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Celebrating A Year Debt Free
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It has been a year since we paid off our mortgage, one of the major milestones on our path to financial independence. We have never carried credit card debt or car loans, and we long ago dispensed with our student loans. Living debt free has been one of our most satisfying and liberating experiences. We do not waste time worrying about meeting debt payments, but instead can focus our energy on that which is truly important - spending time with family and friends, and working towards our family’s future. Sadly most Americans will never experience the freedom of living debt free. CNN’s article of October 10, 2005; DEBT: CONSUMERS JUGGLE BIG BURDEN (http://money.cnn.com/2005/10/07/pf/debt/debtmeasures/) sums up the current fiscal state of American households; “Spread over homes, cars, credit cards and student loans, Americans manage unprecedented debts. Americans' love affair with credit cards has continued unabated recently, with the average credit card debt per household reaching a record $9,312 in 2004. That's up a whopping 116 percent over the past 10 years.” Poor financial planning combined with an uncontrollable and insatiable consumer appetite has driven American households to live well beyond their means. As interest rates climb – which due to inflationary pressures is almost guaranteed - many of the most untenable debtors will become insolvent. The changes in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) will make their situation even more dire. While this situation will present fire sale opportunities to acquire more assets, especially in real estate, I am concerned about the health of the financial markets. Will the tightening of consumer spending drive down consumption with detrimental impacts on corporate performance? If so, should I move our portfolio overseas until the markets stabilize, but to where? These are questions we will struggle with as we work towards our next milestones; college and retirement.
About this poster:
Posted by:
LHU
(male, late-30s)
(Posted 10/11/05)
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Responses (9)
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Anonymous
(10/12):
Congratulations - you must not live in California if you already paid off your mortgage and you're in your "mid-30's".
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LHU
(10/12):
New York metropolitan area, just as pricy.
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UESGal
(10/12):
that is truly a great achievment! as a former NYer, I know how tough that is to do in that city, what an accomplishment!
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LHU
(10/12):
The objective of this posting is to provide proof that with a diligent financial plan you can take hold of your financial future and thus your family’s destiny, not to rub salt in a wound or instill an inferiority complex. Before we talk debt, we need to define what assets and liabilities are. In a nutshell assets throw off cash, and liabilities consume cash. An asset can be a stock, bond, (a positive cash flow) rental property, patent, etc. A liability is a car, boat, and – in my mind – a house. Why a house? Well, even though our house has markedly appreciated in a hot housing market, it still has consumed more cash in the form of property taxes, insurance, maintenance, etc. than it has appreciated (this incorporates tax breaks and inflation adjustments). If we had borrowed the money and bought a diversified portfolio of stocks we would have performed much better. But you have to live somewhere… Next – “But you get a tax break…” This is true – except for the AMT (Alternative Minimum Tax) also know as the stealth tax, and is a topic for another posting.
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LHU
(10/12):
As Scuba astutely pointed out COMPANIES that have a low D/E ratios are often viewed negatively, however this has nothing to do with HOUSEHOLDS. The reason COMPANIES are viewed negatively is because they are flush with cash and not investing in ASSETS that can generate a greater return on investment. Nor are they taking advantage of the tax benefits associated with carrying debt. (Note: Microsoft and Intel carry no/low debt. Are these companies viewed negatively because of this? If not, what is so different about them? Oh, I know, details, details, stick to the big picture.) HOUSEHOLDS on the other hand are holding illiquid LIABILITIES (= HOUSES) that consume cash, require large transaction costs to sell/buy, and with more households getting hit by the AMT, often do not generate a tax benefit. So Scuba is correct, (with a few exceptions) be wary of COMPANIES with low D/E ratios, but unless your HOUSEHOLD is buying assets, be careful of your HOUSEHOLD D/E ratio.
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noadvertising
(10/13):
Congrats to you! Too many young people have been sucked into the credit card/gotta have it lifestyle. It's like the TV shows and video games that they're accustomed to--all instant gratification. The current generation wants everything immediately that their parents (or grandparents, depending on their ages) worked their whole lives for, before credit was all the rage. There will always be material things newer/more intresting/trendier/more advanced than what we have. We need discipline to live within or under our means without some stupid commercial or internet ad telling us what we need to own. People are so concerned about their images (what car to drive, what ridiculously expensive purse to carry, what highly advertised shoes to wear, etc.) that they spend and spend to keep up, not with the Joneses, but with whatever trend advertisers push on us. It's utterly ridiculous if you stop and look at it. If I manufacture doo-dads, I pay an exorbitant price to market/advertise them and tell you why you're not hip unless you own a (new!) doo-dad, then I change the doo-dad twice a year and tell you that the old one is no longer hip (even though it's perfectly usable) and that you need to buy the latest one (as I increase my price).
