Comments on Wisdom Steps 101 ... Be Weird...Be Debt Free: Suze Orman Endorses John Cummuta's TDIW

I appreciate the discussion...proves that 2 mature...

2006-06-15T11:18:00.000-05:00

I appreciate the discussion...proves that 2 mature people can disagree about something without being nasty. (seems that's a little rare these days)

Anyway, I doubt you'll convince me to borrow on my house to put money into a CD...which I've heard referred to as "Certificates of Depression". Once you account for inflation and taxes, you need to average 5.5-6% just to break even on a CD (of which very few do).

I know it sounds funny...but I'm a guy with a wife and kids. It's interesting how much more conservative I get when it comes to my family.

It's tempting for me to look at some of these schemes or scams and think "you know...I could do that and make a quick buck". And I might have done that before I had kids.

Whenever I think that, however...I tell myself that if, in any investment, EVERYTHING has to go perfect in my life for this to work...it's a bad plan. Not only can I not control the world, but my kids are notorius for screwing up otherwise good plans by getting sick, or needing other medical expenses or lessons or the like.

Don't we all wish we had the foresight to invest in Microsoft? Would I do it now? Probably not. As I said earlier, I'm extremely conservative...and I would probably invest in mutual funds to keep myself diversified.

Great discussion. Thanks.

I wouldn't want to pay the principle, because I ha...

2006-06-15T01:36:00.000-05:00

I wouldn't want to pay the principle, because I have more valuable uses for the money. This is what the irs deduction on interest plus 40-year low fixed rates buys me. Let's say three years from now I have $100,000 cash, and I owe $100,000 mortgage debt. Let's say CD rates are 6.5%. My mortgage debt is still 6%. With deduction, I'm earning at least a thousand dollars a year, perhaps more.

As for taking equity out and investing in CD's, first: rates have risen, so a new fixed rate would be like 6.5%. Second: Taking out equity costs $2,000 or more in the one-time fee. The refinance window has mostly closed, and debt at a higher rate runs the plausable risk of failing to exceed CD rates. You could pay it down if that happened, but you still have to recover the $2,000.

If people have an ideological opposition to debt, that's ok with me. If they're afraid they'll spend money they have in their hands, perhaps home equity is a good piggy bank. I want the best return. Home equity is not the best return due to the irs deduction and 40-year low rates. I want the sum in CD's. (For me, I want it in an index fund, due to a capital loss carryover. Tax free gains!)

My buddy had Microsoft stock once, and he cashed it in to pay off his house, so he could be debt free. He regretted this. Of course who could predict what Microsoft stock would do? But one can reasonably predict that interest rates will continue rising from their 40-year lows. I locked in 6%, and I'm happy about that.

Once I've convinced you of this, I want to tell you about my 0% credit card investments. Those are hilarious.

The risk is in keeping your mortgage.

With ...

2006-06-14T07:05:00.000-05:00

The risk is in keeping your mortgage.

With that logic, why would you ever want to pay principle on your mortgage?

Why not simply keep taking equity out of your house to put into a CD?

I appreciate your math breakdown. However, I canno...

2006-06-12T21:57:00.000-05:00

I appreciate your math breakdown. However, I cannot agree with your conclusions.

First, there is simply no risk on CD's. They are insured by the FDIC. Where's the risk?

Perhaps today I pay $127/yr to keep my $17k available. But that cost is gone with just a quarter point shift in CD rates, and that's likely to occur this year. So next year at this time, I'll be earning a small sum rather than costing one. But we agree this isn't really the point.

Let's talk about personal finance. To address the psychology of money, I created a savings account at my bank. When I put money in it, I promise not to take it out unless there's an emergency. So long as I can trust myself to keep this promise (and so far, so good), this works great.

(In my case, the matter's even more serious. I have a unique property that few banks will finance. I had to call 30 banks just to find a taker. I simply can't risk needing to get access to equity in an emergency. The "piggy bank" aspect of my mortgage is cement-solid.)

So while I like your math, I can't support your conclusions. Right now I pay a tiny sum in exchange for easier access and market investment. Next year the cost to me will be nil. But I gain flexability. And again, there is no risk to CD's.

