What to Pay Down First to Accelerate Retirement

[CoolRich59]

I'm going to be non-committal whether what follows is the right thing to do, but let me play devil's advocate: If you sent $1170, the next payment due is April 1. So what happens if you send another, say, February 1? If they cash the check, either principle gets reduced, or your next payment is then due July 1. Repeat this process, and you either get a principle reduction or yet another advanced due date. Inevitably that "due date" will be beyond the expiration of the loan, except it would already have been fully paid off in advance. So, you're still getting benefit of cash flow of that now-no-longer-due loan payment.

Your point is well taken, but from my perspective, I wanted 100% of the add'l $$ going to pay down the principal. IMO, I should not have to pay the loan company $1170 for the privilege of being able to do so - that just rubs me the wrong way.

 

[Jeffman52]

I don't disagree, but these posts are in the context of the OP, who does not appear to have any of these sorts of "can't control debt" problems. So "all debt is bad" just doesn't apply.


I think I'll take a taste of the home-brew beer I put on tap yesterday, even though it's before noon.

Not a good thing to do for someone with a drinking problem, but just fine if you don't paint with too broad a brush. It's not one-size-fits-all.

-ERD50

Agree it just doesnt apply to the OP.

Keep in mind that most of Dave's audience is heavily in debt and has been for many years and just cant seem to get off the hamster wheel. His get out of debt advice is a great stepping stone into financial independence and wealth. His concepts to that group of people is very solid. Once people learn how to control their spending, and get out of debt. They typically will learn the other concepts of building wealth that might not match Dave's concepts at all.

Hey what kind of beer are you brewing? I was thinking about getting a starter kit and brew some beers. What kind of time do you put into it? I'm a IPA and Pale Ale guy in the summer and more of a Imperial Stout drinker in the fall and winter.

 

[jollystomper]

CoolRich59, I have a similar situation, but with lesser amounts and shorter terms.

2 Car payments, each at 1.95% interest, total $500/month, with a year left on one and 18 months left on the other. At this point the monthly interest amount is so small they are not work paying off early.

Our mortgage is at 2.87% with 11 years to pay it off. We itemize so the effective rate is lower - being in the 28% tax bracket makes it closer to 2% effectively.

These amounts are not impacting my decision to retire. At those low rates, unless you expect to have a monthly cash flow issue in retirement, I would not rush to pay them off.

On the debt discussion, it is possible to have a little debt but it takes a LOT of discipline that the average person does not have. We could have paid cash for both cars at purchase time, but decided to finance them because of the low rate, the non-impact the monthly payment would have on our lifestyles, and better non-debt things to do with the money we would have used to purchase. But this is not a usual situation.

 

[ERD50]

Agree it just doesnt apply to the OP.

Keep in mind that most of Dave's audience is heavily in debt and has been for many years and just cant seem to get off the hamster wheel. His get out of debt advice is a great stepping stone into financial independence and wealth. His concepts to that group of people is very solid. ...

But that's part of my problem with DR. He does not present it as a stepping stone. He just eschews all debt, pretty much at all costs.

Once people learn how to control their spending, and get out of debt. They typically will learn the other concepts of building wealth that might not match Dave's concepts at all.

Not from what I've seen (I mentioned, I watched a few of his videos - on another forum someone was really pumping up Dave's "I hate Credit Cards" approach). Some of his followers were clueless, and he got them on a better track (that's good). But these people then seem to see him as some sort of 'guru', and I think most/many become followers for life.

Even that wouldn't bother me so much, but he uses bad logic and false claims to try to make his case. That's where I get a bit worked up about it. He essentially tells me I'm stupid (or evil? and evil??) for getting those 2%-4% rewards, float and convenience. I'll never get rich that way, so why do it? Makes no sense.

It's like telling a kid that training wheels on a bike aren't just for getting started, and that anyone who takes the training wheels off will never be a good bike rider. They're stupid for taking the training wheels off, you need training wheels to excel at bike riding. Now that makes no sense either.

Hey what kind of beer are you brewing? I was thinking about getting a starter kit and brew some beers. What kind of time do you put into it? I'm a IPA and Pale Ale guy in the summer and more of a Imperial Stout drinker in the fall and winter.

A range of ales. Maybe best to start a new thread, there are a few brewers on the forum, and I think we've probably hi-jacked this one enough with Dave stories! But do it! I can give some tips on a starter kit, most include stuff you won't need, and other stuff you might outgrow so fast that you are better off starting with an upgraded component.

-ERD50

 

[Texas Proud]

I'm going to be non-committal whether what follows is the right thing to do, but let me play devil's advocate: If you sent $1170, the next payment due is April 1. So what happens if you send another, say, February 1? If they cash the check, either principle gets reduced, or your next payment is then due July 1. Repeat this process, and you either get a principle reduction or yet another advanced due date. Inevitably that "due date" will be beyond the expiration of the loan, except it would already have been fully paid off in advance. So, you're still getting benefit of cash flow of that now-no-longer-due loan payment.

