For years, there have been many debates about good debt vs bad debt. There have also been many different opinions on how to tackle debt. On the one hand, people are of the opinion that all debt is bad and you shouldn’t have any. On the other hand, people are of the opinion that some debt is good and can help you build wealth. I won’t dive into that debate with this post. However, after reading this, you will see how I tackle debt. I am by no means perfect, and I’m sure there’s room for improvement. But, so far, it’s working for me, and maybe my approach may work for you too.
I bought my first house last year. I was excited, but quickly realized that home ownership can be expensive. Between unexpected repairs and expenses, it can get quite costly. But, when done right, investing in real estate can be one of the best investments to make.
As a single guy, I was used to having roommates. And so, when I bought my house, I kept the tradition. I used an approach dubbed as house hacking by Bigger Pockets. The idea is that the income from my roommates would help cover the mortgage. And it did. I found really great tenants, even though one of my roommates was constantly late with his rent. But it all worked out in the end. I was able to use that income to help cover the mortgage, which gave me breathing room to do other things with the money.
So, if you have a mortgage, and you’re situation allows, maybe you could rent out a room for additional income. It’s kind of like having a duplex, triplex, or fourplex. The difference though is that you’re sharing a space. I realize that for some people, they will have a family and so it may make a lot of sense not to do that. But for single individuals like myself, it’s not a bad way to go.
However, you have to be prepared for the ups and the downs. For example, both of my tenants moved out of the house and I myself moved overseas . So, I had to get a property manager to take care of the property while I’m gone for the next year. The property has been vacant for about a month. It actually was advertised for two months, but I was still living in the property for half of that time. The good news is that the property management company just approved a tenant who will be moving in the first week of September. But, imagine if it took three or four months to rent the property. I would be faced with the choice of reducing rent to an undesired amount or risk more months of vacancy. So, one should account for vacancy, repairs, unexpected expenses, etc, before investing in real estate.
Now that the house is rented, the goal is to have the house pay for itself. So, proceeds and profits from the rent will be used to cover the property expenses. Once I get to the point where the house can cover its expenses and sustain a higher payment towards the principle, then I’ll use the house’s income to pay down the mortgage early. But that’s a long way off.
If you’ve listened to Dave Ramsey for any amount of time, you’ll notice that he hates all debt. This includes taking out a loan to buy a new car. His philosophy is that if you’re going to buy a car (or even a house) you should pay cash. Well, although I’ve listened to Dave Ramsey often, I don’t rigidly follow his advice. Many people are not in a position to just pay cash for a car – at least not the car they would ‘want’ to drive.
However, I’ve given some serious thoughts to this approach. I don’t have a car now and won’t need one for the next year. But, conceivably, I might need a car a year from now. So, it may make sense to pay cash for the car and not go into debt.
It turns out I will be receiving around 11k next year fall. I was going to put that amount in my dividend portfolio. But, I’m starting to think that it might be better off to use that money to pay cash for a car. I’ve never really bought anything for that amount of money before (not counting stocks), so it might be mentally hard to do. This decision is not for another year. So I have plenty of time to decide. But it’s been on my mind lately.
That being said, if I find out that I won’t need a car for an additional couple of years or so, then I would put the 11k into the portfolio and save separately to buy a car with cash.
so, how do I tackle a car loan? By avoiding it in the first place by paying cash for the vehicle.
This should be no surprise. I’ve decided that I’m going to pay off my student loan. If I listen to Dave Ramsey and save $1000 in my emergency fund, stop contributing to my retirement accounts, and pay everything extra on my debt (using the debt snowball), I would surely pay off my student loan within a year. However, I don’t want to do that.
Doing so would require me to stop contributing to my dividend portfolio as well. I think the automatic contributions to my retirement account is a good habit. And I need all the good habits I can get to counteract all my bad ones. I also like the automatic savings I do with my monthly contributions to my portfolio.
I do admit though that it is VERY difficult to try to max out my 401k, IRA, contribute to my dividend portfolio AND payoff my student loan in a year. It’s going to be a BIG help to have my house rented. But, even then, I plan on using the profit from the rental to put in a separate account to cover vacancies, expenses, etc. I want the house to pay for itself without coming from my paycheck. It may take a while to get to that point, but once there, that’s the best place to be. But, even with the house rented, it’s going to be difficult to do all those things.
I’m contemplating reducing my monthly contributions to my dividend portfolio so that I can speed up repayment on my student loan. There’s nothing magical about getting rid of the student loan in a year. Indeed, it realistically might take me 18 months or 2 years the latest. But, the quicker I pay off the debt, the faster I can focus on building wealth.
CREDIT CARD DEBT
I don’t have any credit card debt at the moment. But, when I did, I paid them smallest to largest, essentially following Dave Ramsey’s approach. I don’t plug this too often, but if you subscribe to this site, you can see the free tool (spreadsheet) I used to help me stay on track and get out of credit card debt.
People tackle debt differently. For me, I chose to invest in a house to get rental income, so that the income can cover the mortgage and property expenses. I’ve decided to pay cash to avoid a car loan. And, finally, I plan to focus on paying off my student loan, but while maintaining some level of automatic investments to my retirement and taxable accounts.
What do you think about how I tackle debt? How do you tackle debt? Let me know by commenting below.