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Archive for May, 2015

Six month balance sheet review & Remembering Henry

May 31st, 2015 at 12:23 pm

Just looking at my balance sheet today compared to six months ago (11/30/2014). Overall I have a nearly 25K net increase, of which half is in retirement savings (and that increase is pretty evenly divided between new contributions and capital appreciation).

Of the other half, 5,000 is a net decrease in debt (which has been transferred from credit card balance transfers to a personal consolidation loan) and the rest is an increase in savings (some ready cash and the rest in my HSA).

Nice to see progress and especially to feel like it is progress that will continue, rather than a few steps forward and a few steps back. Of course, we'll see if there is any big market correction this year, but at least for the factors under my control, I am feeling positive.

Also, for those of you who have seen me on here for a long time, yesterday was the five year anniversary of Henry's passing. Hard to believe it has been five years. I always told him his middle name was "Retirement," since during the 4 years I had him I ended up putting the amount that I otherwise would have put towards retirement towards medical expenses for him--but he was well worth it for the love and purpose he gave me during some pretty tough years.

When is a 10.9% loan *not* a 10.9% loan?

May 10th, 2015 at 08:58 am

I was struck yesterday by the comments I received about my debt consolidation loan, with people uniformly concerned about the interest rate.

10.9% is, indeed, the *nominal* rate, but that doesn't mean that it is the *effective* rate--the rate that I will actually pay. *That* depends on how quickly I pay the loan off--and I won't take the full 5 years.

In fact, this morning, I worked out on paper a plan by which I can have the loan paid off in *2* years. If I pay the loan off in two years, under my plan, I will pay $2,509 in interest rather than the $6,085 in interest under the full amortization schedule. That works out to an effective annual interest rate of 6.96% per year for two years, for an unsecured loan. And *that's* not bad.

For those of you who were worried about my slowing down contributions to retirement--I'll contribute less than I would have without any personal debt, but a heck of a lot more than I have contributed for the past six years of underemployment. Counting the 3% employer match, I'll have 12,000 added to my retirement contributions this year and 15,000 next year. I have a SIMPLE plan, so the maximum contribution for 2015 is 12,500 + 3,000 catch-up contribution for being over 50, so a total of 15,500. (2016's total allowable SIMPLE contribution will probably be 16.5K). So while I'm not quite at the maximum retirement contribution allowable, I'm most of the way there, and in two years, when the loan is paid off, I'll definitely be at the max.

Also, the debt is there--it's a sunk cost that needs to be repaid in any case. I could punish myself by denying myself some pleasures in order to try to maximize my retirement contributions, but the only CERTAIN time one has is the present, and I'm not the type to unnecessarily restrict myself today for a tomorrow that may never come. Planning and reasonable retirement contributions given income, yes, but tightening my belt now, when I am earning 50% more than I ever have in my life? Absolutely not. I'm on good track to have a million in my retirement fund by the time I turn 65, and I'll probably retire when I hit 1.25 million, which I anticipate happening when I am 68--just beyond my Social Security Full Retirement Age of 67. But just in case I don't make it there--I'm going to enjoy my life as much as possible while I can!

I think it is important to think about WHAT you are buying when you take out a loan. You are not just buying the use of money (with the interest rate as the purchase price). You are also buying time and flexibility and the peace of mind that comes with having a clear pay-off date. I certainly haven't had the peace of mind while transferring debt from 0% balance transfer deal to 0% balance transfer deal. And while I'll pay approximately twice the amount to the bank under the terms of this loan than I would if I continued the balance transfer approach, I'll also buy myself that precious peace of mind--plus flexibility if the worst should happen and I lose this job or have a major home repair expense.

Is that peace of mind and flexibility worth it to me? It certainly is, or I wouldn't have chosen this approach.

Rules of thumb, like minimizing or avoiding debt, are well and good, but they are a starting point, not an ending point. If someone is financially unsophisticated, yes, encourage them to avoid debt--but keep in mind that taking on debt should be a calculated risk. If the person is unlikely to be able to pay that debt off, then the first tack should be cutting expenses. But if the person has the wherewithall to pay the debt off, then one should consider the psychological benefits that one is purchasing with the debt and ask the person whether they are willing to pay for that peace of mind and flexibility.

Debt is also leverage, folks, and what one buys with money is not just material objects but psychological qualities too.

When you fall off the horse, get back in the saddle

May 9th, 2015 at 04:45 pm

Confession here: I fell off the debt reduction horse during the past few crazy, unstable years. My net worth has grown, but whereas I was out of debt in 2009, I accumulated, at a peak, 30K of non-mortgage debt (currently $25,667). For the first time in years, my income is stable and no family crises loom, so it's time to get back in the saddle. First step was getting back to posting income and expenses with YNAB, which I used to do. Nice upgrades to the program during the past 5 years since I last used it. Second step was consolidating the credit card debt with a personal loan-20k, 5 years, 10.9%. I'm tired of juggling 0% balance transfers. And it won't take me 5 years to pay...but I have flexibility with a longer term, just in case. And step 3 was to temporarily cut my retirement savings to 3% in order to add $420 a month to emergency savings. I've been living with too small a buffer, which is why the debt accrued. Increase the buffer, pay down the debt, max out retirement savings once I have more liquidity...and hopefully not only keep the job but eventually get a raise. My net worth is currently 27K higher than it was 6 months ago when I started the job, and hopefully the market and luck are with me and I'll do at least as well in the second six months. Overall debt to equity is currently 20.7%. Aiming to get it lower still.