I do not know what the name of the loan was way back when.... but in your example the total amount of payments are the same... let's say the payment is $100 per month and you owe 12 months... you can pay $100 each month OR you can pay $1200 now.... if you pay now the loan is paid off, but you did not save the cost of interest.. the principal might only be $1100 and that is all you should pay...

 

[38Chevy454]

Late tot he party here. Since the money you were going to put towards the loan payoffs was after-tax money, and now are going to put in investment account, you should make that a Roth IRA investment.

 

[Jeffman52]

A range of ales. Maybe best to start a new thread, there are a few brewers on the forum, and I think we've probably hi-jacked this one enough with Dave stories! But do it! I can give some tips on a starter kit, most include stuff you won't need, and other stuff you might outgrow so fast that you are better off starting with an upgraded component.

-ERD50

OK then...

http://www.early-retirement.org/forums/f27/who-brews-88071.html#post1923857

 

[Markola]

I feel most of Dave Ramsey's debt advice "is wrong and is to be ignored". Maybe more misguided than 'wrong'.



He is so debt adverse that he leads people to make bad financial decisions. I listened to one of his radio shows...



-ERD50

Not sure from this that you are in a position to judge "most" of Ramsey's advice. Solemnly ending my relationships with credit cards and car loans was a formative step on my path to becoming the millionaire I am. Perhaps read the book that helped me, then judge.

 

[ERD50]

Not sure from this that you are in a position to judge "most" of Ramsey's advice. Solemnly my relationships with credit cards and car loans was a formative step on my path to becoming the millionaire I am. Perhaps read the book that helped me, then judge.

I've seen enough to know, objectively, that he is deceitful in many of his presentations. I don't like that, and I can't excuse it. He could do better.

That doesn't mean that he hasn't helped some people. I'm sure he has. But that's no excuse for misrepresenting things. Just tell it like it is.

-ERD50

 

[Markola]

Fine, you don't like him. I can't stand to listen to Ramsey's show, either, and think his absolutist, cold turkey approach to debt is more than I need today. Still, the electric shock treatment from his book jolted me into a big and healthy step forward to allowing my 50+ savings rate in recent years. I was already saving strongly in my retirement plans but didn't have a monthly budget and good discipline on day to day spending. His book helped me focus on that area.

Remember, people on this forum don't compare to the average American consumer. We are mostly freaks of nature, Olympic athletes of saving, the Millionaires Next Door featured in that classic book. Most people are spending all they have and more, regardless of income levels. There is a nation full of people out there who think it is normal to be drowning in consumer debt. He manages to reach a lot of them with a clear and simple path out of debt and lots of encouragement, which on balance, I think, is a good thing. Anyway, sounds like the OP got the plan he was looking for, so good luck!

 

[ERD50]

Fine, you don't like him. I can't stand to listen to Ramsey's show, either, and think his cold turkey approach to debt is more than I need today, though the electric shock from his book provided a big step forward to allowing my 50+ savings rate in recent years. But there is a nation full of people out there who think it is normal to be drowning in consumer debt. He manages to reach a lot of them with a clear and simple path out of debt and lots of encouragement, which on balance, I think, is a good thing. Anyway, sounds like the OP got the plan he was looking for, so good luck!

You don't seem to be hearing what I'm saying. I'm fine with a "cold turkey" approach to debt for those who need it, and do not criticize him for that at all. But that doesn't make it right for him to misrepresent things, and (strongly) infer that those who can manage debt are stupid, and that everything about the credit companies is evil.

An Analogy: Let's say you are extremely lactose intolerant. You get good advice to avoid lactose in your food. Fine.

But it's not right for the person giving that advice to characterize the entire milk producing industry as "evil snakes". It isn't right to characterize anyone who does use milk/cheese products without problems as "stupid" and "playing with snakes". It doesn't make it right to misrepresent the statistics and cause/effect of the entire milk/cheese industry. And it isn't right for this advice-giver to portray himself as some kind of hero, because he rails against the milk/cheese industry.

Or substitute "chain saw" in there, with you as a 'klutz' who just can't seem to handle one safely. So no one should use chain saws, and the chain saw companies are "evil snakes".

As I said, just tell it like it is. If you can't use the tool wisely, then maybe it is best to refrain from using it. But don't paint the tool as 'bad', competent users as "stupid", etc.

The best approach is to say "refrain.. until you learn to use the tool wisely". If that is "never", then it's "never", but it doesn't mean that is the case for everyone. Anything else is a lie, and I kinda like the truth.

