Coming to terms with all the debt I never thought we had

As I scan the personal finance blog sites and headlines, I can’t help but notice how many people paid off big chunks of debt.

“See how we paid off $56K of debt”
“I crushed $24,000 in student loans in one year!”
“Our journey out of $83K of consumer debt”
“I paid off $40,000 in debt, and you can, too”

I’ve largely ignored these stories, because I don’t really feel like they apply to me. I’ve never defined my financial situation around debt. But I’m just now coming around to think about the debt we’ve already paid and debt have today and realizing these stories are more relevant to me than I thought.

Well when you put it that way …

As I said, I’ve never defined my financial situation around debt. That’s because I’ve never been in a situation where debt forced me to make difficult daily lifestyle decisions. I was always able to afford my debt payments without worrying about how to pay rent or buy food or even go on vacation. Even when I bought my Neon and my budget was pretty tight, I still had a ridiculous cable package and other fat in my spending. I never took out more than I could afford to pay back according to the payment schedule.

Thankfully, I have never fallen into the credit card overspending trap. I’ve always paid my credit card in full every month, as has my wife since we’ve been together. The only time I was charged interest was when the card company changed by billing date and I didn’t realize it. I called them and had that waived. I’ve never actually paid any credit card interest.

So let’s look at the debt my wife and I have had over the past 11 years.

Honestly, that’s the first time I’ve ever totaled all those things at once. That’s nearly a hundred grand in mid-term loans. We never had payments on all of them at the same time, though there was always overlap among them.

We became debt free except for the mortgage in October last year, when we got the proceeds from the sale of our house. We killed the last $11,000 of student loans and $4,800 to pay off my Taurus.

Then the air conditioner in the new house went on the blink, and here we are with debt on the books again.

Why our debt didn’t feel like DEBT

The two home improvement loans at our old house were done on zero-percent interest credit cards, which meant if we paid the balance in full within 18 months the loan was essentially free. (There was a small application fee at the outset.) We had the room in our budget to do that, so we didn’t pay any interest on those loans.

All the car loans, as well as the student loans, were less than 3 percent interest. None of them was racking up huge amounts of interest. Depending on the personal finance guru you read, many say you shouldn’t pay those types of debt down faster but should instead invest the excess and enjoy better returns over the long run.

It’s easy for me to rationalize that debt as being a responsible use of debt — after all, we were saving, we were living below our means, and we were putting money away for retirement. (This was the pre-FIRE days, so we weren’t putting away as much as we should have, but I didn’t know that at the time.)

How FIRE changed my thinking about debt

In January 2016, I finally had it with my Neon. It was 13 years old, and although it had really low mileage there were some problems making me question its reliability. The car shook something fierce, especially at a stop. I spent $1,100 on repairs (including four new motor mounts) that did nothing to address the issue. The mechanic suggested there were other things he could try, but he wasn’t sure any of them was going to fix the problem on its own.

I started looking at a newer used car and the value of mine on trade. It was worth $1,000 in trade and not quite double that in a private sale. I just paid more than its trade-in value for some motor mounts that, while needed, weren’t a magic fix.

I bought a 2015 Ford Taurus, took out a $17,000 loan with a credit union at 2.99%, and gave my old car to my mother in law to replace her even worse off vehicle. But this time, I felt guilty about the loan. I was determined to pay it off as fast as possible.

Because I had learned so much about personal finance, I started paying attention to what our debt was costing in interest, what it was doing to our monthly cashflow, and how it was preventing us from accelerating our retirement investments. I looked up how to create an amortization schedule in Excel so I could manipulate the car payments to see the effect on interest paid. Car loans are typically simple interest loans, rather than compounding interest loans. So the faster you can pay down principal, the less interest you pay in future payments.

After we sold our house and freed up equity, we zapped all debt but the new mortgage. My new car loan was gone nine months after my first payment, and I paid about $215 in interest.

Why I chose to take on new debt

So why, just months after clearing our plate of non-mortgage debt, did I decide we should put $12,000 on a new credit card?

It boiled down to risk mitigation. We could have drained the emergency fund and covered the new A/C and furnace, but then we wouldn’t have that cushion there if we had a real emergency. A bank wanted to give me $12,000 for 18 months without charging me any interest. Their hope is that I’ll screw up the payments and they’ll get me on the accrued interest. They even put the minimum payment at about half the amount I need to pay each month to clear the loan in the grace period.

I know I’ll have no problem making the payments in time. If a bank wants to tie up its money for 18 months with no gain instead of making me do that with mine, who am I to decline? I’ve reduced my monthly cashflow, which is delaying savings for a rental property, but I also kept my risk profile relatively unchanged. If necessary, I could pay off the balance tomorrow, but instead I can keep the rest of my money doing what it’s intended to do.

My debt plan going forward

Now I recognize that those were real debts. The kind that so many other financial bloggers write about and so many people strive to overcome. They didn’t define our financial lives, but that doesn’t make them any less real.

I don’t anticipate taking out another loan with interest unless it involves a rental property. My future budget projections have savings for our next vehicle(s) built in. Other expenses are accounted for in various buckets.

That’s not to say I wouldn’t do another zero-interest loan if the circumstances made sense. I don’t see the benefit of stretching things thin just to avoid all debt. But I also expect to be prepared to pay in cash at the time I need to, and I plan to ask for a discount for doing so.

Debt, like any dangerous tool, must be treated with respect and handled with care. There’s a saying in woodworking that a craftsman never blames his tool. That adage applies just as well for the financial craftsman carving out a well-planned lifestyle.