Debt Level

[cakkd]

I'm 42 years old, and recently went on an overseas vacation with my 61-year-old friend who has been retired since he was 40. Though the way he retired early can;t be replicated, he had some simple advice to me on how I could at least retire at age 65: 1) Make sure you are getting the maximum match on your employer retirement account; 2) Pay off debt, and get your debt level as low as possible.

I know these forums are focused on credit, and I have been focused on improving my credit to get the best mortgage refinancing rate. But isn't lowering your debt level a more important priority? My current debt payments are 36% of my gross income. I'd like to get this down to below 20% in the next three-and--half years. According to my friend, even though my student loan rates are little above 2% and car loan around .7%, I should still pay them off as fast as possible.

It looks like we are going to be fighting deflation for a while, so this means low borrowing rates but also low interest on savings.

Does it then make sense to concentrate now on paying off debt?

[JoshNurse]

I would pay off dept first.  All of that interest is money being thrown away.

Any way to reconsolidate all of your bills into one lower interest payment?  Like you mentioned... in about 3 years you will be debt free and can start putting the maximum amount into your Roth IRA very month.

If you can put any amount into your roth ira while you pay off the debt then it would be even better...it doesnt have to be the maximum.

[Kenny]

At the end of the day, whether you're paying 0.7% interest or not, heck even 0%, it's still money that is owed. That's money that goes into an abyss and never to return. I see what they're saying. I understand it, but it's very hard to put it into practice. I have a feeling that when one does put it into practice and gets all their debt gone.. you absolutely never want to get back to the place where you/we are now.

You're absolutely right that one of the main things this forum should teach is debt reduction. Doesn't matter if you have excellent credit and owe 40k on something, at the end of the day you still owe 40k on something, and won't be able to have the freedom of someone with average credit and no debt.

My goal in the coming years is to go to a place of very little to no debt, and try to start those first steps into building wealth so that one day it might be possible to retire and not have to go to work miserable wishing that I could retire. Of course, if one has a job that's a misery, one should re-evaluate that job.

Sorry for the rambling!

[Gunnar419]

Definitely makes sense to focus on paying off debt! Especially when the interest rates on the debt are higher than the interest rates on any savings/investments you may have -- but really any time just because debt is a drag on the future.

In a way, all of MyFico does teach debt reduction with its emphasis on low credit utilization rates.

[compassion101]

In my life, my student loan is 3.4% and my car is 1.9%, and only 0% balances on CCs so I'd prefer to always put money into retirement/investments.

If your rates on any of your debt are over 8-10% then you should probably be paying off the debt first, especially if it isn't cancellable.

BTW, we are not in a period of deflation, there are other reasons why the intersts rates are currently low. The only time in the last half century that we experienced deflation was in 2009, and even then it was not very much.

[wa3more]

+1 on what Compassion said.

Since you would be paying 8-10% debt with after tax dollars, paying that off would equate to a guaranteed after tax return of 10%. No where could you get that in the markets.

[cakkd]

As for deflation, I was referring to deflationary pressure, not deflation itself. 

At some juncture, building a credit score and reducing debt are at cross purposes. This is particularly the case with installment loans. I want to get rid of them, and lower my debt burden. But having fewer accounts open, less diversity in accounts, and a shorter age of accounts will make for a lower credit score. 

Oh well, besides a mortgage loan (or in my case a refi), if your debt load is less than 20% of your gross income, what do you need credit for anyway? Note that I'm not saying being totally debt free all the time is always the best option, you have to want to have some assets.

But it seems to me the blissful existence is owning assets, having a low debt level, and investing for retirement beat a high credit score while being heavily leveraged.

As I alluded to above, IRs are as follows: car payment 0.7%, 1 student loan 2.1%, other student loan 2.8%. Yes, these are low, but I'd be more comfortable boning up some extra money now and not waiting 10 years to have this debt off my back, even if it's only $22k.

[MarineVietVet]

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@Kenny wrote:
At the end of the day, whether you're paying 0.7% interest or not, heck even 0%, it's still money that is owed. That's money that goes into an abyss and never to return. I see what they're saying. I understand it, but it's very hard to put it into practice. I have a feeling that when one does put it into practice and gets all their debt gone.. you absolutely never want to get back to the place where you/we are now.

You're absolutely right that one of the main things this forum should teach is debt reduction. Doesn't matter if you have excellent credit and owe 40k on something, at the end of the day you still owe 40k on something, and won't be able to have the freedom of someone with average credit and no debt.

My goal in the coming years is to go to a place of very little to no debt, and try to start those first steps into building wealth so that one day it might be possible to retire and not have to go to work miserable wishing that I could retire. Of course, if one has a job that's a misery, one should re-evaluate that job.

Sorry for the rambling!

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AMEN!! Being debt free should always be the #1 goal.

[Anonymous]

It's a difficult pill to swallow, but you just have to make a plan and stick to it.  Decide what amount extra you can throw at those accounts with interest and pay them down as quickly as you can.  Chances are you're paying a lot more in interest than that money is making sitting in the bank.  It took me the better part of 2 years, but I finally got a few thousand dollars in credit card debt paid off and now I have NONE!.  

[cakkd]

I should be down to around 28% debt (of gross) within the next four months. After that, it's a longer slog, but I should be at about 18% in three years.