Simple Question - who is better off:

Person A: Has learned to use debt wisely, because they were taught about it, and makes most purchases with a credit card, spends no more than they would have (maybe less) than if they used cash, gets the float, convenience and flexibility of a CC, and gets 2% - 4% back on all those purchases.

or...

Person B: Was never taught how to use debt wisely, avoids it, so does not get 2%-4% back on most purchases, has to maintain a higher level of cash to handle these expenses (which means there is less in his long-term portfolio, earning long term rates), has to go to the ATM, has to carry that cash on him.

Person A will grow their portfolio faster, that extra 2%-4% just keeps growing as an investment. They are far better off. But Ramsey won't admit that, and lies about it. And hurts the people who could grow to benefit from that advice.

-ERD50

 

[donheff]

You don't seem to be hearing what I'm saying. I'm fine with a "cold turkey" approach to debt for those who need it, and do not criticize him for that at all. But that doesn't make it right for him to misrepresent things, and (strongly) infer that those who can manage debt are stupid, and that everything about the credit companies is evil.

An Analogy: Let's say you are extremely lactose intolerant. You get good advice to avoid lactose in your food. Fine.

But it's not right for the person giving that advice to characterize the entire milk producing industry as "evil snakes". It isn't right to characterize anyone who does use milk/cheese products without problems as "stupid" and "playing with snakes". It doesn't make it right to misrepresent the statistics and cause/effect of the entire milk/cheese industry. And it isn't right for this advice-giver to portray himself as some kind of hero, because he rails against the milk/cheese industry.

Or substitute "chain saw" in there, with you as a 'klutz' who just can't seem to handle one safely. So no one should use chain saws, and the chain saw companies are "evil snakes".

As I said, just tell it like it is. If you can't use the tool wisely, then maybe it is best to refrain from using it. But don't paint the tool as 'bad', competent users as "stupid", etc.

The best approach is to say "refrain.. until you learn to use the tool wisely". If that is "never", then it's "never", but it doesn't mean that is the case for everyone. Anything else is a lie, and I kinda like the truth.

Simple Question - who is better off:

Person A: Has learned to use debt wisely, because they were taught about it, and makes most purchases with a credit card, spends no more than they would have (maybe less) than if they used cash, gets the float, convenience and flexibility of a CC, and gets 2% - 4% back on all those purchases.

or...

Person B: Was never taught how to use debt wisely, avoids it, so does not get 2%-4% back on most purchases, has to maintain a higher level of cash to handle these expenses (which means there is less in his long-term portfolio, earning long term rates), has to go to the ATM, has to carry that cash on him.

Person A will grow their portfolio faster, that extra 2%-4% just keeps growing as an investment. They are far better off. But Ramsey won't admit that, and lies about it. And hurts the people who could grow to benefit from that advice.

-ERD50

+1. That said I never watch Ramsey so I don't know if he is really so categorically anti CC. As ERD says, lots of us have multiple lines of credit with points or cash back and never pay interest on them. I find it amazing that so many people use debit cards instead of credit cards.

 

[pb4uski]

FWIW, I just had my 1st anniversary with our Citi Double Cash back card... we earned over $650 in rewards over that 12 months... that's not chump change to Ramsey's listeners who can manage debt so IMO for him to claim that credit cards are bad and shouldn't be used at all is pure ignorance.

Plus for major purchases I get a free extended warranty.... collected $700 on that a few years ago. Plus the protections of a credit card if you have a dispute with a vendor can be quite valuable.

 

[Koolau]

I suppose one could make the argument that the more CC cash-back you receive, the more you must have spent! Still, those rebates are nice and we are within our projected spending (note, I didn't say budget). So it's all good. YMMV

 

[samclem]

Thanks everyone. I really appreciate you all taking the time to reply.

Based on your input, yesterday I cancelled the scheduled extra payments to one of the car loans and to the mortgage and "reset" them to the regular monthly payments.

I was going to redirect those $$ from our checking account into one of our investment accounts when I had a related idea. I checked with my employer and learned that I could "split" the direct deposit of my paycheck.

So, now those $$ that went to the extra loan payments will be deposited directly into the investment account. And, as we find ways to cut spending, we will increase the amount that gets directed into that account.

More importantly, I've been cutting and pasting info from this forum and emailing it to my kids. While I regret not doing more to prepare for retirement earlier, I'm determined to "convert" my kids so that they can start applying these lessons now while they are in their 20s.

All this is great. Now the next step: As each of the two auto loans get paid off, immediately increase the size of that direct deposit to your investment account by the same amount as the expiring loan payment. You guys are already used to living without that money, this is a painless way to increase the amount you put away every month.

And, along the same lines, when you get a pay increase in future years, dedicate a big slug of it to your retirement investments. This is what helped us a lot--we increased our spending as my career progressed, but at about 50% of the increased pay. The rest went into the retirement portfolio. We didn't feel deprived (we were spending more money, after all), and it significantly increased the level of our savings.

