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.

Back around the beginning of the year, I got my first "rewards" credit card from Chase--their amazon.com credit card. It gives me 1% back on most purchases and 3% back on purchases made through amazon.com (I've spent $742 there so far this year). I put all my non-bill expenses on the card--about $1500 per month. After every $2500 put on the card, you get mailed a $25 gift certificate to use at amazon.com. I've earned 6 ($150) so far this year.

I saw some ads for the Chase Freedom card, and began to wonder if that would be a better deal--3% back on the top three places you spend each month--which for me would be grocery and pet expenses (about $800/month) and the third category would vary depending on whether there were car repairs or doctors bills, etc. I figure that if I'd been using the Freedom Card, I'd have earned $225 in gift certificates so far. The freedom card has a bit higher rate than the amazon.com card, but since I pay in full every month, that doesn't matter. I started the application process and have a form to complete and send back to them, but then I found yet another alternative deal.

The third alternative is through my mortgage company, which is offering a 1% rebate back that goes towards paying down the mortgage. Since it's 1% on everything, that's less on rewards--but nice to have it go directly towards paying down the mortgage.

I suppose the most advantageous thing to do would be to continue the application for the Chase card to get the 3% back, then take the rewards in cash, and send the cash reward to my mortgage company as an extra principal payment when it arrives. At the rate of $225 extra every 9 months, each payment knocks about 2 months off my $550 mortgage over the course of time. Keeping it up would knock off over 3 years off the mortgage and eventually saves over $12,000 in interest payments.

(I just learned how to calculate amortization schedules, so I've been having fun calculating alternative scenarios.)

1. The "someday/maybe" list...things I want to buy go on a list (some items are on paper, but mostly I just add things to my "wish list" at amazon.com). Only if I keep on thinking about buying things after a long time do I usually buy them.

2. Consider buying used. I buy most of my books and furniture used, and a good portion of my clothes and some of my appliances. Lingerie, walking shoes, and electronic devices are the main categories of durable goods that I always buy new.

3. If I can get it for free, I do so. I make a lot of use of the library! And if I can borrow a rarely used item from a friend, or rent it for a day (eg., heavy duty steam cleaner), or barter for it (minor home repairs for tax assistance), those are also ways of getting things without shelling out $$.

4. If I'm going to give in and buy something new, I check out prices on the internet, and I also check to see if a coupon code is available. Today I ordered "yoga toes" for some persistent foot problems I've been having--they're about $50 on the web, but a quick search garnered me a $15 coupon code, so the cost is $35. (And given the good reviews these get--albeit without any formal scientific evidence--I'm hoping these hope me avoid more expensive trips to the podiatrist, orthotics, etc.

5. Keep track of what you spend regularly. I *do* struggle with the spending demon, especially insofar as spending too much on groceries and eating out. Keeping careful track of these categories is somewhat helpful in keeping my spending in line...I tell myself that I can wait another 10 days or whatever until it's time to refill the food budget envelope again (given that the larder is full). Since it's usually a relatively short time to wait, I can do so without depriving myself of my favorite indulgenes.

6. And, as others have said, pay off the credit cards monthly and put something aside for savings every month.

I've cancelled class tomorrow--from past experience I know that no more than 15-20% of students will show up the afternoon before Thanksgiving. I don't know why my school's administration insists on having classes the day before anyway--every other school I've taught at cancels classes the day before to give students the opportunity to drive safely to their destinations. Of course, students will take every opportunity to take the whole week off that they can, and that's a pain too--it's the "give them an inch and they take a yard" phenomenon.

So I have a 5-day weekend for what has been an unexpectedly hectic term. There's some grading to do and letters of recommendation to write, but I also have a little time to myself for the first time in a while anyhow. I haven't thought about anything much beyond work and Henry for a long time.

It's actually kind of scary having the mental space since I know new challenges are ahead--but at least I can avoid thinking about most of that until the end of the term in mid-December. The time I take off this weekend can be for play, not planning.

Now that the leaves are gone, I can see the sparkle of water on the river from my front porch when it's sunny and at night. It's just a glimpse, but that little view gives me the same sense of space opening up too.

