I was reading Financial Samurai’s recent post how he won’t be paying off his mortgage on a rental property for years despite having enough cash to do so and it really stuck with me. While FS makes it clear he has enough liquidity to pay off a mortgage on a second property I am in a similar situation minus a couple of zeroes. I have enough liquidity to almost completely eradicate my debt on an auto loan and a healthy student loan balance I choose not to because liquidity is just too damn important (I have NO credit card debt). Since getting serious about my personal finances a couple years ago I have taken a pretty balanced approach to paying down debt vs. investing/saving.
I think it is nuts that there are bloggers out there that will only keep a $1,000 balance while attacking debt. What kind of emergency can you solve with just a grand? My balanced approach is that every dollar is split between (there is no exact percentage):
- Living expenses & Minimum Debt Payments (401(k) is included in there since it is all automatic)
- Liquid Savings
- Perpetual Income
- Extra Debt Payment on Auto Loan
However in the past few months, I have been attacking debt aggressively, which has made me start to miss (if that is possible) the amount liquidity I could have had. Then I remember my favorite thing about paying off debt and then it turns into a cat fight than in my head.
Increased Liquidity vs Debt Repayment
I have paid off a little bit under $7,000 on my auto loan in the past 10 months (most of that in the last 4), but how much sexier would it be if my liquid cash account was $7,000 bigger? And there lies the problem.
I am trying to reach an internal balance between wanting liquidity for an eventual home purchase (we will be selling our condo in a couple months), maybe investment opportunity, etc. vs. reaching my goal to be debt free and all the awesomeness that comes with it. It is simple yet complex concept that,
Every dollar I pay towards debt is one less dollar I have in my liquid cash account or investment accounts
This should seem obvious to most, but with the speed that I have been paying down debt in the past 4 or 5 months has really affected how much more I could have saved/invested, and I am not too sure I am alright with that. When I pay my auto loan balance by another $250 or $500 that is liquidity I won’t see back for months until the debt is cleared, and on the law school loans that money won’t be seen for years.
Personal Finance Advice is Personal
This type of internal discussion I have with myself does provide one self evident truth. Personal Finance is not one size fits all. Is there a good reason I am not attacking my debt with the type of rampage that Dave Ramsey demands? Yup. Is it a good reason? I think so as would most. Does a lower Credit Card balance provide the type of liquidity that a job loss requires?
In the end I think I am going to continue my balanced approach with a cap on principal debt repayment set at $1,000 unless a large chunk of money comes through from my multiple streams of income (Law Firm of Evan, this site, an online side business that has been booming, tax refund, etc.). This allows for a semi-aggressive approach while making sure I am saving liquidity for the upcoming changes in my life.
Is Dave Ramsey Right, am I being an idiot? Should I just focus on getting out of debt?