The Thrill Of Paying Down Debt And Having No Money Is Addicting
Do you get a thrill being broke? For some reason, I do. I’m not sure whether it’s that motivational fire it gives me to work harder for my next paycheck. Or, the fact that when I have no money, I appreciate having money so much more. Remember all the fun times you had as a student with hardly any income? That’s the feeling I love. Every time the bank account runs dry, I go into survival mode just like the starving student and figure out a way to make things happen.
Currently, I can’t for the life of me figure out what else to spend money on for the rest of the year besides the basic necessities. I paid for my club membership and a couple new tennis rackets earlier this year. There’s no need to buy a new used car anymore. The last thing I want are more clothes and shoes after going to Goodwill 12 times this year already. Meanwhile, there’s just only one more week-long vacation I’m planning on which has already been budgeted for.
For the past couple months, I’ve been mulling over whether to pay off some more rental property mortgage which costs 4%. I’ve been going back and forth for a while until I just said screw it one afternoon. I’m gonna pay a slug of this sucker off!
The next step was to decide how much to throw at it. I refinanced to a 5-year ARM last year when the 10-year yield dropped to 2.65% in 2010, and managed to lock in the investment income rate of 4%. 4% so happens to also be my bogey for a risk free rate of return I will accept for doing nothing.
In the past, I had been just dumping all my excess cash into 5-7 year CDs at 4-4.25%. The best CD rates of the same duration are now only yielding 2.5% after doing some checking. Clearly, the next best risk free thing to do is pay down my 4% rental mortgage.
DECIDING HOW MUCH TO PAY DOWN
After much internal debate, I decided to pay down a $50,000 slug to save $2,000 a year in mortgage interest expense. With barely any cash leftover after ear marking funds to pay for property taxes, charity, and pay for some of my parent’s home remodeling, I’m pretty much tapped out! Here are some things to think about before deploying all your liquidity to pay down debt or buy that third vacation home:
* Decide if there’s anything else left you need to buy. I racked my brain to come up with bigger ticket items other than the upcoming vacation and property taxes and I couldn’t figure anything out. I don’t want to buy a new or used car to replace Moose, but if I need to, I’ll just save for several months and buy something. I’ll probably buy some gifts during the holidays and go on another short vacation to Lake Tahoe as well, but all that can be funded from salary.
* Decide what would happen if there was an unforeseen large expense. I don’t believe in an emergency fund as described in my article, “The Emergency Fund Fallacy.“ Emergencies are all too frequent, and there’s no point discriminating between certain dollar bills. Make sure you have insurance for all sorts of accidents, including disability insurance in case you can’t work. You can always decide not to save for a while as you tend to your necessities eg if you save 50% of your after tax income, you have a 50% income buffer for “emergencies”. Also, identify who in your family can provide you a bridge-loan in case things really hit the fan.
* Know what your savings interest rate is and calculate the spread. My bank savings interest rate on my $50,000 was a measly 0.3%. That’s a pathetic $150 a year in interest! To allow my bank to only pay me $150 a year on interest for that much money kind of makes me sick. The spread of 3.7% (4% mortgage – 0.3% savings) is HUGE, especially since I like to arbitrage things out when spreads start hitting 2%. As a result, paying down 4% debt is a no-brainer. What is your bank paying you?
* Know thyself and your own risk tolerance. Some expressed worry about the sudden lack of liquidity. I save 100% of every other paycheck (50% of after tax savings), and have interest income, dividend income, online income, rental income, and can go teach tennis and flip burgers at McDonald’s for $10/hour if I have to. Therefore, I’m not worried about suddenly going to a razor thin cash balance. Instead, I get super pumped to work hard to make sure my other income streams are maximized! It’ll be a fun goal to save up a good little war chest by the end of the year.
THE THRILL OF HAVING NO MONEY
Every time our backs are to the wall, we find a way to make things better. “Going Broke To Win Big” has been one of my financial tenets for a long time. I love the feeling of having no money because I get so motivated to try and optimize my finances and make more. For those who are easily satisfied with what you have, give yourself some anxiety! Seriously, depending on where you live, who really needs much more than $50-$100,000 to survive?
I always pretend I’m poor by starting from scratch every single month. It keeps me on my toes and provides relentless energy. You should try going broke sometime. You might just start loving it!
Readers, do you get a similar thrill of having no liquid cash in your bank account? What are you doing with your savings now that interest rates are so low?
PS Don’t ask me to lend you money OK? I’m broke!
** A month after writing this article, the 10-year yield sank to 1.8% and now I’m in the process of refinancing the mortgage down to 3.375% and maybe taking some money back out! Who knew rates would collapse further.