The True Liability – Not Reaching Your Number!
The True Liability – Not Reaching Your Number!
27 1/2 years left on a fixed rate 2.85% (student) loan … sweeeeet [AJC: queue Homer Simpson drooling] …
It seems that Scott is the poster-child for ‘big debt boy made good’ … what do you think?
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In this next exercise, our main topic is to take a serious look at our liabilities, ie; who we owe, how much we owe and what do we intend to do about it.
My wife and have have started 2009 fresh from the beginning in what Adrian has called Money Making 201 . We completed our Money Making 101 by the end of 2008 by paying off the last of our consumer debt, or what many would call “bad debt”. In Making Money 101 , the whole idea is to clean up your financial act basically by paying off your bad, unsecured, consumer debt, such as credit cards, personal loans, car loans and any other similar debts that cause you a monthly liability. It’s also a chance to get yourself in position to obey various financial rules that will aid in you ultimately building your wealth as fast as possible, provided that you are also working on ideas for your growth engine, so you can begin generating some serious cash to invest, or start your own business.
It’s getting spending under control as well and getting into good money managing habits that will basically clear your “financial runway” so that you can build up some really good speed for a better takeoff to build wealth, and continue these new money managing habits in the future, even in Money Making 201 and 301, so that you keep your wealth once you’ve reached your Number by your Date.
We can certainly write the book now on Money Making 101. Just a few short years ago, my wife and I had a networth of negative $225k. This debt consisted of a mountain of credit card debt, two insane car loans, personal loans, my wife’s student loans (at an outrageous interest rate of 12%) my fresh new student loans and a few other blunders here and there.
Before ‘meeting’ Adrian online and talking to him about his ideas for 7 Millionaires In Training!, We had paid off a little more than half of this debt and we started the 7MIT program at I believe around negative 90k in debt or so. Since that time last year, we continued to plug away, paying off each debt according to the Debt Avalanche. We used a method similar to Dave Ramsey’s Debt Snowball to pay off the first half of the debt in which you simply list your debts from smallest to largest, pay the minimums on all the others except for the smallest, in which you throw everything but the kitchen sink at, then as it’s paid, you roll what you were paying on it onto the next largest debt in addition to the minimum that you were paying on it, and simply repeat until all debt is clear. Ramsey does this approach because he believes that you get quicker ‘traction’ on paying off your total number of debts faster, thereby seeing quicker results and keeping the intensity up.
It worked quite well for us actually, as we got excited month after month as we were paying off individual creditors and accounts fast, but to honor Adrian and his system once I was selected as a MIT, we switched over to the Debt Avalanche. With this system, you pay off your largest interest rate debts first, thereby giving you a faster ‘return’ on your debt payment and truly, mathematically paying off all your total debt the fastest. This worked excellently for us as well!
Now that we have paid all of this off, we still however do have 3 very distinct debts. The first one is my student loan. A couple of years ago, my wife and I planned to place that student loan in the mix with all of our other bad and unsecured debt and simply pay it off as fast as possible according to Dave Ramsey’s program as well. We actually did pay a large chunk of it off, but put the breaks on an early payoff for it shortly after I was selected as one of the 7 MIT’s. We had several discussions about this loan with Adrian and the rest of the 7million7years community and decided that we were not going to pay it off early because it is at an astoundingly low interest rate. I was able to lock it in a 2.85% shortly after I graduated, so you can see, average yearly inflation alone is eroding this loan on top of my minimum payment and there are so many other ways to get a return on our money of more than 2.85% that it just doesn’t make sense mathematically to pay it off early.
Our other 2 debts consist of the mortgage on our home and the mortgage on our rental property. If you haven’t been keeping up with our discussions regarding why you should NOT pay off a mortgage early, then you would definitely want to read up on those. So hence, we are not paying a single penny extra to any of these 3 debts above their minimum payments. All three are set up for 30 years(26 1/2 left on our rental, 27 1/2 yrs left on my student loan and now 29 years left on our home).
So you can see our main purpose right now is to continue to keep our lifestyle and living expenses exactly where they are, which is significantly below our monthly income, save every penny above those living expenses and use this cash to fuel a combination of small businesses, real-estate and stocks. This is the growth engine that Michael Masterson states is necessary to achieve around a 45% annual compound growth rate. If this method does produce us even close to a 45% annual compounding growth rate, we will pleasantly overshoot our Number or simply achieve our number faster than our Date!
So, basically, you have no plans to pay off your $90k debt early? Am I reading this correctly? Nice deal.