Five Dangerous Debt Payoff Strategies

US News lists five dangerous debt payoff strategies as follows:

1. Paying off credit card debt too fast.

2. Using emergency funds.

3. Tapping a home equity line of credit.

4. Withdrawing from a 401(k).

5. Filing for bankruptcy.

IMO, these are good tips.

I'm a big believer in paying off debt -- all debt -- but you can't get too crazy about it. You have to do it in moderation, making sure all your other financial bases are covered while you whittle it down.

I often get asked if we made compromises in financial plans when we paid off our mortgage. Yes, we made compromises. But our compromises were in spending -- we didn't spend money we could have, instead we saved it and paid off debt. As for other financial compromises, we didn't make any. In particular:

• We had fully-funded emergency savings.


• We contributed the maximum amount to my 401k.


• We didn't accumulate any other debt.

We paid off our mortgage simply by "doing the basics":

• Buying a house we could afford.


• Spending a lot less than we earned.


• Applying everything we could to retire the mortgage: pay raises, bonuses, income from a side business, my wife’s income, and gifts.


• Sticking with it for several years (five to be exact.)

We lived in that house for a year or so totally debt free, then when we moved to Michigan, the equity in that house paid 100% for our new house, so we've never had a mortgage on it. It's been a GREAT decision and one I'd do again in a heartbeat.

If you're wondering what it would be like, imagine not making a monthly mortgage payment for over a decade and you'll get a taste of the feeling. ;-)

Comments

[Rick Francis]

> Applying everything we could to retire the mortgage: pay >raises, bonuses, income from a side business, my wife’s >income, and gifts.
>It's been a GREAT decision and one I'd do again in a heartbeat.

I agree that it is annoying to have a mortgage payment, but right now the loan rates are so extraordinarily low
(30 Year fixed is 4.17% while 15 Year Fixed is 3.45%), does it still make sense?

Inflation is likely to be higer than 3.45%, so effectively a bank will be paying you to not pay off the mortgage early.

I'm all for saving that extra money, but just not giving it to the mortgage company any sooner than required.

-Rick Francis

[Old Limey]

Items 2, 3, & 4 are symptomatic of a person that is in serious financial straits as the result of circumstances beyond their control or a very foolish person that is intent upon living well beyond their means.

If you hit rock bottom because of a job loss, illness etc. then what choice does a person have other than to tap into whatever money is available. However doing this is a temporary respite that could be the prelude to #5.

As FMF points out it should be everyone's goal to be aware of how disaster can be just around the corner, especially in these troubled times, and that the prudent person is well aware of this and makes financial decisions as clearly outlined. This is particularly important when you have dependents to be concerned about.

[Jim]

I think the list makes some good points. #3 makes the pretty good point about home equity loans and homes losing their value.

#1 there is no problem with paying credit cards off too fast. Their actual concern is paying off cards and then turning around and accumulating more debt. Thats not due to paying the cards off 'too fast' but instead due to not fixing your spending habits. I think that one just needed to have the title changed.

[Holly]

@ Rick Francis-

Not sure, but I thought there was some discussion of eliminating the mortgage interest deduction. That might push some to dedicate extra funds toward their mortgage since the Fed continues to claim that there is no real inflation (HA).

[Greg's Advice]

I have been in the same position. We did not go away on a holiday for 6 years, buy a car (we actually sold it)and started a small business it was a great feeling once we reached our goal and now we have no mortgage either.