debt Archives | Empathic Finance

How to find the sweet spot for paying extra on a debt

If you have debt, some of the mandates are clear to you:

Pay it off, obviously.
Pay down a single debt at a time. Pay either the highest interest rate debt first (which makes sense on paper) or the lowest-sized debt first (which works) or some combination.
Pay as much as you can, to get rid of the debt as fast as possible.

It’s that last directive that I want to talk about today.

If you’ll notice, that’s the most nebulous of them all. “As much as you can” doesn’t really give you a roadmap. How much “can” you afford to put down on a debt?

Obviously, I could hide behind saying “everyone’s situation is different”. But I want to try and inject a little more to the discussion.

Because this is also a “more” situation, talking about you one should be doing “more”, without identifying what that “more” is.

And if you’re wanting “more”, you’ll never achieve it. As there will always be more.

I want you to feel satisfaction in your plan. I want you to achieve maximum impact.
So if you’re paying down a debt, what real difference would paying more do? Is there a sweet spot?

Let’s find out.

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Why not avoid bonds too?

Awareness, Decisions

Last time, I talked about my (thankfully?) fruitless attempt to buy tax liens as an alternative investment vehicle. I was initially attracted by the promise of high returns, but ultimately left feeling like what I was trying to do was—if not exactly unethical—certainly not very seemly. I didn’t want to profit on people’s misfortune.

But when I expand the scope of this inquiry a little further, it bumps up against services with similar outcomes, such as with peer-to-peer lending services like Lending Club and Prosper. Same thing: high return potential, but due to another user’s borrowing.

We don’t like to borrow around here for ourselves (as getting rid of debt is a prerequisite for becoming wealthy). We don’t encourage our neighbor to borrow money. All of which leads to a bit of an unfortunate reality that one of the major investment products available to us is a kind of debt.

I’m referring, of course, to bonds.

Tax liens, or that time I tried to profit from other people’s debt

Decisions, Radical Finances

Right after college, I started taking an interest in investing.

At the time, I worked with someone who was similarly interested. We’ll call him Ivan (not his real name).

Ivan was the person who introduced me to Rich Dad Poor Dad. He was so into Robert Kiyosaki that he bought his $200 board game. (I would never have paid that much money, but the game was kind of fun.)

Ivan might have been a little predisposed to harebrained schemes.

One of the things he got really excited about was tax liens.

“People who own homes sometimes have unpaid taxes, and the bank puts a lien on their home. The bank then sells that lien off to the highest bidder. You can make up to 24% interest on those liens. And if the owner doesn’t pay, you can foreclose on the property!”

Ivan seemed almost giddy at that last part.

He was very persuasive though. And he got me to do a lot of research. This did indeed seem to be a thing.

Up to this point, I had only thought about the stock market and more traditional wealth-building strategies. But 24%! Maybe I was just being a sucker?

I decided to investigate first-hand.

My take on Dave Ramsey’s 7 Baby Steps (Part 2, Baby Steps 4-7)

Awareness

This post is part of a two-part series:

In my last post, I talked about the first three (well, three and a half) of Dave Ramsey’s 7 Baby Steps for financial wellness. They are:

Baby Step 1: Save $1,000 to start an emergency fund
Baby Step 2: Pay off all debt using the debt snowball method
Baby Step 3: Save 3 to 6 months of expenses for emergencies
(Baby Step 3b. Save for a home)
Baby Step 4: Invest 15% of your household income into Roth IRAs and pre-tax retirement funds
Baby Step 5: Save for your children’s college fund
Baby Step 6: Pay off your home early
Baby Step 7: Build wealth and give

This is where it gets fun.

My take on Dave Ramsey’s 7 Baby Steps (Part 1, Baby Steps 1-3b)

Awareness

This post is part of a two-part series:

At this year’s FinCon, both Rachel Cruze and Chris Hogan were giving keynotes. They are both part of Dave Ramsey‘s “Ramsey Personalities” team, bringing his message, or some part of it, to more people.

