Case Study - $800,000 in debt and where to start? (3 YEAR UPDATE!)

[eeho]

+1 for an update please, I just came across this thread.

Such a wealth of wonderful advise and gracious respnses from OP, I hope all is going well :)

[Dicey]

Hmmm, his last post here was Dec. 20, 2017. I checked all of his links and none if them appear to be active. IIRC, this subject line was rather click-bait-ish. About 3/4 of this figure was very low interest rate mortgage debt on multiple income-producing properties.

I think he was possibly trying to use this forum to springboard his blog. When it didn't provide the exoected results, he lost interest.

However, since I love a good update as much as anyone, I'll send a bat signal, which didn't exist last time he dropped by: @thebudgetbloggo.

I suspect that since most of his debt is because he is a landlord and not necessarily a spendthrift, he's fine. I love that you guys care.

[thebudgetbloggo]

Still alive and kickin...hard to believe nearly three years has passed!  Hope everyone is closer to their goals!  We are moving slowly, mostly in the right direction-

Liabilities:  $656,160
Assets: $1,069,500

Significant updates:
Got a raise at the old job ($180k)
Started a new job right before Coronavirus hit ($150k)
Retired from the Air National Guard after 23yrs of service
Paid off all the loans related to the brewery ($50k)
Consolidated and/or paid off a couple other loans
Sold the SFH
Bought a new car

Balances:
Loans:   Orig. Prin.   Orig. Length   Curr. Prin.   Yrs left (refi)   Rate
Mortgage   $410,000       30          $293,500   (17)   3.375%
SFH   $80,460       30          $69,351   23   4.125% SOLD
CONDO   $108,000       30          $79,000   (13)   3.375%
DUPLEX   $205,000       30          $161,300  (18)   3.250%
Personal Loan 1   $16,000   5   $14,233   5   7.500% CONSOLIDATED
Personal Loan 2   $25,000   7   $17,612   7   10.750% CONSOLIDATED
Personal Loan 3    $50,000   5   $28,000   3   6.95%

Additional Balances:
Car 1 ORG BAL $40,121 CUR BAL $5,600
Car 2 ORG BAL $65,000 CUR BAL $64,450
Car 3 BAL $0 PAID OFF

HEL   ORG BAL $18,664 CUR BAL $0 PAID OFF
401k Loan   - ORG BAL $35,000 CUR BAL $0 PAID OFF
TSP Loan-   ORG BAL $15,000 CUR BAL $0 PAID OFF
CC1:  $10,500 (Paying off this week)
CC2: $13,300 (Paying off this week)

RENTAL PROPERTIES (Gross Rent)
                 RENT        PYMT   TERM       
DUPLEX   $1,825   $1,560   20   
CONDO   $1,650   $1,050   15   
SFH   $800    $670           30/s] SOLD

[former player]

Thanks for coming back and letting us know what's going on.

Your finances are looking a lot healthier now, so congrats.

(Although I did have a bit of a doubletake over $100k of debt on two cars.)

[thebudgetbloggo]

Thanks for coming back and letting us know what's going on.

Your finances are looking a lot healthier now, so congrats.

(Although I did have a bit of a doubletake over $100k of debt on two cars.)

Thanks @former player - the one car is nearly paid off (wife and kids SUV) and I just bought my first <newer> car in nearly ten years.  Yeah, wrong direction, but considering the other progress we've made I can live with it.  Have a VERY good opportunity to end this year with ZERO unsecured debt, and putting everything I have in that bucket.  Been a long road but I feel we are going to be in good shape soon.  Cheers!   

[Feivel2000]

Great that you came back, but I have a few questionmarks.

Assuming a NW of -80k in 08/2017 (the first post made it pretty hard to really read your NW) and now 450k, you added ~530k to your NW.
125k of this was rent, so you made ~600k in the last three years and saved around 400k?

So a savings rate of 66% while adding a 50k loan and another clown car. While also rolling credit into your mortgage? That's impressive. Or a sign that we can't see the full picture here.

[thebudgetbloggo]

Great that you came back, but I have a few questionmarks.

