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?

20 thoughts on “I’m hardcore when it comes to debt.

  1. We’re currently paying PMI of $266/mo.

    It’s lousy, but I’m glad it was there as an option to having to wait longer to build up a 20% down payment.

    Saving up the rest of the down payment on our house would have taken at least another 18 months – so far, prices have risen sharply from when we bought. Hopefully we will have enough equity in another year or so to get rid of the PMI.

    In general I think PMI is wisely considered if it allows one to take advantage of either a great deal, or a truly rare and ideal home.

    Bottom line is, at the time, I winced at having to pay the PMI, but I feel like I will have saved money in the long run by buying earlier.

  2. Totally agree on the credit card & mortgage and I use both to improve my overall investment return on my entire portfolio. However, for the car loan, I find that the 0% is only available on new cars and I just don’t think that buying a new car is a financially sensible decision:

    http://moneystepper.com/financial-planning/car-loans/

    It is just too much to give up the moment you drive the car away from the garage. *This* (and not the 0%) is the true rate you are paying.

  3. hi!
    I never had debt (probably already said), but my boyfriend had a mortgage for the house we live in, that he paid off as soon as he could with a little help from me.
    Why would he keep the mortgage at 5.7% a year when he could pay it off and instead invest the 500 EUR a month?

  4. I have a cc debt I’m trying to get rid off, no scratch that, will be eliminated before baby comes in May, then I’m lowering my limit and stashing the card away for emergencies only.
    My partner and I have a car loan as well, the only reason we have this is because they were offering 0% interest and well with planning a family we needed a reliable vehicle. We’re still hoping to get rid of the loan faster than the 4 year term though.
    The one debt that I don’t mind getting into is mortgage debt, and I can’t wait to save enough deposit to start buying investment properties.

  5. haha I racked up $10,000 on a line of credit then graduated with $21,000 in student loan debt (I managed to pay off the LOC because I smartened up while still in school).

    Currently I just borrowed $7,000 in student loans for my MBA, but only because it didn’t seem worthwhile to cash out stocks and pay when leaving the money in will generate a small return while I finish up this degree. The student loans are $0 interest while in school so I can just pay them the day of graduation =)

  6. I would swear off student loans at the insane 6.8% the feds like to charge. Now if they were close to 3% or less I would consider using them, especially if they were the subsidized kind that don’t accure interest while in school.

    I broke another of your never evers since I loaned my sister and her husband $40K to buy a car wash. They are paying it back and I don’t see a problem with them paying it off as agreed upon in our contract.

  7. Ninja can you further expand on your thoughts related to not paying extra toward the principle of your mortgage? You seem to be very definitive about that, which is great, considering most people really waver back and forth whether to pay down the mortgage or invest (including yours truly).

    Maybe this is an idea for a separate blog post? (you’re welcome)

    • Melanie it is simply a trade off of risks, if you pay off the mortgage your remove the risk of default and the interest you’d pay, if you instead keep the mortgage and invest the extra you remove the risk of suboptimal returns on your money in the case of the investments going at the historical rate.
      For example: In my case of a note with 2.5% APR (really 1.875% when taken in the tax-deductible portion (I already exceed the standard deduction without the mortgage)). Paying off the mortgage is effectively placing money into a non-liquid bank account returning 1.875% APR (not a rate in today’s bank accounts).

      Instead of paying off the mortgage, if I take the extra and place it into an index fund I could _on average_ get 7% return. This arbitrage results in my money growing at a 5.125% rate. Over 15 years that would mean I would have 53% more.

      An example: 300k 15-year 2.5% mortgage
      Regular Payment: $2000
      Total Payments: $360000
      Interest Cost: $60000

      Expedited Total Payment: $2500
      Expedited Loan Length: 11 years 7 months
      Total Expedited Payment: $345576
      Expedited Interest Cost: $45576

      Savings: $14,424

      Investment Projection: $500/month at 7% return for 15 years
      Final Balance: $158481
      So you get an additional $144057 (158k-14k) for holding your mortgage note longer.
      Even if you wanted to keep the expedited schedule your balance in your investment account after 11 years 7 month is $107792.66 and you could pay off the remaining $76,694.89 and still have $31k left over.

