I've been following TF for several years now and have heard over and over how I need to get out of debt NOW. I completely agree for those who are abusing credit, but how about me?

I have about a $300,000 mortgage that I pay easily, including all taxes, maintenance, etc. I have two car payments that will finish up in 2011, again, paid easily. I save 'thousands' per month into retirement and regular savings.

Am I still somehow screwed if it all goes to hell? If I lose the home, it's not the end of the world. We have no children. I'm still about $200,000k from my home being underwater. Both my wife and my jobs are as secure as the next person's. I mull the idea of selling the home now and renting until the ultimate correction occurs, but that would end my marriage. My wife already thinks my tinfoil hat is a bit large.

I'm just interested in some subjective feedback. Thanks! MJ

What's your back end ratio on everything (DTI) and how long can you maintain it if you lose 50% of your household income?

A quick napkin calc has our DTI at about 26%. We could maintain for quite a while at 50% if we're deliberate.

Let me revise that DTI. Forgot living expenses (power, gas, etc.) Let's say 33%.

26% is IMHO high but not ridiculous. What's "quite a while"? If the answer is "two years", you're probably safe. If it's "one year", you're in the yellow zone. If it's a few months you're gambling that the **** does not hit the fan to any material degree. If it does, you're ****ed.

If this really IS K-Winter you're looking at a decade before things truly turn around. That doesn't mean there won't be good and bad periods in there, as there will be. It does, however, mean that if K-winter started in 2000 we have another 10 years to go.

Thanks Karl. We could do two years if we cut hard. We have the benefit of a lot of our monthly expenses being optional. It would change our lives dramatically, but would not put us behind on any current debt payments.

Gen, what is K-Winter? Thx


Mj, even though I'm in a good position right now, the rate of change in my situation (the derivative, if you know calculus) doesn't have much acceleration in the direction I want it to be going. By making two simple decisions, the acceleration in the direction that I want to be going financially has increased dramatically. I basically identified where my money was being eaten up most by taxes and interest and have chosen to divest myself of those items, as my ownership of them is voluntary.

If you like your wife better than the tin foil hat suggest you stay the course.

You are long $500K real estate with a perpetual put at $300K. If things go very badly (and they may) you'll lose the house - in that eventuality the jobs won't pay the mortgage - but at least you won't be alone!

Don't know your age and the particulars of your income stream.

I am well into my 60's, and I have been a "no Debt" guy on a personal level for my adult life.

The usual exception to that was an easily manageable mortgage.

I've had a great life and been in control of my destiny.

**** happens, and it can happen to you too.

With little or no debt, you can survive pretty much what life throws at you.

My suggestion - keep the house if that keeps your wife happy - but pay off all other debt and do not incur more.

My house is paid off - I plan to live in it to a ripe old age, I don't care what the book value is - I'm happy there.

Amazing how clear your head is when you can make decisions without having to service debt.

If I had put on any consumer debt - I would have been gone business wise several times.

CAVEAT -

I am prejudiced, I am a "no debt" guy

My simple rule on debt.

Absolutely no debt more than "net 30 days" unless the value of the item purchased with debt is probable to increase more than the interest paid for the debt.

That rules out just about everything because if it were true, then the large banks would likely already have purchased it and be reselling it out for a higher rate.

No debt is all nice but really I think debt on things like cars and school loans isn't that bad at all. It's the house loan that ****s you up.

Ex, you borrow 150k for 30 years and you pay double what the house is worth at 5% interest. You borrow 18.2k for 5 years at 5% for a car and you pay 2400 in interest. Pretty clear where I'll be making my biggest down payment.

I think car debt is a big no-no because it eats up your cushion in a fiscal emergency. After the cars are paid off sock away the money and pay cash for used.

All debt eats up your cushion, even the cable bill. Might as well load up on the most unprofitable debt (cars) for bankers vs the most profitable (home).

My long term goals are to never owe over 60% for a home, never pay off a car or student loan and save 40-55% of my monthly income. Then when TSHTF I can get rid of the car and drive my beetle, put student loan into deferment, and focus on keeping my house with the lights working.

I got a loan for a 2 year old car so I didn't have to use any of my $40K emergency fund. I'll be paying $400 over the life of the 36mo loan which IMHO is not a bad deal to not have to tie up $20K. If I lose my job, the market for cars is liquid and we will sell immediately and go to one car and a motorcycle. The market for houses is decidedly not liquid and you are trapped trapped trapped if you lose your job and have a mortgage - though the solution there in a non-recourse state is to simply stop paying. Government school loans are the devil as they are non-dischargeable in a bankruptcy.

My first house will be a grid-tied solar/wind powered trailer home (registered as a vehicle so no property taxes) similar to this: http://www.sustain.ca/models-2/8x36-solo.... with a shop out back. I'll pay cash for the land too.

Why pay any $ in interest to banks? Unless you are making more $ on the asset than the interest paid, I don't see any reason to borrow.