Assuming a NW of -80k in 08/2017 (the first post made it pretty hard to really read your NW) and now 450k, you added ~530k to your NW.
125k of this was rent, so you made ~600k in the last three years and saved around 400k?

So a savings rate of 66% while adding a 50k loan and another clown car. While also rolling credit into your mortgage? That's impressive. Or a sign that we can't see the full picture here.

Good question - I'll have to go back and look myself.  I think the original post's NW was hard to decipher, and may look low because I never accounted for the FMV of any of the properties (I did in my post yesterday, accounts for roughly $282,000 in equity/NW).  Additionally, I had refinanced them all to shorter terms not long before disappearing, so equity is building faster.  Net $50k from sale of the SFH paid down some debt, and have been paying down additional debt with 2nd job.

PRIMARY - FMV:  $410,000 BAL: $293,500 YRS: 17 RATE: 3.375%
CONDO - FMV: $175,000 BAL: $79,000 YRS: 13 RATE: 3.375%
DUPLEX - FMV: $230,000 BAL: $161,300 YRS: 18 RATE: 3.250%

Didn't really "add" a $50k loan, it was used to consolidate three higher rate loans, and is already paid down by nearly 50%.  That was Personal Loan #1, Personal Loan #2, and HEL.  I also paid off the two 401k loans (also $50k) I had used to open the small business.

[SwordGuy]

There are two ways to make money on real estate - cash flow and appreciation.  You are cash flow negative, so you have to make it up somewhere else.  That somewhere else is appreciation.  Leverage may not be your friend here, even though your tenants are paying off your mortgage.

There are four ways to make money:

1.  Cash flow.   This is my favorite because it means the property pays for itself after purchase.  No additional cash infusions are normally needed.
2.  Appreciation.   This means the property went up in value.  You only get that value when you sell, though.
3.  Depreciation.   This shelters income from taxes.
4.  Equity.  The renters are paying the mortgage.

The OP is using #3 and #4, Depreciation and Equity, just fine.

I do not know the market the OP is in so I have no idea on #2, appreciation, its amount or its' likelihood.

The properties "appear" to be cash flowing, but a quick glance makes me wonder about that.    You see, every single day everything associated with those properties is wearing out and trying to break.   The OP just hasn't gotten the bill yet.    Money has to be set aside to cover predictable repairs (roof, hvac, painting, carpet, appliances, ad nauseum).   Money has to be set aside for vacancies.    The properties need to be priced so they cover the cost of hiring a property manager.   (You can do that job yourself, but you should be paid for that labor just as anyone who held the PM job should be paid.)   It's important for the property to cover the need for a PM because shit happens.    People get sick or injured and need family to be full time caretakers, get stuck in foreign countries during a pandemic, etc.

Sword Guy recommends Gallinelli's book on investment property math.  You might want to have a look at that.

https://www.amazon.com/Estate-Investor-Financial-Measures-Updated-ebook/dp/B018HOKXBG/ref=sr_1_1?ie=UTF8&qid=1504069909&sr=8-1&keywords=frank+gallinelli

I most certainly do recommend this book!    It will help you understand the true numbers associated with your rental properties and that's essential to make money in real estate without counting on luck.

[Laura33]

First, congratulations on the progress. 

Second, make sure you don't fall into a two-steps-forward, one-step-back way of thinking.

From the numbers you posted, it looks like you've paid off around $135K of debt (not counting regular amortization -- focusing on the "paid off" stuff).  But part of that came from liquidating an income-producing asset, not budget cuts or such.  Now, I still agree that that was a good idea, because the house wasn't paying for itself.  But that still means that you have sold an asset to pay for (past) consumption, which is not what you want to be shooting for long-term -- it's necessary when you're that far in debt, but not desirable.

With clearing around $50K on the SFH, that means that you've covered about $85K out of your debt on your own, out of increased income and lower expenses.  Again, congrats!  That's really great progress.

But then you went and bought a new car.  Which was an *expensive* car, since you used to owe less on the $65K car loan than you do now.  So basically, it looks like you gave back around $65K of that savings and put it into a new car, a/k/a still more consumption.   

