I’ve been listening to money guru Dave Ramsey on the radio for about a year now. Dave laughs at anyone who would suggest there is such a thing as “good” debt. Debt makes you a slave, he says. Listeners call in with sob stories. Grandmothers who co-signed on their grandson’s car. Shopping addicts, families keeping up with the Joneses.
Dave says that all debt should be paid off immediately. And after that, you should save up and earn money to pay cash for your next big purchase, be it a car or home. Also, be sure to keep at least six months worth of your salary in your savings.
On existing debts, you should pay way more than the monthly minimum. That way, you’re paying toward the principal (the actual retail price of a house, for example) rather than the interest and debt.
Here’s where Sajan and I began to debate.
-It’s good to have liquid cash in the bank in case of an emergency.
-But shouldn’t you use it to pay your debt?
-Wait – rather than paying off debts, you could invest that cash and grow it, so in the end you can get rid of an even larger sum of debt.
When it came to our house payments, we wondered if we if there was a big difference between making minimum payments and making larger payments. Our plan is to rent out the house in a few years anyway, so why pay off more of it now when our renter can do it for us later? Would it really save us that much to pay more now? When you start talking about interest, taxes, escrow and all that junk, the conversation gets confusing and plays tricks with your head.
In my heart of hearts, I felt that something was wrong with making only minimum payments. Something is wrong if you have liquid cash and you’re not tackling your debts.
So Sajan called the mortgage company the other day to settle this once and for all. If we applied a little bit of our savings to the mortgage as a lump sum, we would save tens of thousands of dollars.
I kid you not.
Chunking lump sums at your mortgage now and then PAYS OFF. We discovered our required monthly payment will always remain the same. For example, if it were $100 a month, it would stay $100 whether we pay more or less. But, paying more will reduce the amount of time that we are a slave to the mortgage. The fact is, all of our current payments go straight to interest and taxes. Barely anything is going to our principal. But if we pay more than required, ALL THE EXTRA MONEY GOES TO THE PRINCIPAL. So years are shaved off our payments.
How cool is that?
I feel like wiping sweat off my brow. This homeownership/mortgage payment stuff can get stressful. Today we have a happy ending.
So the truth is: Do not let your debt sit there and accrue. Throw cash at it. Knock it out. Or it will haunt you and scratch at your back and right behind your ear like a ghost monkey.
To me, something is wrong with a society that encourages being bound to monthly payments for the rest of your life.
Today’s fortune cookie: Those who pounce on debt will be rewarded.