If you never see it, you don't miss it.

 

[brucethebroker]

Sure sounds like this has become the Dave Ramsey/Credit Card thread.....

Back to OP. Not being able to retire with a mortgage is, IMHO over hyped. A reasonable mortgage (mine is $600 a month) should not be considered anti-retirement. Personally, I would rather have cash in hand than to pay off a 3% mortgage. We like to take the occasional risk and pay cash for value investments that occasionally pop up. What could be better than paying 3% (to the mortgage company)?

Cash flow in retirement is your friend. If you can pay a mortgage out of your anticipated cash flow, and don't feel "poor", what is the big deal? Yes, you probably should not use 30-40% of your monthly cash flow, but what about 15-20%?

Many confuse psychological concerns with financial. Yes, psychologically, it might feel better NOT to have a mortgage in retirement. But that does not mean it would be the best financial strategy. Certainly not with a 3% mortgage....

 

[Trumpcardz]

L

 

[CardsFan]

I find it amazing that so many people use debit cards instead of credit cards.

This amazes me as well. Independent of any cash back offer, you get free float and much better protection from fraud and identity theft. Plus the previously mentioned extended warranty.

 

[CoolRich59]

All this is great. Now the next step: As each of the two auto loans get paid off, immediately increase the size of that direct deposit to your investment account by the same amount as the expiring loan payment. You guys are already used to living without that money, this is a painless way to increase the amount you put away every month.

And, along the same lines, when you get a pay increase in future years, dedicate a big slug of it to your retirement investments. This is what helped us a lot--we increased our spending as my career progressed, but at about 50% of the increased pay. The rest went into the retirement portfolio. We didn't feel deprived (we were spending more money, after all), and it significantly increased the level of our savings.

If you never see it, you don't miss it.

Thank you. Absolutely.

Discussed doing just this with the DW: Once the car loan is paid off, that amount immediately gets added to the automatic deposit into our retirement savings. Assuming I get a raise this year, the amount of the raise gets added. If I get a bonus, it goes in as well.

 

[CoolRich59]

Back to OP. Not being able to retire with a mortgage is, IMHO over hyped. A reasonable mortgage (mine is $600 a month) should not be considered anti-retirement. ... If you can pay a mortgage out of your anticipated cash flow, and don't feel "poor", what is the big deal? Yes, you probably should not use 30-40% of your monthly cash flow, but what about 15-20%?

I agree with you. But, in my case, our mortgage is $2,300/mo and we have 12 years remaining. As things stand right now, at my current savings level, I don't want to have to service that debt with retirement funds.

 

[MarieIG]

I my have regretted how I handled some of my investing but I've never regretted paying off my mortgage early.

 

[mystang52]

I my have regretted how I handled some of my investing but I've never regretted paying off my mortgage early.

+1 My feelings are the same. As I've mentioned in other threads on this topic, one should not discount the emotional aspect (at least for some) of being rid of the mortgage, and of course other debt.

 

[pb4uski]

Opposite for me.... we have a mortgage.... refinanced for lower rate and a little cash out just before I retired 6 years ago.... the monthly payment is on autopay and is automatically logged into Quicken... other than seeing those entries in my bank account and in Quicken and a monthly piece of mail acknowledging our payment I do not give our mortgage a second thought.

I recall my Dad, who was very successful, once saying that one of his few regrets was that he did not use leverage more and I took his comment to heart.

My peace of mind is in knowing that anytime that I want I can just sell some securities and pay off the mortgage. In the six years since I refinanced, my investment portfolio has earned many times the 3.375% I pay in mortgage interest.

 

[Maenad]

More importantly, I've been cutting and pasting info from this forum and emailing it to my kids. While I regret not doing more to prepare for retirement earlier, I'm determined to "convert" my kids so that they can start applying these lessons now while they are in their 20s.

If your kids are receptive to your advice, I recommend this blog post from Jim Collins. He talks about what advice is timely for people your kids' ages.

His "Stock Series" is a classic for a reason, so I recommend that too.

And his video on F-You Money is awesome.

 

[ERD50]

I agree with you. But, in my case, our mortgage is $2,300/mo and we have 12 years remaining. As things stand right now, at my current savings level, I don't want to have to service that debt with retirement funds.

Can you explain how "service(ing) that debt with retirement funds" is a factor?

The math tells me that if you pay it off pre-retirement, you then have less post-retirement funds. Seems like mostly a wash to me, not a go/no-go decision point.

Some people mention taxes from the extra cash flow required to pay the monthly mortgage, but wasn't the money used to pre-pay the mortgage taxed? And if not, then it is available for the monthly payments. Again, seems like mostly a wash to me.

-ERD50