I think I need to take up meditation again and practice letting the river of my thoughts run by me rather than getting as caught up in things as I have of late.

Damn, wrote out a long entry which not only didn't get posted but now there seems to be an entry in my blog which includes ALL of the prior postings, without spaces. Yikes.

Anyways, the gist of the longer post is this: considering a part-time job offer (on top of full-time work), I realized that the true value to consider was not the salary offered, but how much of that salary I would take home after taxes. Since my full-time job puts me squarely in the middle of the 25% tax bracket, that's 25% to the feds, then another 11.75% for social security, medicare, state taxes, local taxes, and state unemployment taxes. That leaves 63.25% of the offer as the value in question. Looks like a lot less, then.

Seems silly to me to tax income--decreases incentives. I'm beginning to see the wisdom of plans that suggest taxing consumption instead.

It's always hard to keep in mind the "real cost" of anything you purchase. By the "real cost," I don't mean the PRICE, but all the money that you need (a) to earn in order to be able to afford the purchase price, and (b) to be able to use, store, maintain, and ultimately get rid of the product.

It's often the price, however, that lures us to buy a product in the first place. For example: last Sunday's paper had an ad from Linens 'N Things advertising a sale on several Black & Decker appliances which one could get for $9.99 after rebate. One of the products listed was a toaster oven--something that has been on my "someday/maybe to buy" list for a while. Since I'm trying to cut down on my food expenses by eating out less and cooking more at home, and it's oppresive cooking in the summer heat (and I don't own an outdoor grill), I allowed myself to persuade myself to buy the grill.

Initial outlay $31.79 ($29.99 + 6% PA sales tax). However, I am in the 25% tax bracket, so in order to be able to lay out that initial expenditure of $31.79, I had to actually *earn* $42.39. I should also count the cost of getting to and from the mall--one simple way would be to estimate that the 16-mile round-trip on the highway would require half a gallon of gas, about $1.80 (or 2.40 if I again count the amount of money I had to earn in order to be able to spend $1.80). Another way would be to include not only gas but the presumed depreciation as well, and use the IRS mileage reimbursement rate, currently 44.5 cents per mile for 2006. Google maps indicates that it is 8.15 miles each way for me to drive to the mall, so by that calculation, it cost $7.25 for my trip to the mall (or $9.67 if I again apply the tax rate rule). Since this exercise is a demonstration of how much things cost beyond the price, I'll use the higher rate.

So: the amount of money that I needed to earn in order to afford my $9.99 toaster oven was actually 52.06 ($42.39 + $9.67). Presuming that I do in fact receive the rebate, the "real price" of the toaster was actually, $32.06!

This doesn't even count in the "opportunity cost" of what I could have earned if I'd been working rather than taking the afternoon off and shopping. I could technically include that in the analysis too--IF I would in fact have been working. But it's summer vacation and I wouldn't have been, so I won't extend the analysis that way.

However, I WILL extend it to look at the cost of OWNING and USING this new toaster oven. When I looked at it in the store, I realized that almost none of my existing cookware would fit inside it, other than my loaf pan. Linen's 'N Things doesn't sell special toaster oven bakeware, but Bed, Bath, & Beyond does. In order to be able to use my toaster oven, I ended up spending $17.99 at BBB for a casserole pan and a broiler pan, and another $10.59 at Michael's for a set of a dozen silicone muffin cups, since my oven is small enough that even the standard "toaster oven size" muffin tins wouldn't work. That's another $28.58 price/$38.11 after taking into account the money that I need to earn to afford the price.

Since I bought this on the same trip as the toasteroven, I won't add in any more gasoline price. Other things that I could add in but won't include the cost of having a place to have the toaster oven stand. Back when I moved, I bought a $35 (price) microwave cart at Target that fortunately has room for the toasteroven as well. Theoretically, I could add in any maintenance costs or getting rid of costs to the price as well, but I won't at this point.

So, in sum, my "$9.99" toaster oven REALLY requires me to earn $70.07 to pay for it.

Perhaps I wouldn't have been so quick to jump at the sale if I'd thought of that beforehand. But now I'll keep in mind that I need to save at least $70 by eating at home when I'd otherwise go out to eat in order to justify this expense!