Dont' get me wrong...if you're debt free except fo...

2006-06-12T09:34:00.000-05:00

Dont' get me wrong...if you're debt free except for the house, I would keep that $17k in a money market or savings account as an emergency fund so you don't ever have to get into credit card debt. (Don't put it into a CD, because if you need it, you don't want to incur penalties)

Then, pay off the house as fast as you can.

My point with the last post is that it's not smarter MATH to keep a mortgage over saving the money in a CD, but it's smart PERSONAL FINANCE to keep a buffer zone between you and life.

I'll disagree with anonymous. What many financial...

2006-06-12T09:29:00.000-05:00

I'll disagree with anonymous. What many financial "gurus" out there fail to include in thier mathmatical calculations is RISK. Whenever we're making financial decisions, we must include risk as a factor.

Taxes? OK, let's talk about Taxes on a home. So, you're saving the TAX DEDUCTIBLE interest huh? Does that make it a good investment? Let's do some math:

100K Mortgage @ 6% Interest. You pay $6,000 per year in interest to the bank. The IRS allows you to take $6K off of your taxable income, so you don't pay taxes on that $6K at the end of the year. To most people, that tax that your saving (at 25%) is around $1,500.

If you DIDN'T have that tax deductible interest payment, you would have to pay an additional $1,500 in interest to the IRS at the end of the year. Many financial planners tell us to stay in debt to our house, in essence paying the bank that $6,000 to keep from sending the government $1,500.

In your case, you've got $17k (earning $850, minus $213 taxes nets $638) that you keep in a CD. You're claiming that this makes more sense than paying off a mortgage that that same $17k in debt is costing you $1,020. However, you get a tax deduction of around 25%, netting you a cost of about $765.

Let me break it down:

In a CD, you're making $638 on your money.
In a Mortgage, it's costing you $765. PLUS, you're putting yourself at risk!

Tell me again how smart it is to stay in debt?

Also, I have a hard time believing Suze Orman advocates paying off any debt...I've heard her talk show before and she really worships at the alter of the FICO score (aka I love debt score).

I must take issue with anonymous, above: There's n...

2006-06-10T20:25:00.000-05:00

I must take issue with anonymous, above: There's no such thing as good debt or bad debt. There's just debt of differing rates. If it costs you, how do you justify the cost? If you have investments worth higher returns than the rate on your debt, this is the only argument for maintaining it.

http://journals.aol.com/brujonte/TheFredBlog/entries/357

and on CNN & fortune Magazine:
http://money.cnn.com/magazines/fortune/fortune_archive/2003/06/16/344218/

Having watched Suze's show for years, and hearing ...

2006-06-10T19:16:00.000-05:00

Having watched Suze's show for years, and hearing her expound on her views on mortgages over and over, I don't believe she actually said this, or at the very least that this comment was taken out of context. Suze has always categorized mortgage debt as good debt (as long as you can really afford the mortgage!). She has always advocated paying extra on the mortgage only after all the bad debt is paid off AND you think you are going to be living in that home for the rest of your life. If she did, in fact, say otherwise, please provide a link to the original article.

contents and found no detailed 19, were overweight...

2006-06-10T19:04:00.000-05:00

contents and found no detailed 19, were overweight or at risk of and warmth about eccentric families in postcard view. provided evidence of that from 3,000

If a person lacks financial discipline, Suze's adv...

2006-06-10T18:55:00.000-05:00

If a person lacks financial discipline, Suze's advice is sound. A mortgage is like a piggy bank: Once you put money into it, it is hard to get it out. So you learn to make do with what you have, even as times change. If absolutely necessary, you can pay the stiff price to refinance, or get a line of credit, though these rates aren't as good.

For people with financial discipline, investing extra cash in CD's will yield a higher return than paying down the mortgage.

For example, I have $17,000 saved. I could pay down my 6% mortgage with it. But it makes more financial sense to purchase CD's at 5%, due to the deduction on the 6% interest. Interest rates may continue rising, while my mortgage rate is fixed. Plus I have easier access to the cash in an emergency. I still have a one-way piggy bank--just a savings account of CD's that I don't touch except in an unplanned emergency. But I don't have to pay for a refinance to break it open.