Lanny’s Debt Update

Debt.  What is debt?  Is this America’s Horror Story?  Is it chains strapped to your hands and ankles?  Well, by definition, Debt is “An amount of money borrowed by one party from another. Many corporations/individuals use debt as a method for making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.”  Thanks Investopedia for that.  Debt can be used in two ways – to pay for something that we use day in/day out as a liability that does not generate cash for us OR debt can be used to leverage buying an asset that produces a greater return than the cost of the debt itself.  I have debt and I wanted to share an update where I stand based on today, Mid-April.

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Debt of Lanny

Now, I am going to go full disclosure with even more of my life here, to help describe more of my journey that I am on to financial freedom.  I have debt and I have quite a bit from a dollar stand point.  Here is a wonderful screen shot of my debt as of this writing, we’ll say – Mid April 2015:

Lanny Debt

 

There she is, all $94,487.02 of Debt.  $82K to a mortgage and $12.5K to the car.

The Mortgage – To begin, I bought a house in September 2011, which the real estate market was still almost at the trough or bottom that it was in.  A trough is the lowest point prior to going to a peak, similar to mountains – you have peaks and valleys – I essentially bought my house close to the “valley” of real estate valuations over the last decade, plus some.  I did it!  Right?  The American Dream?  Well, I had a roommate, where at the peak of him being there, was producing me an estimated/annualized $6K of cash, but I had to kick him out, hence my article of losing the roommate and a check that went with it.  I have been by myself now for 8 full months, a lot of traveling has happened during that time and I’m still eager to find out what the identity of me living on the side that I live at – east side of Cleveland.  I have now lived here for 3.5+ years and my mortgage has dwindled down from $88K  to $82K, or a little over $1,500 per year.  I have a 30 year mortgage at 4.375% rate, so I played the cards decently well when I was buying my house.

I continue to find myself on the other side of town – for example, I am on the west side of Cleveland typing this at an incredible coffee shop – Blackbird Bakery (picture below).   Which isn’t far by any means, as the drive is anywhere between 25- 30 minutes.  But making this trip several times a week begins to add up after a while.

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I think I am finding myself typing my mind down a path that will be a topic for another day.  This time last year, funny thing, my mortgage was at $85,010.  Therefore, I’m actually down $3K over the last 12 months, primarily due to my extra payments to the mortgage (I have since made 2 $500/payments or $1,000 extra to principal in total since 12/31/14).  Actually, scratch that – in June of 2014 I made one extra payment ($446.96) in fact and have paid $1,447 over the last 12 months right to principal.  This will tremendously reduce the amount of time/years left to the mortgage, as making one extra payment per year reduces your time horizon by approximately 5.5 years.  One can say – I’m on sort of hyper mode right now – I can see my mortgage lasting somewhere around 17-20 years if I continue my goal of $2,000 extra to principal per year.  Fortunately, I am halfway to the goal this year, based on my quarterly update posted a week or so ago.  What else has happened during the last 3.5 years, though?  Oh that’s right – the real estate market has bounced somewhat back and is slowly taking its trip back up the peak, not much, but I feel I have gained around $15k-20k in value since my purchase, or roughly 3.5-5% appreciation per year.

This has led to many questions, however, such as – should I invest or pay down the mortgage?  This is a very, very tough call and one that I’ve asked our twitter following and readers on the blog, often.  I love the discussion – as the viewpoints are all over the place, literally.  Some say – go HAM (hard as a mother…), some say don’t add a single penny, others say – hey do an extra payment every now and again or even add $50 to each payment.  Heck, sometimes I wish I was in Bert’s small sized 10.5 shoes to see what it’s like to rent and share the cost, as he had moved in the summer of last year.   However, here I am – my fixed payment with escrow now is approximately $851.17, thank God for my ever rising property taxes…  this is still very close to when I broke down my fixed monthly expenses last year.  There is great math involved with the true rate/cost of my debt and borrowing, as well as my payments on what it “ACTUALLY” costs me with my after-tax impact.

