This is part 2 of a 4 (or 5?) part series detailing why we want to retire by 40, as well as how to retire by 40. You can read Part 1 here, but basically I’m giving you all the dirty details from what got us into our bad financial situation, what exactly that situation is (this post) as well as how we’re going to leverage savings, investing, and even to a rental property to ultimately achieve financial independence and Retire by 40!
The first part of our journey to financial freedom is debt freedom
This kind of seems to be the golden standard among those trying to reach Financial Independence (FI). If a debt is bad (car, credit card, etc) and costing you more in interest than you would make by investing the same money, you’ve gotta get rid of it. For us, this is the breakdown:
As you can see, we’re paying it down, but we’ve had some setbacks. Our debt will go down, then up, and then down again – it’s frustrating! Some of the increases were due to my forgetfulness – like forgetting the ATV loan – but we’re working to pay it down!
As it stand right now, we will be out of debt in July of 2017, which is just shy of 3 years from now.
Current debts & interest rates
Obviously, we want to do this debt paydown as strategically as possible, which means we need to take interest rates into account.
Auto Loans (Our Traverse & ATV) : 7.9%
Personal Loan: 0.0%
Student Loans: (from largest to small amount) 3.4%, 4.5%, 6.8%, 5.6%
The Auto loans are what’s killing me, and not just because of the interest rate. In addition to that enormous rate we’re paying higher insurance costs! It’s rough, but we’re digging out! If you want to read more about how we ended up with so much auto debt, read Trapped Into Debt – It’s worth the read, I promise!
Why were not paying off the mortgage:
Maybe you’ve noticed that while the mortgage was listed on my debt spreadsheet, it wasn’t on the interest rate list. That’s because I’m an completely unconcerned with paying off the mortgage.
Blogger after blogger has extolled the virtues of not paying off the mortgage. Why? This is one of the many areas where I disagree with Dave Ramsey. Chances are, your mortgage interest rate is less than you can earn by investing right now. For the year, my investments have averaged a return of 7.3%. Know what my mortgage interest rate is? 3.75%. Why on earth would I try to pay down something earning 3.5 percent less than what it would earn just sitting there.
But, there’s more! I view our home not just as an investment for the here and now, but as an investment even after we move out of it. How? We’re going to have tenants. After all is said and done, factoring in insurance, taxes, mortgage, maintenance, a percentage for vacancy, and a property manager fee, we’re looking to clear about $600 per month, or about a 20% return on our investment each year. I know a lot of people don’t want to mess with being a landlord, with all of the tenant horror stories they’ve heard, but I have two words for you: Property Manager.
A good property manager is worth his (or her) weight in gold.
Why we’re paying the personal loan first:
No matter what, the personal loan comes first. Here’s why: We purchased a HUD home, not realizing that the $6,000 and change we bid over the asking price (it’s really competitive) was expected to be brought to closing in cash. Once we found that out, we were fully prepared to back out. We had about $12,000 for this house, and between all of the repairs that needed to be done (plumbing in the basement and electrical, to name a couple), the $6,000 we bid over the asking price, and the closing costs, we didn’t have enough cash. But, before we back out, The Big Guy’s grandparents said “Whoa, slow down there.” They basically told us that they thought the house was a good investment, and that if we were willing, they would be happy to lend us whatever we needed.
At first we said no. We didn’t want to take money from family, and we most certainly didn’t want something to go wrong where we couldn’t repay it and then have it come between us. But, after about a week, we changed our minds and said yes. Why? Because The Big Guy’s grandparents were right – the house was a good investments. So our personal loan has priority. I would rather rack up interest than have something like this come between family.
And there you have it
….the dirty details of our finances, that is :-) Stay tuned for the next segment, where I explore which debt we should pay off first, and some alternatives that don’t actually involve paying off all of the student loans or even the ATV! Crazy!
What are your thoughts on paying off the mortgage, or our rationalization for putting the personal loan first? I would love to hear them!
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Matthew Dishman says
I like your blog but I think you should take a closer look at Dave Ramsey’s plan. Because I don’t understand why you are disagreeing with him about the mortgage. Paying that off well after paying your other debts. I encourage you to at least take a closer look at it. My wife and I have been through it and it works the best.
I think in US it makes sense to not pay off the mortgage because you can deduct the mortgage interests. Like you mentioned, if you can earn a higher rate for your investment than the mortgage rate, it makes little sense to pay off the mortgage.
Here in Canada we can’t deduct mortgage interest for personal residence so not paying off the mortgage may not work as effectively even if the investment return is a bit higher.
Toni lloyd says
I absolute agree, why would you pay off your mortgage if it’s at such a low rate. Pay off the things that has the highest interest rates. The best thing to do is invest in real estate while rates are so low. That’s my plan to retire early.
Oh yeah, right now you can’t beat real estate investing. I’m sure that will change in a few years, but might as well invest now!
I feel the same way about your attitude toward paying off your family first. Both my dad and sister loaned money for me and I can tell there is a lot of tension there because of it. They have been gradually paying it back to us every month but nothing has got to feel weirder than borrowing from your youngest.