An Interesting Financial Tool

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July 8th, 2004, 01:30 PM
reason

Quote:

Originally posted by Jumper69:
That's what happens when we run a debt based economy.

Accumulating debt on depreciating assets (ie cars, appliances, etc) is stupid. Unless it can be seen as an investment of sorts, or something that can create wealth debt accumulation is a bad thing.

I've decided I'm going to run my current car into the ground. When I absolutely have to buy another one, I will. But until then I plan on being disciplined, making a "car payment" to myself every month. When I have to buy a car, I will buy what I can afford, based on what I've saved.

I will take on debt to buy a car if the debt is very low cost and doesn't add to the price of the car.

I figure if I can hypothetically earn 3% on a liquid, low interest bearing account over the course of 5 years as opposed to paying 4% on a car loan, that ends up being a nice swing in wealth.
July 8th, 2004, 01:49 PM
jumper69

Quote:

The accumulation of consumer debt in the United States will end up being a huge barrier to economic growth.

Exactly and this goes back to your catch-22 theory. We need to keep buying in order for the economy to keep growing. If we keep buying, however, we accumulate more debt. The more debt we accumulate the harder it will be for our economy to grow.

At some point our system will implode.

D2 & I will not finance a car for more than 3 yeras. We ALWAYS put AT LEAST 20% down to avoid being upside down.

We have a 15 year mortgage that we expect to be paid off in less than 10 years.

Contrast that with others I know who have bought the latest McMansion in West Chester, have 2.5 kids, 2 leased SUV's and are generally everything I detest about people. Their credit cards are pretty much maxed. But HEY, at least it looks like they live the good life. [img]graemlins/whatever.gif[/img]
July 8th, 2004, 01:50 PM
reason

Quote:

Originally posted by cincygreg:
Still not sky high, but they are indeed the highest they have been in years.
If you have the dough rey me and are in a possition where you can handle putting some away where you cant touch it for a while, it makes absolutley no sense not to go for higher yields.

They may not be sky high, but 4% is higher than .5% no matter how you spin it.

I don't see locking yourself in to a 5 year cd to get 4.4% as such a good idea right now. Particularly with the expectation of yields rising.

I'm just blowing this out my ass, but I say go find yourself a nice medium sized, well-run regional bank that pays a 3% dividend, low payout ratio, and a history of dividend increases in a geographic hot spot - and buy their stock.

The taxation on dividends is advantageous compared to the interest on cds, and if you pick your spot right you can experience capital gains, or potentially a reap the benefits of the takeover in this rapidly consolidating business.

I have no immediate recommendations, but I have a list I want to look at: Colonial, Synovus, and a number of "smaller" banks, particulary in the South.

I just had some luck with Southtrust, which is in the process of being bought by Wachovia.

[ July 08, 2004 10:50 AM: Message edited by: reason ]
July 8th, 2004, 01:59 PM
reason

Quote:

Originally posted by Jumper69:
<blockquote>quote:<hr /> The accumulation of consumer debt in the United States will end up being a huge barrier to economic growth.

Exactly and this goes back to your catch-22 theory. We need to keep buying in order for the economy to keep growing. If we keep buying, however, we accumulate more debt. The more debt we accumulate the harder it will be for our economy to grow.

At some point our system will implode.

D2 & I will not finance a car for more than 3 yeras. We ALWAYS put AT LEAST 20% down to avoid being upside down.

We have a 15 year mortgage that we expect to be paid off in less than 10 years.

Contrast that with others I know who have bought the latest McMansion in West Chester, have 2.5 kids, 2 leased SUV's and are generally everything I detest about people. Their credit cards are pretty much maxed. But HEY, at least it looks like they live the good life. [img]graemlins/whatever.gif[/img] <hr /></blockquote>You just described my brother and his wife. Except he lives in Burlington. Just built a nice house that would sell in the $350,000 range. All new furniture. New cars every two or three years.

While he has caused me to wonder if depriving myself of the nice things in life is causing me to not live life to the fullest, I look at him and think he'll be in debt for the rest of his life.

Because, as I told my Mom, he'll be unhappy with the small dining room he designed, the small living area (He built an ego house, designed for large personal space, small communal space. His walk in closet is bigger than his breakfast nook.) The furniture will all be replaced in 3 years, as it has been several times before. The cars will disappear and be replaced by new ones.

I'm sure he does well, but he'll always be slave to a bank.

When I'm 55, my goal is to not need a job.

[ July 08, 2004 01:44 PM: Message edited by: reason ]
July 8th, 2004, 04:53 PM
reason

Quote:

We have a 15 year mortgage that we expect to be paid off in less than 10 years.

I refinanced from a 30 year 7% loan to a 15 year, 4.875% loan. The breakeven is about two years into the new loan. The savings in interest payments is substantial, and my monthly payment only increased maybe $30.

There are two schools of thought about paying off a mortgage. One is to make your house as "liquid" as possible. Don't pay off the mortgage early. Instead, use excess cash flow to invest. The argument is that once you have bought a house, it is in your possession even though you don't truly own all of it. The beauty of real estate is that you only put 5%-20% down yet get the benefit of return on 100% of the value. Paying it off early negates that benefit and reduces the return on investment. Plus, once it's paid off the you can't truly release the value unless you sell the thing.

The other school of thought is promoted by Suzie Ormond (sp?), the financial guru. I think she has a tv show or talk show or something. I've only read about her, not seen or heard her. She recommends paying off the home as quickly as possible. The logic is that stocks and other investments are just paper. A home is real. IF things head south, if your home is paid off, you still have a roof over your head, and you more quickly build equity. Plus if your mortgage rate is 4.875% (or whatever), you can look at that as your built-in guaranteed return on investment (times 1 minus your tax rate)

It's kind of a Maslow's Hierarchy of Needs kind of thing. Take care of your basic needs first, then work down from there. Right now I'm obviously more inclined to take the Suzie Ormond approach.

[ July 08, 2004 02:10 PM: Message edited by: reason ]

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