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LHU
(10/13):
Scuba – Thanks for bringing up these points. Yeah, we bought a house, but not because we thought asset appreciation is greater than the cost of capital. We bought the house because we needed a place to live, and owning was cheaper than renting (= less cash consumption) - and I can hammer a nail anywhere I want to. I remember those definitions of asset and liability from my accounting class. The textbooks and course were devoted to corporate accounting, not personal wealth generation. For personal wealth, I subscribe to the definitions proposed in Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money--That the Poor and Middle Class Do Not by Robert T. Kiyosaki and Sharon L. Lechter. This is an easy read (a little repetitive), but with your finance/accounting acumen, will be easy to digest. I recommend borrowing a copy from your library – tell me what you think. After I ran the numbers for our house, I had to concur with Kiyosaki – it is a liability. We adjusted our financial plan based on these facts, and paid down our debt while at the same time building our portfolio of financial assets. So now - based on your definition of Net Worth – the house comprises less than 50% of our net worth, and that percentage is continuously shrinking.
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matthewelync
(10/17):
SCUBA is missing the point. AND you can depreciate rental property for tax purposes. LHU is happy because he paid off the mortgage! In other words he paid off the entier loan it was in effect fully serviced. In fact you sound demoralized because you may have an expensive mortgage to justify, and I hope you locked in a low mort. rate for as long as possible. Besides HOSUEHOLD Debt is viewed much differently than Business debt that leases, borrows for machinery, buildings so businesses do not have to own a worn-out asset. As for a household the less debt the better off they are, as LHU is correct. Plus a fully paid off house is an Asset unless the owner is forced to sell for less than the purchase price which is possible but in many cases esp. in CA- highly unlikely. In fact LHU can refi to pull cash out albeit at higher rates to get more moeny to perhaps buy more assets at depreciated prices i.e mortagage defaults. Id does mnot blw, being debt free rocks.
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Scuba
(10/17):
matthewelync: I think we're all right (LHU, you, and I), we each have sound arguments and pieces of advice. I agree 100% that from a household standpoint, the less debt the better. Having said that, it doesn't mean debt is bad and that's how I read LHU's post/replies. Debt was the enabling factor in his ability to get a house in the first place. To continue beating a dead horse, To really be specific, a house is an assest when its value is worth more than you owe, until then it's a liability. Also, I didn't say anything about rental property, but you are correct and it can be depreciated. I said land (i.e. dirt - 100 acres in Idaho on the Henry's Fork), in which case that cannot be depreciated. As for my situation, I'm a renter so not worried about a mortgage.
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Responses (7)
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TicalBits
(10/12):
so, you posted this to make us all feel inferior?
I for one welcome our new Debt Free Overlord LHU.
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Scuba
(10/12):
While I commend you being debt free, economists and business theory strongly points out that debt isn't always a bad thing (assuming it can be serviced). You wouldn't have been able to buy your house without the debt (i.e. an investment where you felt the cost of capital would be less than any appreciation you might expect to gain from the asset if/when you chose to sell). Therefore, don't be all high and mighty and rub this all in our faces as if we're the morons for carrying debt. In fact, companies that don't have any debt (i.e. low D/E ratio) are often viewed negatively. I made some broad statements, but you get the point.
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Scuba
(10/12):
LHU: You need to pick up a basic accounting text book and look up the definition of an asset and liability. In your definition, what's your net worth since cars, houses, etc. are all liabilities? Additionally, why would someone take on a mortgage and interest if it was something that consumed cash and didn't offer a return greater than the cost of capital (at least with a likely probability). Asset appreciation greater than the cost of captial is why you took on the debt in the first place. Depreciation does not effect cash flow, it effects earnings. Land is one asset you cannot depreciate as it does not "wear out". A key component in this discussion you failed to note is equity. I do agree with you regarding D/E ratios and the examples of INTC and MSFT because of their large cash balances. As a final note, stocks (assets) that tanked during the "crash" certainly didn't "throw off cash" or turn any positive cash flow. Assets and liabilities have nothing to do with cashflow. Debt is a liability, but can be sold to generate cashflow, companies and households do it all the time.
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grandpa
(10/22):
As any economist will tell you, a house is not an asset. In approximately 5 years after you have paid off your house, your insurance and taxes will require the same amount each year as you were paying with your mortgage
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guinness
(10/26):
I may be new to home ownership....but If I dont have a mortgage...I dont have the tax right off.....
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alohaforall
(5/27):
Being Debt Free may sound good but is it really? Wouldn't it be better to be Wealthy or even WEALTHY!
Perhaps you could take the equity in your home and leverage it into one, two or even ten homes. All appreciating and all paying their own way. The true measure of well bing is not debt but NET WORTH coupled with positive cash flow. So please do not break your own arm patting yourself on the back while misleading other people that your philosophy is the best way to live. Being debt free may be extremely limiting to your future growth and net worth (If you only knew how)
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MortgeFreedomFighter
(5/27):
Great You paid off your mortgage and you paid the full interest costs. Unfortunately, you missed an important wealth creation lesson. One creates wealth essentially with debt or OPM. You just did.
Now start your next wealth journey by borrowing wisely to buy an appreciating asset with cash flow, again, using debt.
For those who still have a mortgage to pay, here's hope. Now, you can save half the costs of that mortgage. Look for the new, break through strategies that pay off a mortgage fast. You now know it is possible to pay off a mortgage based on this example. For you, it should take only half the time and costs. In addition, make sure you also have another Asset and Income source to retire on in addition to your home. These of course will depend on taking out some good debt not Consumer Credit Card debt.
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