A message for the savers and aggressive paying off debt folks

Hello ATS,

I would like to preface this conversation with some facts. If you have a credit card with a 19% interest rate, you need to get that paid off asap. That part is obvious to me, stop the starbucks, stop going out to eat twice a week, stop buying Amazon stuff you don't need, just stop spending money. I know this is hard but this message isn't for you.

If you have a handle on your finances, and you aren't in crippling credit card debt, what should you do in this environment? I did some math earlier and I was surprised at my findings. Let's look under the hood at some numbers.

Most people have a mortgage interest rate in the 3% range. You would think, if you had 10k to put down on your mortgage principle it would have a big impact on the amount of interest you are paying. Let's look at the math. *Keep in mind, this is really dumbed down math, interest is compounded daily*

300k at 3% APY is $9000. If you put that 10k down your new amount is 290k* at 3% which is APY of $8700. You saved 300$. This works in any amount. Why in the world wouldn't you put that 10k into I-bonds or a treasury bond paying 5%? I think I-bonds is 6.89% right now. The 2 year treasury bond is close to 5%.

That 10k would yield $689 dollars in I-bonds or $500 dollars per year in 2 year yield.

Some things to consider. I-bonds have a maximum contribution of 10k per year (yes I know you can contribute 15k if you use the tax return loophole. This doesn't impact many people) and you have to hold for 1 year. In addition, when you sell your I-bond, you lose the last 3 months interest. Once you understand the restrictions, and you're comfortable with them, why not take a free $700 bucks?

*if paying down your mortgage to 290k vs 300k gets you out of paying PMI, do it, don't think about it, do it.

We've seen inflation tick up higher which means I-bonds interest rate should reflect this when it recalibrates in May. When you buy, you get 6 months of the current rate from point of purchase, so if the rate goes up in May, you will get 6.89% from the point of purchase and you'll have to wait for the new rate. You won't get the new rate until your 6 months expire, why does this matter. It works the same way on the other end, when inflation drops and I-bond rates fall to 0-2%, you'll have to wait out your purchase plus the 3 months of lost interest.

As you can probably tell, I love math and figuring out how to inch ahead. I hope my message inspires at least one person.

Thanks, see you on the flip side.

a reply to: litterbaux

Thank you. Something to think about.

a reply to: stelth2

Thanks bud, I'm not a financial advisor or anything. Just a normal guy crunching numbers.

Paying ahead on your mortgage does not actually save money like paying on the principle does, but it does help to make sure you don't default if the economy sours or you are laid off from work. It helps to buffer things a little to make sure you don't lose your home or wind up paying late fees. We have a car payment and we are a month ahead in case unusual expenses arise. As for a mortgage, we paid that off eight years ago and will hopefully never need to get another one.

Make sure that you have the county notify you that someone is trying to put a lean on your property, people are starting credit cards and taking personal loans in others names and then default on them and they sue you but the address is different, sometimes in a different state. So then they put a lean on your property. I know a couple of people who had others take loans in their name and had this problem and one guy even had someone take out a federal pandemic loan on his tiny buisiness for over a hundred grand....someone in a southern state and he lives here in the U.P. of michigan. Now he had to get a lawyer and he did not have to pay it, but he did have to pay a couple of grand for the lawyer which the government did not reimburse him for even though they gave money to someone who got info from his little business site where he was required to list his FEIN for his business.

Watch not to get scammed. Another thing if your mortgage is sold between banks, make sure that all of the money paid is correct, I know two people who had money disappear from payments made within the transfer plus one of those had their escrow for insurances and taxes dissapear and it was a major job with lots of calls to straighten this out and formal bank investigations occurred. Both people did get everything back, but most people just think everything is done right, these two people checked up on things and noted the wrongdoings which ninety five percent of people do not do...their belief that everything is right is a false assumption. In one of those cases, it led to a major government intervention of a bank when a small fraction of people complained and a big fine going to the government but no extra money going to the people effected unless they did a lawsuit where lawyers eat up all the money.

