I’m hardcore when it comes to debt.

My debt journey can be summarized as follows:

  • 0 to 18yrs old: Debt free because I was too young to have debt
  • 18 to 24: Legally allowed to have debt, so why not rack up $28,000 in student loans
  • 24 to 27: Live debt free after realizing I hated Sallie Mae with a passion
  • 27 to Present: $283,000 mortgage debt.

My personal stance on debt is pretty fluid. When I first got in to this whole personal finance thing I swore off everything but a mortgage. As I’ve become a little more seasoned in my PF knowledge, I’m realizing debt is not necessarily as evil as we make it out to be.

Yes, it is often a terrible, terrible thing. But sometimes, it’s not really bad at all.

I’ve decided to outline the Ninja household’s current philosophy on debt…

Credit Cards:

As you all know, I use my airline credit card for just about every purchase I make. I have no plans to change this habit as Girl Ninja and I really enjoy the perks our CC offers. That said, I made a personal commitment to myself when I graduated college, that if I ever miss a payment (yes, even by one day) I will immediately pay my balance off, cancel my card, and switch to a debit only system. So far, so good. Haven’t missed a payment yet. Credit cards can be a great resource if used responsibly.

Car Loans:

As for a car, although we have no plans to buy a new car anytime soon (never say never), I would be open to the idea of taking out a loan if I did. The loan’s APR would have to be really close to 0% and I would have to have, at least, that amount of cash in savings or a taxable investment account.

I think about it this way. If I either had to pay $20,000 up front for the car, or could pay $20,000 back over the course of five years, I’m taking the 0% loan every time. Remember, liquidity is king. The best kind of debt to have is debt that doesn’t cost you any money.

Mortgage:

Girl Ninja and I went from having no debt, to $283,000 of debt in about one hour (how long it took to go through the closing documents when we bought our house). Having a mortgage payment sucks. That’s for sure.

But I have no plans to pay my principle down quicker than the 30 year loan term. Inflation is man’s best friend when it comes to mortgage debt and I plan to let it run its course.

Lastly, I’ll never pay private mortgage insurance. It is such a big fat waste of money. If we had only put 5% down on our current place, instead of 20%, we would have had to add another $200 or so to our monthly payment just to cover the PMI. That’s a sunk cost that you will never see a return on. Maybe you feel differently about PMI?

And that pretty much sums up what debt I find acceptable. I’m not a fan of second mortgages. I would never take out a loan to start a business. I would never finance a luxury item like a boat, motorcycle, or vacation. I have no plans to raid my retirement account early. I will never take out another student loan again. And I will never co-sign a loan, or lend a substantial amount of money, to a friend (or family member) as long as I live.

Never. Ever. EVER.

How does debt fit in to your life (what types of debt do you have)? What types of debts do you plan to continually utilize (auto loans, responsible CC use, mortgage)? What types of debts have you sworn off for good?

Keep your credit card debt. It’ll be good for you.

Do you have an income?

Do you have expenses?

If you answered yes to either of those questions, you darn well better have some financial priorities in place.

While there are a million different things we could talk about in regards to financial priorities, today I want to focus on just one.

Which comes first: investing or paying down debt?

I think financial priorities are something most of us think we have figured out, but don’t always truly understand.

Today I’m going to show you why investing in your 401K is often a better option than paying down high interest credit card debt.

Let’s look at an example:

Jane, makes $50,000 year. She’s 30 years old and her employer fully matches 5% of any contributions she makes to her 401K plan. Jane also has $5,000 in credit card debt, at 15%. What should Jane do, pay down the card as quick as possible, or start building up a nice little nest egg for retirement?

A 15% APR, on a $5,000 balance, means Jane will be paying about $62/month in interest. If she made nothing, but minimum payments, it would take her a little over 22 years to pay that sucker off. She’d also pay $5,729 in interest over that time resulting in a total payment just shy of $11,000. Yikes, that $5,000 original bill became a whole lot more expensive. Better pay that sucker off ASAP, right?

Now let’s examine the investing route.

Jane would be investing $208/month in her 401K if she contributed 5%. Her employer matches that and gives her another $208. If she earned a doable 6% return on this money, and never got a raise in her life, she would end up retiring at age 67 with $683,030 in her 401K. Not bad at all.