  8. I think paying down a mortgage is only smart if you are close to having it paid off or are going to refinance. Otherwise it’s probably better to diversify and put your money elsewhere. I mean, if I’m in a position where I’m leveraged using money borrowed at 4.5% or below and I’m also allowed to deduct the interest – why would I be in any hurry to reduce my leverage? Seems like you’d be better off putting the extra money elsewhere and getting a better return, then using that money to pay off the mortgage at the same time you would have if you just increased your monthly mortgage payment.

  9. I’m not as anti debt as most followers of personal finance blogs either.
    I currently owe 85k on my house which is worth 190k. That is my only debt and I have over 400k in investments so I don’t consider this a bad situation however I do want to pay off my house because I would enjoy being totally debt free. I’m 9 years into a 15 year mortgage.

    I think 20k or 30k in student loans to get a college degree in a marketable major is not a bad investment in yourself. 120k in student loans in a general degree with no idea what you are going to do for a living is a bad idea. Full disclosure I got a general business degree with no idea what I wanted to do so I speak from experience.

  10. I decided to accelerate my mortgage payments when I ran the numbers.

    The total amount of interest I would pay on my mortgage, if I followed the 30 year plan compared the amount of interest I will pay on my accelerated plan of 10 years, is crazy. I’m saving nearly 90 thousand dollars in interest by paying more upfront.

    The other thing that sealed the deal for me was when someone pointed out that if I break down my monthly payment into principal and interest, for every additional full principal payment I make, my loan repayment term shortens by a full month. And at the beginning of my loan, when the monthly payment has such a *small* principal portion – it’s much easier to knock out a couple extra months of principal payments than it will be near the end of the loan, when the principal portion is much larger.

    So, right now, I’m throwing as much as I can at the principal of my mortgage – because it’s the most effective bang for the buck at this point in the loan.

  11. I just paid off my mortgage. I have three other rental properties without a mortgage too.

    It depends on how much you have, and what financial security is worth. cash is king, but it is nice knowing that you are not paying 4.25% interest.

    Paying off a mortgage is like putting money in a savings account at that interest rate.

    • A savings account that can lose value. Which we know savings accounts can’t so I don’t think the comparison is fair.

      Instead, it’s like tying up a ton of your net worth in a single stock, which typically isn’t the smartest of moves.

  12. I’ve got 100k mortgage and 20k on credit cards. In UK £ which makes things 60% worse than if it as in US $.
    I dont mind my mortgage payments – its better than paying rent – just one of lifes trade offs
    I hate my card debts, but I used them to cover my families expenditure between losing my job and setting up my own business.
    I’m reducing things on the cards by around £600 a month ($1000 ).
    With an income of £2200 I’m spending over half of it on debt repayment, and the rest on household bills and taxes – leaving me with about £270 a month.
    That works out at about 10% disposable income from my pay – I cant wait to be debt free!

  13. I like to leverage myself. Nothing beats a good 0% APR balance transfer fee with a fee of 2-3%. 2-300 dollars in fees is manageable spread out over 15 months and when you can make that money up in dividends or interest.

    When it comes to excesses or luxuries, those are things I am not willing to go into debt for.

  14. I currently pay PMI, as we bought a house last August. I considered how long it would take to save up the appropriate 20% down payment which we were striving for with the housing market gearing up again with housing prices increasing and interest rates shooting up. So we put 5% down on a solid $170k house, paid in cash for $15k in renovations and any furnishings/house items we needed, and banked $10k in our emergency fund (half of which are in not-quite-as-liquid investments). We have a very affordable monthly payment, which we are paying extra on principal so I can say “buh bye” to the PMI that much sooner, which amounts to about $100 a month extra in our payments.

    Overall, I’m very satisfied with how we purchased our first home sooner while banking some money for emergencies at the same time, to ease my troubled mind in case anything happens. With prices and interest rates on the rise, I wanted to make sure we were not priced out of the market in our expensive living area.

  15. I have a little different perspective on this:

    We are paying down the mortgage faster than we need to now, when we have some ‘extra’ funds available. My husband is a transplant patient, and we know that one day the transplanted organs will fail. That will result in a drastic drop in income. I’d like to have the mortgage paid in full before that happens. It’s a lot easier to live on a smaller income when your house is paid. (add to that my less than stellar self control when it comes to spending, and if it’s spent paying down the mortgage, it won’t be spent on the slopes).

    We would still be OK if his organs did fail before the mortgage was paid off, but having it done with would make life easier.

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