Sushi Money

     It’s that time of year to go through the balance sheet at home.  I take a hard look at at balances and spending at least once a month, but about every quarter I like to take a closer look and see where I can reduce debt and increase savings and investments.  I’d like to say I pay off my credit cards every month… but nope, not the past couple of years after a household move, etc.  It can really sneak up on you!  I try not to carry more than a 2-3 month payoff balance, but even that makes me uncomfortable over time.  So my current goals include paying off all my credit cards (all two of them!) by September 1st.  Then I’d like to try keeping them paid off for six months or more and see how that works out.   I also have a secured debt account at 0% with more than a year horizon for payoff.  I don’t like debt in general, and I’m tempted to pay it off when I can.  But I keep saving the money to pay that debt in a liquid money market account earning better than 5%.  So what’s better… having someone else carrying the debt over a year or more at 0%, while earning 5% on my money?  Or just paying it off to be finished with it…   That answer was pretty clear, and for the past year I’ve been keeping that 5% myself in the form of interest earnings.   

     I also have a car loan at 4.8% and I’m tempted to pay it off when able. But this comes down to a comparison of the after-tax rate of return I think I can earn on my money while investing or saving it… versus the after-tax interest rate I am paying on the loan.   For a mortgage loan on your house, the interest is deductible…. so if you have a 6.5% mortgage loan, your real after-tax interest rate may be closer to 4.5%, and you may see a better use with your money over time investing it, rather than paying down your mortgage. (Keep in mind that investing your money requires long-term discipline, consistency and successful market outcomes to achieve a decent return, while paying down your mortgage is a guaranteed return by paying off that debt.  But investing your money is not guaranteed, especially if you move it around or spend it instead of investing it!).   With my 4.8% car loan, that is the rate of interest I’m paying, and I believe I can effectively leverage my money while investing to achieve a better overall return, rather than pay off the 4.8%.  It’s also pretty close to break even on high-yield savings accounts around 5% these days.  

     Many people also try to achieve credit card ”arbitrage” with their debt while using 0% balance transfers. But one effective argument against 0% balance transfers is that a consumer may be tempted to use the credit card while accumulating additional debt that is not 0%!  Depending on the credit card company, they will normally charge interest on additional debt continuously, and any payments made to the account will be applied to the 0% balance debt first.  Once that is paid off, then payments are applied to the additional debt.  And by the way, if you are late or miss a payment on the 0% balance transfer?  It rockets right up to the agreed upon rate, or even the default rate- sometimes exceeding 27%!  So if  you do a 0% balance transfer…  throw that credit card in a drawer, don’t use it, and never miss a payment.   That “good deal” can become a financial disaster if not managed appropriately.  I wonder how many people really pay their cards off totally every month…  I’m going to become one of them soon!   

     Does carrying debt bother you over time?  I think it takes a psychological toll at some level, especially when you think of the time it takes to manage income and expenses, ensure timely payments, checking statements, allocating the money, etc.  Most of us will always have some form of debt, especially with the home mortgage.   But being debt-free would be pretty cool… How about sharing your experiences and thoughts?

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