Rapid Debt Payoff is catching on in some enlightened financial circles:
sources:
http://journals.aol.com/brujonte/TheFredBlog/entries/357
and on CNN & fortune Magazine:
http://money.cnn.com/magazines/fortune/fortune_archive/2003/06/16/344218/
"Everyone should be aggressively paying off MORTGAGE debt as fast as possible."
- Suze Orman, financial planning self-help guru and author of six best-selling financial self-help books
Suze has always advocated paying off credit cards. Now she includes your mortgage, highlighting the devastating impact of debt on ordinary families.
Pay off all of your debt in 5-7 years using the money you already make. Find out why financial guru and best-selling author, Suze Orman, is advising her millions of followers to "Pay Everything Off as Fast As Possible!"
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As those who have been following my blog since I began a couple months ago (March 25, 2006), know that I started off hard touting John Cummuta. Since then I have brought in Dave Ramsey, and have tried to merge the teachings of two of the greatest financial teachers I have ever heard. Cummuta makes since when he talks about eleminating debt before building your savings. However, Ramsey also makes since in having that $1000 emergency fund in place first, so that you don't use the credit card at all anymore.
"Today we live in a world with more unknowns than I have ever seen in my life," she says, sitting in the lobby of the CNBC building in Fort Lee, N.J. Orman tends to infuse even one-on-one conversations with oratorical intensity. "Having talked to literally tens of thousands of people, I can say that what is good for America--and not just what is good theoretically, or for some financial wizards, but what is good literally--is not having credit card debt, not leasing a car, and not having mortgage debt. This is not good for a human being. It's just not. All these financial shows spending all their time telling people what to do with their money ..." She waves her arms toward the rest of the CNBC studio. "Well, get out there and talk to people like I do. The truth is, they haven't got any money. Who has money to invest anymore? Invest what?" - Suze Orman
I am glad to see Suze come on board and recomend paying off all your debts including the mortgage. I think it's time that I look up her program again on CNBC and give it a watch to see what she has to say. It's been to long since I have watched her.
"It may be fabulous for you to get a tax write-off. But if something happens to you, ladies and gentlemen...I promise you one thing: Uncle Sam is not going to let you move in with him." - Suze Orman
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If a person lacks financial discipline, Suze's advice is sound. A mortgage is like a piggy bank: Once you put money into it, it is hard to get it out. So you learn to make do with what you have, even as times change. If absolutely necessary, you can pay the stiff price to refinance, or get a line of credit, though these rates aren't as good.
ReplyDeleteFor people with financial discipline, investing extra cash in CD's will yield a higher return than paying down the mortgage.
For example, I have $17,000 saved. I could pay down my 6% mortgage with it. But it makes more financial sense to purchase CD's at 5%, due to the deduction on the 6% interest. Interest rates may continue rising, while my mortgage rate is fixed. Plus I have easier access to the cash in an emergency. I still have a one-way piggy bank--just a savings account of CD's that I don't touch except in an unplanned emergency. But I don't have to pay for a refinance to break it open.
contents and found no detailed 19, were overweight or at risk of and warmth about eccentric families in postcard view. provided evidence of that from 3,000
ReplyDeleteHaving watched Suze's show for years, and hearing her expound on her views on mortgages over and over, I don't believe she actually said this, or at the very least that this comment was taken out of context. Suze has always categorized mortgage debt as good debt (as long as you can really afford the mortgage!). She has always advocated paying extra on the mortgage only after all the bad debt is paid off AND you think you are going to be living in that home for the rest of your life. If she did, in fact, say otherwise, please provide a link to the original article.
ReplyDeletehttp://journals.aol.com/brujonte/TheFredBlog/entries/357
ReplyDeleteand on CNN & fortune Magazine:
http://money.cnn.com/magazines/fortune/fortune_archive/2003/06/16/344218/
I must take issue with anonymous, above: There's no such thing as good debt or bad debt. There's just debt of differing rates. If it costs you, how do you justify the cost? If you have investments worth higher returns than the rate on your debt, this is the only argument for maintaining it.
ReplyDeleteI'll disagree with anonymous. What many financial "gurus" out there fail to include in thier mathmatical calculations is RISK. Whenever we're making financial decisions, we must include risk as a factor.
ReplyDeleteTaxes? OK, let's talk about Taxes on a home. So, you're saving the TAX DEDUCTIBLE interest huh? Does that make it a good investment? Let's do some math:
100K Mortgage @ 6% Interest. You pay $6,000 per year in interest to the bank. The IRS allows you to take $6K off of your taxable income, so you don't pay taxes on that $6K at the end of the year. To most people, that tax that your saving (at 25%) is around $1,500.
If you DIDN'T have that tax deductible interest payment, you would have to pay an additional $1,500 in interest to the IRS at the end of the year. Many financial planners tell us to stay in debt to our house, in essence paying the bank that $6,000 to keep from sending the government $1,500.
