Thinking about Paying off Low Interesting Debt!

by Evan

With the upcoming home purchase (without a home sale on the other side), I have really been giving a lot of thought to my monthly nut.  An unhealthy amount.  Then I came up with an idea described in excruciating detail below.

My Increased Monthly Nut

I believe that most adults should have at least an idea of what they spend a month.  I have been in the back office of a wealth management firm for over 12 years, and I can’t begin to tell you how many people do not have any kind of clue as to what they spend each month.  Money only has 3 places to go:

  • You pay taxes with it
  • You save/invest it
  • You Consume it

That is it! When you run down that exercise with a client/producer it is amazing how fast people start to realize that they consume way too much.  I digress.  I have been struggling with figuring out what my new normal looks like as it relates to my “monthly nut.”  Since we agreed to buy our new home without selling the old home a large portion of my net worth is still tied up in the walls of the old place. This has lead to an alarmingly huge jump in my monthly nut. Specifically, my housing costs (principal, interest and taxes) are increasing from $3,100 a month to $4,600 a month! That extra $1,500 is a huge jump that has me a bit freaked out. But I have a plan…one I am not too sure about a plan nevertheless.

Next to being able to look back and remember pieces of my life that would otherwise be gone, this blog’s next best benefit to me is the ability to write out an idea and see where I land after 500 or 1,000 words.

Paying off Low Interest Debt to Clear Cash Flow

My net worth has a few liabilities that are at 0% or extremely low interest rates, and while I am paying very little interest on them they are a drain on my monthly cash flow. Specifically we have:

  • $440/mo going to a credit card with 0% interest. The balance is a little under $7,000. The idea was that I figured out the monthly amount that would pay it all off without any interest.
  • $170/mo going to The Wife’s credit card that was used for her corrective eye surgery. The balance is at about $1,500, and again is at 0% as long as I keep paying before the time on the deal runs out.
  • $385/mo going to student loans. The debt is at a low, 3.5% fixed for 30 years with a balance remaining of $34,500.

So my idea is that for approximately $43,000 of capital I can clear up $995/mo in ongoing costs. This is not an easy decision for me (nor should it be for anyone where $43,000 of capital isn’t just easily available), and the pros and cons basically write themselves.

On the one hand, this is low interest debt! I mean it is basically free money at this point. Why would I use capital that could be deployed elsewhere and growing over the hurdle rate of 0%, 0% and 3.5% shouldn’t be particularly difficult. Use the power of the leverage and invest that money.

On the other hand, I am freaking out at about a 50% increase in housing costs! If I were to shove this amount into our yet to be finalized loan I would literally be saving only about $200/mo I can remove 60% of the increase with just these 3 easy moves.

There is also this nagging feeling that IF a democrat takes back the white house there could be a student loan forgiveness program that I may qualify for. I don’t think a program should get off the ground, but if it does and I paid back this large of an amount to watch other people have their loans wiped I am going to be pissed, like really pissed.

Final Decision

I am sitting on a plane writing this post, and I think by the end of next week, I am going to wipe out all the credit card debt.  That will clear up approximately $600 of monthly payments going out.  I know that mathematically this is a bad decision but I will feel so much better the moment it is done, so that has to outweigh a bit in this case.

I am really struggling with the student loans.  I can’t get my head around the idea that if the next president and congress essentially wipes out this line item and I didn’t take advantage of it I am going to be furious.  This is the only reason I am not moving forward with this move.  In addition it is time to audit my other fixed monthly nut costs to determine how to trim some fat.

I am struggling because if someone gave me this set of facts, asking for advice, I would probably land in a very different place. 

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1 comment

BidAskDividends July 31, 2019 - 12:06 pm

Although mathematically you’re completely correct, there is something to be said about the psychology of paying off the debt and having one less thing to pay. My wife and I are starting to prep our home for sale, and then rent a house in a different part of the city until we decide our longer term plans. Although I prob won’t touch my student loans with the expected profit (around $25K @4%). Two home improvement debts of 0% and 3% will be eliminated immediately.

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