Monday, April 26, 2010

Goals - Why Become Debt Free?

I've heard a lot of people questioning the wisdom of being debt free lately. At Bible Study this weekend I made a comment that John and I are planning on being debt free by the time he is done with seminary so we can just go wherever God calls us and not have to be encumbered with the mortgage we have on the house here. There were so many expressions of shock and dismay and even one woman who said something along the lines of "Never gonna happen!"

I want to make it perfectly clear from the beginning that we do currently have a mortgage, a very small amount of credit card debt (that, God willing, will be gone this month!), and several self-loans from our personal savings. We do not have student loans or a car payment. I am not in any way looking down my nose at people who have debt. Believe me we've been there! Over $10,000 in credit card debt, $12,000 in student loans, and two car loans in addition to the mortgage.

Would we keep the mortgage if we weren't planing on following God's call to wherever he wants John to minister? In other words, if John weren't in seminary and planning a career change, would we keep the mortgage? Probably.

You see, I've always - my whole life, literally - been taught that there are two kinds of debt that are acceptable: school loans and a mortgage on a single property. Two caveats with this: 1) the school loans should never total more than your first year's salary and 2) the mortgage should never have a payment worth more than 40% of your net income.

Need a car loan? Pay it off ASAP. Same with credit cards. Best case scenario, use the card, and pay it off in cash right away - completely.

When John and I married, he had about $12,000 in school loans. I had bought a car off my parents for blue book value and that was our only vehicle. We took the minimum payment on the student loans and then added our 'car payment', $300, per month. In two years we were able to shave off a pretty good chunk of the student loan. Right before I graduated with my Master's Degree, we took a chunk of money out of savings and paid off the rest of the loan and paid cash for a second car.

About 8 months after that, I was in a multi-car accident on the freeway here. The "new" car was totaled. We used the insurance for the down payment on the car I currently drive. We paid it off in 3 years. And traded in the car we bought from my parents and a little bit more for the down payment our minivan after we realized that that car was on it's last legs and that if we ever had a 3rd child, we'd need more room than a sedan could provide. We paid that off in 18 months. That car we own is 12 years old now and the van 8. They run fine and work well for what we need. Are they new, no. Do we care? Not really.

After having a car payment, I can't tell you what a relief it is not to have one! I hope we never have to have one again. One trick is to keep paying yourself (i.e. your savings account) the amount that you had been paying on your car loan. It adds up fast! Our current plan is to pay cash for a second van to replace my car in the next 18 months or so.

Unfortunately, the credit cards keep going up and down. We typically use them for travel and Internet purchases. And pay them off each month. Occasionally we have an expense - usually a trip for a family emergency - that gets on there and doesn't have the full amount in the 'emergency' category of our budget. Right now, due to a funeral a couple of months ago, we have a small balance that needs to be paid off. God willing it will happen this month! It's such a blessing when we don't have anything on the cards that we try to keep it that way and are working to build up our emergency funds and other cash reserves so we can pay off the cards immediately when we do need to use them.

We do have a mortgage and a bit of equity in a rather run-of-the-mill, 1950's post-WWII rambler. Our purpose for paying this off is two fold: 1) So we don't run into the danger of ending up with two mortgages at some point and 2) We can have the ability to buy, no matter where we go.

You see, our church typically doesn't have a parsonage for the pastors anymore, so we have to provide our own housing. We want to follow God's calling and not have to depend on the salary to make our decision. If we move to a higher priced housing market, we have a wonderful down payment. If we move to a lower priced or comparable housing market, we will be able to pay cash for a house (helpful in a tight market) or, again, have a sizable down payment. In either case, we won't be stuck with two mortgages if the housing market here tanks or slows way down or home values drop and we can't sell this house by the time we have to move. Yes, we'd still have to pay taxes and insurance, but those two add up to far less than a mortgage payment!

This new job that I got starting in August looks to help us along the way to this goal of being debt free. I'm excited about that. You see, we plan to keep living this lifestyle we currently live and throw my salary at the mortgage and savings until we're where we want to be. We've always lived on one salary even though much of the time we've had two, so it's not that much of a struggle for us. I'm just hoping I have the personal strength to not indulge a bit after I start.

What are your goals for your finances? Are you working to become debt free? Why or why not?

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Lea