In your case, you've got $17k (earning $850, minus $213 taxes nets $638) that you keep in a CD. You're claiming that this makes more sense than paying off a mortgage that that same $17k in debt is costing you $1,020. However, you get a tax deduction of around 25%, netting you a cost of about $765.
Let me break it down:
In a CD, you're making $638 on your money.
In a Mortgage, it's costing you $765. PLUS, you're putting yourself at risk!
Tell me again how smart it is to stay in debt?
Also, I have a hard time believing Suze Orman advocates paying off any debt...I've heard her talk show before and she really worships at the alter of the FICO score (aka I love debt score).
Dont' get me wrong...if you're debt free except for the house, I would keep that $17k in a money market or savings account as an emergency fund so you don't ever have to get into credit card debt. (Don't put it into a CD, because if you need it, you don't want to incur penalties)
ReplyDeleteThen, pay off the house as fast as you can.
My point with the last post is that it's not smarter MATH to keep a mortgage over saving the money in a CD, but it's smart PERSONAL FINANCE to keep a buffer zone between you and life.
I appreciate your math breakdown. However, I cannot agree with your conclusions.
ReplyDeleteFirst, there is simply no risk on CD's. They are insured by the FDIC. Where's the risk?
Perhaps today I pay $127/yr to keep my $17k available. But that cost is gone with just a quarter point shift in CD rates, and that's likely to occur this year. So next year at this time, I'll be earning a small sum rather than costing one. But we agree this isn't really the point.
Let's talk about personal finance. To address the psychology of money, I created a savings account at my bank. When I put money in it, I promise not to take it out unless there's an emergency. So long as I can trust myself to keep this promise (and so far, so good), this works great.
(In my case, the matter's even more serious. I have a unique property that few banks will finance. I had to call 30 banks just to find a taker. I simply can't risk needing to get access to equity in an emergency. The "piggy bank" aspect of my mortgage is cement-solid.)
So while I like your math, I can't support your conclusions. Right now I pay a tiny sum in exchange for easier access and market investment. Next year the cost to me will be nil. But I gain flexability. And again, there is no risk to CD's.
The risk is in keeping your mortgage.
ReplyDeleteWith that logic, why would you ever want to pay principle on your mortgage?
Why not simply keep taking equity out of your house to put into a CD?
I wouldn't want to pay the principle, because I have more valuable uses for the money. This is what the irs deduction on interest plus 40-year low fixed rates buys me. Let's say three years from now I have $100,000 cash, and I owe $100,000 mortgage debt. Let's say CD rates are 6.5%. My mortgage debt is still 6%. With deduction, I'm earning at least a thousand dollars a year, perhaps more.
ReplyDeleteAs for taking equity out and investing in CD's, first: rates have risen, so a new fixed rate would be like 6.5%. Second: Taking out equity costs $2,000 or more in the one-time fee. The refinance window has mostly closed, and debt at a higher rate runs the plausable risk of failing to exceed CD rates. You could pay it down if that happened, but you still have to recover the $2,000.
If people have an ideological opposition to debt, that's ok with me. If they're afraid they'll spend money they have in their hands, perhaps home equity is a good piggy bank. I want the best return. Home equity is not the best return due to the irs deduction and 40-year low rates. I want the sum in CD's. (For me, I want it in an index fund, due to a capital loss carryover. Tax free gains!)
My buddy had Microsoft stock once, and he cashed it in to pay off his house, so he could be debt free. He regretted this. Of course who could predict what Microsoft stock would do? But one can reasonably predict that interest rates will continue rising from their 40-year lows. I locked in 6%, and I'm happy about that.
Once I've convinced you of this, I want to tell you about my 0% credit card investments. Those are hilarious.
I appreciate the discussion...proves that 2 mature people can disagree about something without being nasty. (seems that's a little rare these days)
ReplyDeleteAnyway, I doubt you'll convince me to borrow on my house to put money into a CD...which I've heard referred to as "Certificates of Depression". Once you account for inflation and taxes, you need to average 5.5-6% just to break even on a CD (of which very few do).
I know it sounds funny...but I'm a guy with a wife and kids. It's interesting how much more conservative I get when it comes to my family.
It's tempting for me to look at some of these schemes or scams and think "you know...I could do that and make a quick buck". And I might have done that before I had kids.
Whenever I think that, however...I tell myself that if, in any investment, EVERYTHING has to go perfect in my life for this to work...it's a bad plan. Not only can I not control the world, but my kids are notorius for screwing up otherwise good plans by getting sick, or needing other medical expenses or lessons or the like.
Don't we all wish we had the foresight to invest in Microsoft? Would I do it now? Probably not. As I said earlier, I'm extremely conservative...and I would probably invest in mutual funds to keep myself diversified.
Great discussion. Thanks.