If Jane decided to postpone contributing to her 401K, she could use that $208 to make accelerated debt payments each month. But let’s not forget, that 208 number is pretax, so in reality she’d have about $175 extra to throw at her credit card. With the additional payment, Jane will now be credit card debt free in 20 months and will have only paid about $673 in interest. Sounds a heck of a lot better than the 22 years it was going to take in the first example.

Here’s where it gets interesting.

Wanna know what Jane’s 401k would look like if she didn’t start investing until after she became CC debt free? She lost nearly two years of company matching and compound interest, resulting in $596,388 in her 401K. That’s $86,642 less then if she started investing at age 30.

Guys and girls, this point is SOOOO important it can not be overlooked. It is absolutely in Jane’s best interest to start investing in her companies 401K, even though she is not debt free. If she waits until she has her credit card paid off, she loses a crap load of money. I know this seems to go against the grain. Credit card debt is evil, don’t get me wrong, but that doesn’t mean it should always be at the top of our financial priorities.

Obviously, in a perfect world you will have enough discretionary income that you can not only contribute to your retirement, but also pay down your debt quickly. I always have been, and always will be a DEBT PUNCHER, but only when it is in your best interest.

Does your employer offer a 401K match? (I’d like as many people as possible to answer this question since I’ve heard a lot of the retirement benefits in the private sector have been getting cut left and right). Are you taking full advantage of that match? If not, you’re crazy. I’m sorry, you just are. You are literally giving up FREE money. In Jane’s situation would you go the way of Dave Ramsey and still pay down your credit card first, or would you let number’s guide you and start contributing to your retirement?

Pay your pops.

A reader asks…

My husband and I are doing fairly well financially, but we wanted to see what we could be doing better. My husband is very big into investments and I was always very big into liquid savings (I watch a lot of Suze Orman). After meeting with our financial adviser, he said he felt like we should only have 5-10k in an Emergency Fund and max out our Roth, invest more in our 401k and lastly invest in our mutual funds. I can get behind this, it makes sense to invest our money as opposed to having it sit in a savings account not earning interest.

The one area I’m unsure of though is that he told us there was no need to be throwing money at our debt because the interest rates are so low and we are making much more in our investments. He didn’t say it was “bad” to pay off the debt, just said he thinks we should focus on the investments.

As far as debt, we have our home, two cars and then about 25k in student loans. My father paid off my student loans, so I’m actually just paying him back at 4%, so it is fairly “secure” debt. I personally would rather get rid of all of our debt, but also see his point on the fact that we would be earning more on our money if it is invested.

As of right now this is a rundown of our finances, we make about 140k combined gross income, our house is 216k with 3.5% interest on 30 year mortgage, one car has 4k left and the other 13k both under 4% and then the 26k in student loans i’m paying my father for. Right now we have about 18k in liquid cash, although we are expecting to have to pay 5k in taxes this year. 

What are your thoughts on investing vs paying down the debt?

As always, I’ll provide advice on what I would do in this situation, and then you all should chime in with what YOU would do in this situation.

1) Is your financial advisor fee-for-service or commissioned base? If he works off a commission fire his butt and find a fee-for-service advisor. Seriously, do that.

2) I’d be cautious of the sales pitch your advisor gave you about the stock market. Yes, it’s true savings account interest is pathetic. Yes, the stock market was up 25% last year. But don’t forget, the markets just lost 326 points yesterday. They were down heavily from 2007 to 2011.

Tread carefully when you write things like “but I also see his point on the fact that we would be earning more on our money if it is invested.” Sometimes that’s true. Sometimes it’s not.

3) I would pay off my student loan ASAP. Even though the interest rate you’re paying poppa bear is ony 4%, I’d get rid of it fast. Why not the car or mortgage first you ask? One reason.

I hate owing family money.

Super nice of him to offer to cover your loans for you, so why don’t you return the favor and pay him back quickly. This immediately removes any potential awkward business/family relationship. With $140k/yr in income you can knock this out in a few months.

4) After paying dad back, do whatever the heck you want. I’d probably pay off my cars and then start investing more heavily. That said, if you want to focus on investing and keep the car loans around a little longer I don’t have much beef with that. Contrary to what many may say, you can have debt and still be financially stable.

That’s all I got.

What say you dear readers?

Are you a loaner.