From calculating out the mortgage interest deduction – my true “real” tax effected rate is 3.28%.  How is this calculated?  I approximated my annual interest as of this writing to be around $3,588 for the year.  To note – mortgage interest is tax deductible if you itemize your taxes.  Please refer to the irs.gov website or your tax professional – I am a CPA and therefore, am a bad ass when it comes to taxes… joking, joking.  Since I am, sadly, in the 25% tax bracket, you take 75% of that amount or $2,691.  Taking $2,691 divided by $82,000 = 3.28%.  What does that really mean?  Well – if I can generate a yield on a stock above that with an after tax impact of 85% (1-15% for dividend tax rates), then I should invest rather than pay down the mortgage faster OR if I feel the appreciation of an investment can be higher than my cost of debt, then go that route.  As you recall in my November post on my goals for 2015 – I am doing the hybrid and applying $500 in extra payments per quarter or $2,000 for the year.  However, your yield on cost generally goes higher, therefore – this should not always be followed but is a suggestive comment/analysis.  As of now – I am continuing to live here, looking for means to reduce my overall monthly payment (challenging the appraisal and property tax assessment – I’ll show YOU, Cuyahoga County) and continue to make payments, as the after tax cost (when including my property tax deduction), ends up reducing the amount a bit.  My end of year projection ends up being roughly $80,000 remaining by 12/31/15, if I play my cards right – it’ll tip just below that into the $79K range.

The Auto Loan – Well, now let’s segway into this beast.  I am now at $12,481 remaining on the auto loan at around 2.2-2.3% interest rate.  Not a huge burden and the interest cost is fairly low.  It’s a 2010 EX-L Honda Accord and is quite luxurious in my mind – the bells and whistles of blue tooth, leather seats, sunroof and navigation – so, damn, lucky.  This shouldn’t take long, but SCREW having a car payment.  At most times – I wish I was Jason or Dividend Mantra, as he gave up his car for the second time and no longer has to worry about any payment, amortizing cost, auto insurance or auto repairs/maintenance.  Cleveland isn’t the best city for public transportation – so that has been binding my ass a bit.  Which you can go revert back to my post — why do I live on the East side of Cleveland… hehehe…

Over the last 12 months, my principal balance has decreased from $15,561 to $12,481 or $3K roughly.  This actually is funny to watch dwindle down, since it is obviously amortized over such a short life.  I took my last car to the limit – over 213K miles and am planning to do so with this car, if I continue to live where I am and own it.  Therefore, I can see another 9+ years with this car at the rate that I place miles on it.  I should be car loan free in less than 4 years and the auto insurance within the next year should be fairly low as well, as my goal is to whoop someone’s ass in that arena.  However, this is a cost and combined with auto insurance is over $350 per month – Ouchhhhhh.  I can do away with this, as combined with the mortgage above – it reduces my efforts to save 60% of my income (still was able to cross it last month) and could continue to give me stock purchase anxiety as it reduces my cash flow to invest.  I like where Bert’s mind is at – he left the public accounting world and lives much closer to his new location and has reduced travel, further making it easier to take public transportation to work and giving more time to his life to find a new method of having a vehicle outside of paying down his loan amount.  Damn you, Bert, I see why you changed your job, though, and am happy for you.  I’ll continue to drive this vehicle for the future, unless my location/place of living/employment changes.  I am expecting to bring this debt down to $12,400 by 12/31/15.

Conclusion for the Readers

How do you feel about the debt load above?  Is it brutal?  Do you think I am killing myself or worrying about too much?  Any tips you’d have for me?  Seriously – any cool/unique ways that I am not thinking of to reduce my payments, debt load and overall – to increase my cash flow?  Please let me know.  Additionally – what type of loans do YOU have?  What is your plan of attack?  Are you car free?  Do you have a mortgage?  Thanks everyone, eager to hear everyone’s thoughts and thank you all again for coming by, I love it.