For those who don’t know, Dave Ramsey is a personal finance author and radio host (and some would say “guru”). He is best known for his aggressive stance on debt, and for his “7 Baby Steps”, a plan to financial freedom.

It occurred to me that I have never actually talked much about the 7 Baby Steps, so I figured I’d give each one of them my take. To make this not too much a giant screed (too late), I want to just focus on the steps, and not on Dave Ramsey himself, or anything else about his work.

So here goes: What are the 7 Baby Steps and how could they work for you?

Why not debt consolidation?

Awareness, Radical Finances

Paying off debt is hard. Chances are that you have debts in a number of different places (car, student loan, credit card, and even perhaps medical or personal debts as well), all of which have different payment dates, rates, and amounts.

It can be overwhelming.

So when you hear of services that will consolidate your loans, it’s a tempting offer. They promise to give you one loan payment per month, eliminating so much of the administrative headache (and potential for things to go wrong) that come with multiple payments.

It sounds appealing. But is it worth it?

The debt doldrums: how to manage a single large debt

Radical Finances

Do you have a really big debt? I do. It’s called my mortgage.

Last year, I was able to successfully pay down my mortgage such that my loan-to-value ratio (essentially, the percentage of how much I owed on my home) hit 80%.

There was a clear benefit to getting down to 80%, as that is the threshold where you can start to pester your mortgage company about getting rid of PMI (a project that I serialized in five parts: part 1, part 2, part 3, part 4, and part 5). And once PMI is gone, you can put that money toward your mortgage premium, paying it off faster, in a kind of debt snowball.

So that’s the benefit of getting to the 80% milestone. What’s the next milestone?

It turns out, sadly, that there really isn’t another intermediate one.

This is a problem regardless of mortgages. You might have a single large debt (say, student loans) that towers over all your other debts. It might even be your only debt. You want to stay motivated to pay it off, but it’s Just. So. Big.

How do you stay motivated to pay it off?

5 things about money that are strange when you start to think about them

Awareness

I typically think about money in terms of what it can do for people, but sometimes, I think about money itself, in the abstract. Kind of like this guy:

Okay, actually not at all like that guy.

But sometimes it is interesting to think about money in the abstract. And the more you think about these things, the stranger they become.

So here are five things about money that get stranger when you think about them. Because chances are, you haven’t thought about them.

How to potentially double your money’s impact via lump sum debt reduction

Awareness, Radical Finances

It can be hard to visualize how paying a debt off works.

There’s an interplay between principal and interest. You pay money to reduce the principal, but during that time, interest on the debt has piled up, reducing the impact of your payment and adding to the amount you owe.

You might think the a debt payoff plan is like this:

But it’s actually more like this:

(Downward for principal paid, upward for interest accrued.)

The goal is that the amount you pay is greater than the interest you accrue during the same time period. That way you make progress. And as you pay off principal, the amount of interest you accrue becomes less and less.

This means that when you pay extra now, it will positively affect (increase the power of) every other payment you make for the life of the debt.

I think this is worth your attention.

If you’re still unsure about what method to use to pay off your debt

Radical Finances

If you’re like most people, you’ve got some form of debt. It could be a car loan, it could be credit cards, or it could be “good debt” like student loans.

No matter, it’s got to go. You need to get out of debt if you’re ever going to build any kind of wealth. Seriously. The money that’s going toward your debt is the same money that will go toward wealth.

And you want to be wealthy right? Or at least wealthy enough to have choices and to feel secure?

Then it’s time to get focused.

However, your immediate roadblock is figuring out what to focus on. After all, you probably have debt from more than one place.

There are two primary methods to paying off debt: focusing on the debt with the lowest interest rate first, versus focusing on the debt with the smallest debt amount first.

The latter, called the debt snowball, is by far the method I favor. Increased simplicity and more visible progress are the main reasons.

The other method (which doesn’t have as snazzy a name), will enable you to pay off your debts slightly faster, so you’ll save a little bit of money.

I’ve talked about how this works out in practice, but I want to revisit it, not because my views have changed, but because it’s so important.