title: Re: Personal Debt
Post by: james22 on May 26, 2019, 11:15:59 AM
I paid cash for a condo last year just to avoid the mortgage paperwork.
Title: Re: Personal Debt
Post by: John Hjorth on May 26, 2019, 11:34:45 AM
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? [ ; - ) ]
Title: Re: Personal Debt
Post by: james22 on May 26, 2019, 01:00:51 PM
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.
Title: Re: Personal Debt
Post by: SharperDingaan on May 26, 2019, 01:43:31 PM
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
Title: Re: Personal Debt
Post by: sarganaga on May 26, 2019, 08:59:20 PM
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.

Title: Re: Personal Debt
Post by: Castanza on May 28, 2019, 07:48:08 AM
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).
Title: Re: Personal Debt
Post by: Parsad on May 28, 2019, 06:27:13 PM
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!
Title: Re: Personal Debt
Post by: Lance on May 28, 2019, 07:58:20 PM
My personal approach is exactly like Gregmalís, but would reiterate what Parsad said, do what letís you sleep at night.

Thanks
Lance
Title: Re: Personal Debt
Post by: bizaro86 on May 29, 2019, 12:53:23 PM
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.
Title: Re: Personal Debt
Post by: Parsad on May 29, 2019, 03:11:10 PM
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! 
Title: Re: Personal Debt
Post by: fareastwarriors on May 29, 2019, 04:22:28 PM
I used a margin loan from IKBR to put a downpayment for an investment property. I'm still paying it off, slowly. No regrets. 
Title: Re: Personal Debt
Post by: rkbabang on May 29, 2019, 06:57:47 PM
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.