Beware, when banks sell loans to other banks there is a possibility of software glitches because they use different software. Of course the first calls always say it is right...it is a pain in the arse to get things fixed and it seems the banks always benefit and the person owing money always gets screwed...they make sure any mistake is in their favor.

a reply to: rickymouse

ha, that is why I got lifelock. Anyone tries to take a loan, run a credit report, or open an account in my name and I am notified.

originally posted by: infolurker
a reply to: rickymouse

ha, that is why I got lifelock. Anyone tries to take a loan, run a credit report, or open an account in my name and I am notified.

You can also freeze your credit to the 3 credit bureau. It use to cost 10 bucks to unfreeze but I think they went away with that to my knowledge.

Isn't it also a good idea, to split your car payment, and pay every two weeks?
I had a young lady that worked in banking tell me that, so I have been doing it, and I actually paid a little ahead when I had the money, so now my statement every month says my next payment is not due until 2 months later, which I ignore.

I always pay a little extra on my mortgage principle each month as well, trying to get that paid off early.

originally posted by: litterbaux

originally posted by: infolurker
a reply to: rickymouse

ha, that is why I got lifelock. Anyone tries to take a loan, run a credit report, or open an account in my name and I am notified.

You can also freeze your credit to the 3 credit bureau. It use to cost 10 bucks to unfreeze but I think they went away with that to my knowledge.

A few years ago my wife and I setup a trust (no, we're not rich) and we titled our house in the trusts name and moved most of our bank accounts into the trust. A lot more difficult for someone to do title fraud that way.

Had all my debt paid off around 3 years ago. Still pretty broke, but I'm not in debt.

originally posted by: infolurker
a reply to: rickymouse

ha, that is why I got lifelock. Anyone tries to take a loan, run a credit report, or open an account in my name and I am notified.

I had Lifelock. My credit card was exposed when Stratfor was hacked. This was in November. Stratfor kept quit about this (to cooperate with law enforcement) and finally told us all about it in December. Lifelock FINALLY told us about this in January. By that time I had the whole thing taken care of, but Lifelock was basically useless. I cancelled them because when it came down to an actual issue, Lifelock was a day late and a dollar short.

I've been trying to find the time to work the math on this for a while, since I've got two mortgages and a car payment.

Of course, none of these are in the 3% range like your example
Off the top of my head is guess all three loans are in the 5ish range and total around 400k.
I do have some money set aside and I do need a chunk of it to put into work on this house, but I want to pay off that car loan.
Even though the market is boned and that car is magically worth as much as it was when purchased somehow, it's the only loan on something that's actually going to depreciate long term.
Mortgage one is on land- as the area grows and the money shrinks land just keeps it's value or better, while growing trees the whole time.
The house may rise or fall with the markets, but this isn't the big city so as long as it's taken care of it will only rise in value long term

My only question is the interest- I pay a lot in interest on these loans, and while dumping my extra cash into them won't save me a dime today, it will cut down the overall money spent on interest in the end.
I need a spreadsheet for each loan, or all loans, to figure out where that money should go now to save me the most later.

Of course, with 8 percent inflation, maybe that money shouldn't go to any loan.... But I don't see my income keeping up with that inflation rate for a while either so I just don't know.

Is this what financial planners do?

a reply to: peter_kandra

Also keeps alot of taxes at bay, especially if there is a death.

More people should do trusts, its not just "for the rich", its a great way to protect assets from all manner of issues. I don't currently have one, but will probably set one up in the next year or two based on some of my own needs.

a reply to: lordcomac

*I am not a financial advisor*

I would have to look at your numbers and please do not share them with me.

If you can yeild a better percentage in a 3MO, 6MO or 1Y treasury over the rates you are paying, I would do that. I wouldn't go out more than a year unless you are very wealthy. When treasury rates start dropping I would start investing in something like TLT, when rates go down, the price of TLT goes up and it's due to be honest.

The nice thing about I-bonds is you get the rate for 6 months. If you read the fed minutes, and you're a nerd like me, you will notice inflation is "sticky" according to them. The only thing that's been driving down inflation is energy prices and my local gas station went from 2.99 a gallon to 3.29 a gallon in a day and it's sticking there (anecdotal). Natural gas is spiking right now too, look at UNG.

As always, I want to at least help one person financially. We get let out of the education system with zero knowledge of finances.