After 30 years of helping people think about all aspects of their financial plan, here are some thoughts on personal debt.
Opening Thoughts
- Debt is a tool. Use it wisely.
- If you can only afford the stated minimum on any debt, reconsider whether you should take on the debt. You are a mistake or misfortune away from disaster.
- Debt costs more than the stated payment. It might require more hours (or years) at work, collateral in the form of liquid assets you don’t want to risk, or an increase in the amount of disability or life insurance you would be prudent to purchase. Additionally, it might carry relational or psychological costs.
Mortgages
- If possible, structure your mortgage to be paid off by the time your oldest child goes to college. The money you’ve been paying on your mortgage can then be used to help your kids pay for college.
- At the very latest, pay off your mortgage by the time you retire. This frees up cash flow during the years when you no longer make an income.
- If you plan to move from your current home to a more expensive home, consider paying your current mortgage as if it were your future mortgage. Not only will this amortize the current mortgage more quickly, but will pre-position your monthly budget to accommodate the higher mortgage. It’s a good way to test whether you can truly afford the more expensive home.
- The payoff of putting money into an investment account that could be used to pay down your mortgage more quickly might not be as high as you think, particularly within a 20-year window. The difference is likely a fraction of the total amount necessary to provide for financial independence. And, as stated above, there are typically additional costs to debt. It’s worth noting that I’m saying this as a Senior Lead Advisor at Foster Group, a firm whose only source of income is a percentage of the assets we manage!
- If your home is your largest asset, as it often is for the first decades of adulthood, prioritize the acceleration of your mortgage repayment.
Other Personal Debt
- Pay close attention to the monthly payment associated with any student loans. The payment schedule might not be structured in a way that actually leads to paying off the loan. In many cases, the stated monthly payment doesn’t even cover the cost of interest, meaning the principal will continue to grow.
- The cheapest car to own is the one you already have.
- Pay cash for household goods, appliances, furniture, etc. Promotions that allow you to put no money down, not pay for a year or take out a no-interest loan are appealing. However, doing these things might negatively impact your credit score.
- Home Equity Lines of Credit (HELOC’s) can be good for a number of uses:
- Home remodeling projects (as long as you pay it off once the project is done)
- For down payments in order to avoid Private Mortgage Insurance (PMI)
- To purchase out-of-state real estate properties. Typically, HELOC’s have lower interest rates, lower closing costs, and less hassle than originating a mortgage out-of-state.
- For a bridge loans, which are short-term loans used until permanent financing can be secured or existing obligations removed
- To consolidate high interest debt and/or credit card balances, as long as all future credit card purchases are paid off each month.
A Final Thought
- In all instances, the goal should be to eliminate personal debt as fast as possible. Remember: Debt is a tool.
At Foster Group, truly caring for our clients means taking the time to learn what’s in their hearts and using proven methods to help them pursue their goals. If you would like to learn more information about how debt is a tool, please contact us.