Pop quiz hot-shot, your mom, dad, sibling, child, best friend, or other person of whom you are bound to by affection or obligation, approaches you and says “Hey, I have an unforeseen bill coming due and was wondering if I could possibly borrow some money to cover it?”

What do you do? WHAT DO YOU DO!!!!!!!????

Obviously I made this hypothetical situation vague for a reason.

  • If your brother comes and asks for a $20 loan to put gas in his car so he can make it to his first job interview, you’ll probably loan him the money.
  • If your best friend asks for a $500 loan so they can fix a leaking pipe in their basement, would you help out then?
  • What about if your mom or dad needed $2,000 to catch up on mortgage payments they fell behind on?

Shades of gray. There is no one size fits all strategy when it comes to loaning money to close friends and family. Fortunately, I haven’t yet been faced with a situation where I’ve been asked for a loan, but I’m sure at some point in my life that day will come. While I don’t know exactly how I will respond, I assume the level of emergency will directly correlate to the amount of money I’m willing to loan. $500 loan for a new computer? Heck no techno. $500 for a new alternator so you can make it to work? I’ll probably help ya out.

You ever been asked for a personal loan before? How did you respond? Was it awkward?

Flashback

I’m currently in the middle of nowhere Canada with Girl Ninja and 50 high school kids watching them experience the best week of their lives. I imagine I’m having more fun than you right this moment so be jealous. In the meantime I’m upcycling a former post of mine. Enjoy.

I was talking with a man
yesterday who said, “I was raised with a strong German upbringing so I don’t mess around with debt and am proud to be debt free.” As we continued chatting about his finances he eventually told me he has both a mortgage payment and a car payment. Wait, hold the phone.

Hate to break it to ya buddy, but you’re not debt free if you have a mortgage and a car payment. Have these types of loans really become such a standard in our culture that we forget they’re still debts?

I get it. Some people think certain debts are “good” and others are “bad”. This man has obviously decided for himself that mortgages and car loans can be classified as good debt, but last time I checked, my blogs name wasn’t Punch Bad Debt In The Face. No, it’s Punch Debt In The Face, because I believe “good” debt is a term we Americans use to feel better about ourselves and our financial situation (It’s like being called festively plump instead of fat). I don’t discriminate, I punch all debt in the face, regardless of how “good” it might be.

What I think this man

, and many others, mean when they refer to things like mortgages and student loans as “good” debt is that these types of loans are not as bad as credit card balances or payday loans. How about we change your perspective though and admit that “good debt” is really just another way of saying “not-as-horrible-but-still-pretty-sucky debt” (has a nice ring to it doesn’t it).

Obviously this gentleman is comfortable maintaining a car payment and a mortgage as part of his personal finances, and to be perfectly honest, I have no authority to tell him to change his ideology (contrary to popular belief one can have debt and still be financially responsible), but I can definitely call him out when he tries to pretend that he is debt free. I am debt free sir, you are not.

Has our culture become so numb to consumerism that we think we can have a car loan and be debt-free at the same time? Do you believe in good debt?

Why or why not? Should I have punched this man in the face for being so naive?

.

Thursday poll: college debt

College debt has been making headlines these last few weeks for a multitude of reasons, none of which I particularly cared about. So today I figured I’d check in and see just how much college debt the average Punch Debt In The Face reader graduated with.

[poll id=”13″]

For extra credit share you debt amount, when you graduated, and what your major was below.

 

Try to be not broke.

Over the last two weeks I’ve purchased six round trip plane tickets. It’s insane. Between baby showers and weddings, we knew we’d be dropping some serious coin on flights this summer. But dang, $1,600 disappeared from our bank account faster than a Twinkie at fat camp.

Fortunately being not broke is pretty awesome. It allows you the ability to take advantage of incredible deals when they pop up. It gives you peace-of-mind in the event of an “Oh $#@!” emergency. And it gives you the freedom to experience things you may have otherwise missed out on like weddings and graduations.

There really is nothing else to be said besides…

Financial freedom rocks my face off.

Don’t be discouraged if you aren’t there yet. Stay the course. Work hard. Focus on the end goal. You didn’t get in debt overnight, and you probably wont get out if it overnight. Patience and perseverance is the name of this game.

Being not broke is awesome. I hope you are either right there with me, or plan to join me soon.

On a scale of broke to loaded where do you fall? Has your financial freedom allowed you to take advantage of any incredible deals or opportunities lately!?