I just edited an article about seven steps to get out of a personal debt crisis over at Penny Thots. I felt that it was appropriate because I just recently decided that I wanted to get incredibly serious about developing a 5 year plan for eliminating all of my debt that is costing me more than 10% interest.
Why 5 Years?
There are several reasons why I picked 5 years and will be structuring the plan in such a fashion. First of all, I am in enough debt that I know it won’t be happening overnight but I don’t want it to take 20 years either. Some of the debts will be paid off in that time frame simply by continuing to make the current payments, e.g. the Prosper loan. Others will require some additional payments.
In five years (actually 67 months), I will be facing a significant birthday and will really need to be thinking about getting everything in line for retirement before it sneaks up on me without being adequately prepared.
Finally, the youngest child will be graduating from high school in just under six years so it is expected that the house will be empty. Having extra cash and extra time would be a good thing. At that point, extra cash will be used to invest in cash producing assets that help to support my wife and me during retirement.
Why Ten Percent Interest?
I would hope that the answer speaks for itself. Making 10% annually on an investment is a decent return, especially a no-risk, tax-free investment like paying off debt. Any debt that is charging me less than that will make me think twice about possibly putting those funds that would be used for payoff into dividend paying stocks or more real estate.
Student loans and mortgages are carrying such low interest rates that it would certainly seem reasonable to continue to pay these off slowly while building an asset base.
Creating the Plan
First, I need to sit down and figure out which debts are costing me the most interest and figure out where to focus my energies. I also need to write down monthly goals and targets to see if the debt reduction plan over the next 5 years will be feasible. My gut says it is, but I want to write it down in excruciating detail. I will work on that over the next few days.
Then I want to present the plan to my wife and enlist her cooperation and commitment. I figure that I will have to include a few rewards along the way to make any sacrifice more palatable. Things like deferred items around the house and a trip might be useful for obtaining the proper level of motivation.
I feel like I have made some progress but need to really sit down, create some intensity, and then execute. It is going to be a long road, but in the end, should be well worth it. I hope update everyone next week on how it all turns out.
Maybe I am exaggerating a little, but it seems like every blogger that I read is getting into real estate. As a landlord myself, I can’t help but notice these things. It makes me wonder what the implications might be. I suppose it could mean that the price of real estate is nearing a bottom and that now is a good time to get in. Just check out all the bloggers that are getting into the landlord business:
Philip Taylor at PT Money is planning on renting out his home. This is actually the way that I got into real estate. Our first home would not sell and needing some extra room after kid number 6 was born, we were looking for something bigger. In order to do that, we could show the income from renting on the mortgage application which cancelled out that expense. It has been an interesting experience.
Crystal at Budgeting in the Fun Stuff is building a new house, renting the old one, and may just take in boarders. It sure will help offset the cost. Too bad I can’t charge my kids rent, yet. I suppose if they bounce back, I will be doing just that.
Money Reasons is checking out the possibility of investing in real estate. Sounds like a duplex may just be in the cards. I would be cautious in a town with only a few major employers. One of them goes out of business, and the vacancy levels skyrocket, homes are foreclosed and property values drop.
Sandy at Yes I am Cheap even got money from her 401(k) to buy a second property.
Like I said, I am not sure what this all means. I do know that I would like to own some more real estate. Is it something about having an investment that you can touch and see? Is it because most people get the concept of owning property and renting since we are either a tenant, own a home, or are a landlord?
My Real Estate Philosophy
For me, real estate is a long term investment. It should all be paid off in my mid-60’s even if I don’t end up trying to pay off the mortgages early. Then the rents will be used to replace income from working allowing stock investments to grow as long as possible before having to take mandatory withdrawals.
To protect my investment, I have insurance which protects me from natural disasters just like you would want to have on your own home. There is also provision to replace lost rents should anything happen.
In the short term, my goal is to simply break even on cash flow and allow the tenants to ultimately pay for the mortgage. Unfortunately, there is a lot of excess housing supply in my area and rents can’t be raised. In fact, the general trend has been negative, but I have been able to stand pat. It has been that way for the past decade. I consider myself fortunate that I have decent tenants.
Maybe someday, I will go into more detail about my real estate experience. In the meantime, I am sure that there will be plenty of real estate discussion in the blogosphere since it seems like everyone is getting into real estate.
Are you looking to invest in real estate?
These are the carnivals in which my blog has appeared this past week:
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