When I look back and add up all the dollars I've paid to banks in interest, fees, etc I just get sick to my stomach. What I could have done with that money!

Gov't school loans are the devil in the discharge aspect but they give you 40 some months unemployment deferment plus they will do a forbearance whenever you want for however long you want. Out of all loans I've had the student loans were by far the easiest to work with. You have to try really hard to default on one of them. 270 days no pay before default but before 60 days is up they call you to make arrangements (deferment) or offer forbearance. These reasons plus the 3.5% interest and the long pay schedule and decently good amortization are why I'll be giving them the minimum. I owe 36.4k and over the repayment I won't even pay but 15k over 16 years in interest. That's not even half my yearly salary TODAY. Adjust for inflation and moving up in career and it really isn't even that much.

I guess if my career prospects weren't what they are right now I would probably say things differently. I certainly was on the no debt period train when all I did for money was poker but that kind of income isn't stable enough for debt service unless you grind a million hands a year or play high stakes. Plus who the hell wants to be 50 and look back and say all I did was play poker? Definitely not me. Also those trailer things are hot. Might have to check one of them out.

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When I look back and add up all the dollars I've paid to banks in interest, fees, etc I just get sick to my stomach. What I could have done with that money!

That's the whole point of never paying full cash for anything and saving it all for a house. The home loan is what kills you. You could pay cash for everything and save for a house but that's going to take forever and you're going to live with family or rent cheap till you get there or end up borrowing 90% for the house.

Edit: http://www.bankrate.com/calculators/mort....

Put all your loans into this calc and show the table and see which ones will destroy you. It shows you clearly which ones you should not pay off vs which ones you should. So like my goal is don't pay car or student loans so that I can not have to borrow a ton for a house. This way I minimize my interest paid.

I guess your best strategy is to have a 30yr mortgage but overpay each month... leaves you a cushion but will work off the principal.

I think one extra payment a year will pay it off in 15.

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You could pay cash for everything and save for a house but that's going to take forever and you're going to live with family or rent cheap till you get there

Therein lies the problem. We are "forced" to live above our means to pay the bankster's usury! The only way to break the bankster's is to stop feeding them.

Yes, that requires cheap rent and living within our means. Otherwise, just face the facts that we are living above our means and debt slavery is the cost of that and pray that you can continue rolling the loans until you die. And realize that you will pay far more in interest to the bank than you would had you waited and paid cash.

I don't feel enslaved by my debt now that I have steady income. I only feel that way when I'm trying to sit on my ass and not do anything. It's like debt guarantees productivity, at least it does for me. Going to work was the best decision I made second to grad school. I feel so much better about life and where I'm going in life it's hard to put into words. I never felt this fulfilled while playing poker even though I had 2 month periods at poker that would almost equal my yearly take home here.

You can't change the game. You don't have the power to do so. The only thing you can do is weigh all the options and make the best decision. I'm living with my parents until I buy a house while driving a nice car and saving 50% of my income. I don't think it's a bad deal at all. If I didn't have so far to drive on a road that's not exactly safe I wouldn't have bought the car I did and I'd save 75% of my income.

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Yes, that requires cheap rent and living within our means. Otherwise, just face the facts that we are living above our means and debt slavery is the cost of that and pray that you can continue rolling the loans until you die. And realize that you will pay far more in interest to the bank than you would had you waited and paid cash.

The only loan that does this to you is a home loan or CC. Cars and student loans don't. You can dodge the majority of this if you play it right.

New student loans are fixed at 6.8% for life. This changed for loans originated around 2006 or so.

Yeah the last 8.5k I had was 5.8% applied at 6.8%. The rest of the 36k is at 3.5%. My brother and friends finished before 2006 and they all have under 3% on theirs. Sucks that this time around they want drop the rates like they did when Ben dropped them after 2001.

If you cut expenses and can go for 2 years jobless, you're better than most, and will be last on the foreclosure list.

At the same time, say you have an 80% mortgage on a home you bought at the top of the market. If you sell now, you'll take a hit, but you may not be able to get a loan if you wait until the market tightens further.

IMHO:

1) Debt on a depreciating asset is dumb. This includes cars, motorcycles, boats, etc.
It used to not include houses but things are different now.

2) People spend too much time looking at the monthly payment, and not what total item cost is. There's no sense of VALUE anymore. Sure that ****box car only costs you 250/a month for 6 years but is it really worth the 20K you'll end up paying for it?

3) A friend once told me her dads rule of thumb was, of your net income, 25% to housing, 25% to car, 25% to living expenses and 25% in the bank.
Now, housing has gotten more expensive and having it equate to the cost of your car is silly and not possible, but the 75-25 spending to saving rule still makes a lot of sense, even if you divvy it up a little differently.

4) Debt used to increase the worth of something or to better your situation makes sense, within reason. Education (though this is truly outrageous in cost these days), expanding a business, buying a house that will increase in value (in the old days) etc.

Just my $.02.