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.
Best,
Sam
Rates have sunk so low I’m actually considering whether or not to pay off a small student loan fixed at 1.625%. I no longer break even with a 5 year CD after taxes. I’d have to go to a 7-year CD with Pendfed with a measly 2.75%, which after taxes doesn’t even net a half percent. I’m still waiting and hoping for rates to rise soon.
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Financial Samurai Reply:
October 18th, 2011 at 5:06 pm
Rates won’t be rising for a looong time.. at least a couple years imo. Bernanke has specifically stated low Fed Funds rates until end of 2013. Gotta love him!
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I have no thrill of being broke. Honestly, having family and been responsible for putting food on the table… Somehow it does not excite me.
However I was broke when I was young. When you have no responsibilities there is nothing wrong about been broke. You can leave with yourself. Where did you get 4% interest on your mortgage? So you are betting that stock market will produce less than 4% over the coming years?
To survive with the house has been paid off you need less that $ 50 K a year. I published my budged ovver last 4 years and you can “survive” quite comfortably on that.
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Financial Samurai Reply:
October 17th, 2011 at 5:10 am
4% was last year. Refinancing to 3.375% with costs included in the price now. Duration is a 5/1. I could pay it off now, but would be more comfortable paying it off in 5-7 years.
I agree with you on 50K/year with no mortgage debt! This is a rental prop.
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Personally, I like the comfort of knowing that I pay my bills and have money left despite maxing out my 403B, IRA and Roth IRA. As I get closer to retirement, I want a simple life. I will be debt free when I pay off my mortgage in 5.5 years. Living a low profile lifestyles may seem like I am broke, although I think of myself as value conscious.
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Financial Samurai Reply:
October 18th, 2011 at 5:07 pm
Boring! Just kidding :)
Gotta spend it up Krant! We don’t live forever, and as far as I can tell, I think you’ve accumulated a ton of wealth! More than you need!
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krantcents Reply:
October 18th, 2011 at 6:30 pm
You are right! I will have difficulty spending after so many years of saving. I am expecting to live til I turn 100 years old so I do not want to run out of money. I am planning a European cruise next summer so I am willing to part with some of it.
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Financial Samurai Reply:
October 19th, 2011 at 12:05 am
Gotta do it mate. Go no later than September. It gets very cold in October if you’re cruising the Med!
Wow, you are quite a character. Most people would be scared to have no cash in the bank, but you get a thrill out of it! :) I’ve decided to follow your policy of thinking like a broke dude by opening an ING account and moving my cash saving there so I don’t see it. I don’t think I’m brave enough to put $50k into the mortgage though. We have a kid now and need a cushion for the peace of mind.
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Financial Samurai Reply:
October 18th, 2011 at 12:20 am
Let’s say you have $100,000 in the bank and you make a $1,000 advertisement deal on your site. Whoopdedoo!
But let’s say you have $500 in the bank, and you make the same $1,000 advertisement deal. Sweet sugar, party time! It’s exhilarating!
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20's Finances Reply:
October 18th, 2011 at 10:05 am
I agree Sam that it is exhilarating. But… I’m not that much of a gambler. I have an emergency fund and will always keep it. With that said, I am still in grad school and I still don’t have an excess amount by most standards. So, I kind of live this way and not by choice (entirely)…
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Financial Samurai Reply:
October 18th, 2011 at 5:08 pm
When it becomes by choice, it becomes amazing, trust me on this. When I went back to grad school for the love of learning, and not for the grades, I enjoyed school at least 100% more!
Good times are ahead for you!
Good stuff Mr Samurai. Many will argue it’s not good to pay off mortgage debt because of the tax breaks. I’m not sure really, Do you get tax breaks on rental mortgage interest?
Anyway, 4% guaranteed return vs .3 is a no brainer, though I guess some would not think of paying down your rental an investment. I had others argue with me on paying off my house. Now, not only no debt, but 5% we were paying is a lot better than the .1 the bank is now offering. What’s that, about a 5000 fold spread?
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Financial Samurai Reply:
October 18th, 2011 at 5:10 pm
Rental mortgage interest is 100% deducted from rental income. Hence, I’ve been toying with doing a cashout refi to shield all income since I’m in a higher tax bracket now that when I retire most definitely.
It does feel great to pay down rental property debt. Especially at 4%. But now, it’s going to 3.375%!
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I got bummed out after paying off my student loans earlier this year. I missed having all that cash in the bank to possible do other things. And the rate was fixed at 2.3%. Being debt free seems over rated.
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Financial Samurai Reply:
October 18th, 2011 at 12:13 am
Perhaps in the instant, the thrill goes away, but it comes back as you realize you are lighter and more free.