-Lanny

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8 thoughts on “Lanny’s Debt Update

    • Deets,

      Just read it — I like it. Essentially it’s the auto loan that is crushing me. 60-90 days is what I need to really do to evaluate what I’m doing (work/career wise, location, etc..).

      Thank you for your help and thoughts!

      -Lanny

  1. Lanny,

    I still get surprised by the COL in the Midwest compared to the Northeast. You should feel like a rock star that you have a mortgage balance under 6 figures! Living in the Northeast, that isn’t going to get you much, especially now that I’m in NYC. Your interest rate on your mortgage could be lower, but I don’t know if it’d be worth refinancing with such a low principal balance.

    You committed the cardinal sin in the FI/RE community by taking out a loan on your car!!! The horror the horror! I’m just being facetious. But in all honesty if you really wanted to get rid of the car payment, sell the car and downgrade. I sold my car once I moved to NYC, and am car free! I thought about keeping it in the city, just because my family and friends outside of the city can be a pain to get to by train. But I was NOT paying $400/month to keep it here, so it went bye bye.

    My only current debt is some student loans (under $10k) that I have pulled the reigns back on paying. The two that are left are both at 3%, and therefore I’m in no rush to get rid of them. I pay a little extra, but not too much. I could pay them off tomorrow but I’d rather max out all my tax advantaged accounts first and then worry about them. Come the end of 2015, I’ll probably just get so sick of looking at them in Personal Capital that I’ll pay them off.

    As for careers, I’m still holding strong in public accounting although I made the switch to advisory when I moved to the city. Auditing was not for me 🙂

    Take care,
    FF

    • FF,

      NICE! That’s a pretty small debt load and with your student loan interest not only having a low rate but also being deductible would provide further reasons not to pay that off.

      The auto loan – yes, yes, I agree. I could sell it for close to what I am liable for, wipe my hands clean and find a car that still gets me to point A to point B. I think my ultimate place is like you – not having a car. I have a lot to plan over the next 60-90 days that could come to that, I’m excited.

      Public accounting… Really touchy subject, nice job for switching into advisory. haha

      Thank you for stopping by, definitely appreciate your insight FF!

      -Lanny

  2. Lanny,

    I know how you feel with that car loan. I know you can knock that thing out by figuring out something creative!

    Your mortgage balance isn’t bad at all. That’s really solid. One of the major benefits of living in Ohio – cheap real estate. 🙂

    Best regards.

  3. Car loans suck. Been hating them always. But being car free is not for everyone, for many reasons. Maybe at some point you’ll be able to do it. I personally sold my RX-8 – that I loved deeply – a year ago to keep only the family car (still a nice one) and couldn’t feel better about it. Such a relief!

    I wouldn’t worry about the mortgage that much. It’s still a pretty low one. I’ve always focused on what brought the more returns. So I’ve always prioritized investment over lowering the mortgage. However, I’m doing the exact opposite this year because of the RV trip coming. No capital to invest, all is put on reducing the debt so we can leave AND come back with some money.

    So to me it all depends on your goals and what is the most important for you. It might also change over time and that’s just fine! 😉

    You’re already doing good Lanny!

    Cheers!

    Mike

  4. Lanny,
    I don’t know how much your itemized deductions add up to without mortgage interest, but I just wanted to point out one thing that is often overlooked, even by CPAs, when calculating effective mortgage interest rates:

    Without itemized deductions, you’d still get a standard deduction, so if your itemized deductions minus the standard deduction is less than your mortgage interest paid, your effective mortgage rate is not (1- your marginal tax rate) times your mortgage interest paid / outstanding mortgage balance. I don’t have stats on it, but given average incomes and average non-mortgage itemized deductions, I’d have to assume the effective mortgage rate of the majority of Americans homeowners is more than (1- their marginal tax rate) times their mortgage interest rate / outstanding mortgage balance. (Actually, I have a minor quibble with using the ending outstanding mortgage balance to calculate your effective rate, but let’s just ignore that for now)

    Since you’re a badass at this, I assume you’ve already thought of it, but just in case some less badass people are reading…

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