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Well, we are in the broke category now as we begin aggressively paying down debt. I am excited to see how fast we can make it go away! When we are all done and have some money once again, I will keep this post in mind. :)
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Financial Samurai Reply:
October 18th, 2011 at 5:10 pm
Sounds good! It’s kinda thrilling to get into debt since you can buy more, but it’s just as thrilling getting out of debt. Hence for you, it’s a win-win! :)
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I can completely relate Sam (minus a zero or two)….I get addicted to throwing money at my debt but have some sort of repayment regret because of the lost liquidity. But then I have the drive to remake that money.
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Financial Samurai Reply:
October 18th, 2011 at 12:09 am
No regrets E-dog! It’s just accounting anyway! No liquidity = drive to find more liquidity!
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I have to agree with your Sam. When I didn’t make any income at all, it seemed kind of exciting to put away as much as I could and make money last as long as possible. I will say I would never, ever, ever want to go anywhere near true ‘broke’ again. Life like that was pure hell. (It wasn’t consumer debt that had me broke, it was growing up with nothing and coming out of college with quite a bit of debt. Good thing I got my MBA and MRS degree at the same time. Ha!)
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Financial Samurai Reply:
October 18th, 2011 at 12:05 am
Yes, “true broke” would be kind of bad, but boy.. if I was “truly broke”, I would be “truly motivated” to get myself outta there! The one thing I told myself as a kid was that I never wanted to be poor!
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Now that you mention it, it IS a bit titillating. When I get my mortgage bill each month I like to see that number dropping by several hundred bucks a month. I’m “building equity” (in the hopes of beating out the monthly loss I keep taking on equity due to declines in real estate prices LOL). My house can’t go to zero, so at the end of the day, I’ll own something! But seriously, if you can’t count on steady gains in risk-investments, at least you CAN count on debt paydowns.
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Financial Samurai Reply:
October 18th, 2011 at 12:02 am
Indeed. Building equity, paying down debt, saving more money, building one’s wealth is so alluring! Given the addictiveness of it, it’s no wonder so many people just love to do it!
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Everyday Tips Reply:
October 18th, 2011 at 5:35 am
This is probably why people do find the ‘paying down debt’ part so much more intriguing, and almost feel lost when it is over. I like the wealth accumulation part a lot, although this past quarter, I sure didn’t accumulate much… (You could say I lost)
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I understand the feeling of paying off debt and having very little cash left over. But the payoff is that there’s no debt! It’s a great feeling and yes, it motivates me to work harder to save up the chunk I just plunked down on my debt. Right now I’m working on paying off my car in the next couple of months, then refocus on savings. I love being debt-free (minus student loans ;) )
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Financial Samurai Reply:
October 18th, 2011 at 5:11 pm
Yep, that is a great pay off indeed. Gotta get rid of that car loan for sure! That’s priority #1. Once you do, you are gonna love it.
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I don’t know. Living on the edge with lots of debt provides loads of excitement for me every month. Will this be the month that I default? Will I screw up and forget to pay something? Fun times!
Pay the mortgage down.
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Financial Samurai Reply:
October 18th, 2011 at 5:11 pm
You are living the thrill of a lifetime Sandy with your debt! You’ll miss it when it’s gone!
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I love the broke feeling. I usually push out all my money out of the way, this keeps me from buying frivolous things I don’t need. I don’t have debt but have a goal to save for a home downpayment.
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Financial Samurai Reply:
October 18th, 2011 at 5:12 pm
Yep, that’s exactly part of the reason why I hide my money from myself…. to prevent me from spending money on stupid crap!
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I pretend like I don’t have any money for things and I keep my checking account balance slim… Mind tricks that I play on myself… I’m so gullible :)
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I think this is the very first post of yours that you and I share the same point of view! WTF, is going on in the world. First I must say I love love love this article. Secondly, Yes I get a thrill out of “being broke” in my mind like you. I feel that people who are really broke or in debt have it easy. They only have one choice which is to make more money to get themselves out the whole. The tough decisions come into play when you do not have any debt and you have money left over. What to do what to do!! But to answer your question. Now that interest rates are low I’m staying slightly liquid about 2 years worth of emergency fund and taking advantage of the low interest rates to leverage my real estate adventures. I say instead of paying down the mortgages take advantage of leverage and buy a few more.
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Financial Samurai Reply:
October 19th, 2011 at 9:57 pm
You don’t agree with any of my other posts? I find that very hard to believe since most all posts are about honor, equality, improving oneself, and learning!
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YFS @ YourfinancesSimplified Reply:
October 20th, 2011 at 11:20 am
Mr. Samurai,
Do not get me wrong, your post are great and honorable. But, you did have a post saying shouldn’t we listen to rich guys about taxes over people who are not rich.
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Financial Samurai Reply:
October 20th, 2011 at 11:37 am
You don’t believe in credibility? Why does someone who doesn’t know what it’s like to make $200,000 get to dictate to those who do what they should pay and how they should feel if they aren’t paying more themselves?
My reply is in that specific post.
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