Note:  I'm sure it was less than that; I'm assuming the remaining part of the old car loan was rolled into the new one, and so that is not all attributable to the new car.  But still:  you rewarded yourself for paying off debt by taking on more debt.  Yes, you need vehicles.  But you don't need vehicles that require six figures of debt.

By way of contrast:  I live an extremely luxurious, non-Mustachian lifestyle.  And both of us like cars, very very much, and we have always bought non-cheap, nice cars, anywhere from brand-new to 2 yrs old.  We make more than you do and have no debt except for our mortage.  And despite all of that, up until a couple of years ago, we never owned cars that were even worth six figures combined (much less taking on that much debt to buy them).  Even adding our third car for the teen driver would not have put the combined cost over $100K.* 

Look, you are not me, you don't want to live my life, and you don't have to.  But the point is that your mindset and the choices you make every day drive** your results.  And as long as you continue to put nice consumption choices ahead of debt paydown and savings, you're going to continue to get in your own way towards the debt-free and financially-independent lifestyle you want. 

*Yes, we do now, because I bought my StupidCar.  But that came after we were FI, including having college costs fully covered for two kids.

**No pun intended.

[MrThatsDifferent]

I’m sitting here a bit stunned that someone who starts a journey to get out of $800k of debt, makes incredible progress over 3 years, only to add a $65k new car. Is it about making sure that people know how successful you are? That’s 1/3 your salary. On a car!?!  Anyways, I’m not a car person so clearly don’t get it.

[thebudgetbloggo]

I’m sitting here a bit stunned that someone who starts a journey to get out of $800k of debt, makes incredible progress over 3 years, only to add a $65k new car. Is it about making sure that people know how successful you are? That’s 1/3 your salary. On a car!?!  Anyways, I’m not a car person so clearly don’t get it.

Completely understand that perspective - in my opinion, there's also a difference between secured vs. unsecured debt.  Yes, I added more secured debt, but I've paid off and or consolidated a metric shit ton of unsecured debt, with more to come.  I'm trying to strike a balance between the life I want to live and the life I need to.  I could care less how successful anyone here thinks I am - I'm the one who has to live my decisions at the end the of the day - and this forum helped me understand and apply many principles that I otherwise would not have. 

Bottom line - I'm better off for having been here...and isn't that the point?

[charis]

I think the reference was to how successful your car makes you appear to people in your own life, not on this forum, which is generally unimpressed with expensive cars. As you can tell. (Also, not to be too annoying, but the phrase is, you couldn't care less, not you could care less, which means you do care.)

[thebudgetbloggo]

I think the reference was to how successful your car makes you appear to people in your own life, not on this forum, which is generally unimpressed with expensive cars. As you can tell. (Also, not to be too annoying, but the phrase is, you couldn't care less, not you could care less, which means you do care.)

Thanks for the clarification and grammar check.  :)  Look, I mentioned earlier I've owned 10 years worth of beaters while earning a healthy six-figure salary.  By beater I mean my last four cars were 10+ years old...a Honda Civic, a Volkswagen Jetta, a Ford Focus, and a Buick...none worth more than $5k, and they looked the part.  I didn't all of a sudden care what people think after not giving a @%$& for that long.  It was a "dream car" purchase for me at a time when I felt I could afford (and enjoy) it. 

My definition of success is not going to look the same as yours or anyone else's.  But the insight I've gained here has been valuable and helped me achieve more than I would have otherwise.  I appreciate that it's the result of both constructive feedback and criticism alike.     

Cheers! 

[tamuaggie2011]

You've definitely made awesome progress and each person's financial journey is definitely his or her own.

I think the reason for the backlash is because the whole premise of this website/forum is for people to understand that they should be completely out of debt and try to avoid it in the future at all costs (at least in terms of consumer debt).

Again you have made great progress, and I do not think at all this was done for impression but I guess in most simplistic terms it's as though you treated yourself "for a job well done" but actually the job isn't done yet.

Regardless continue to keep up the progress!!

[MrThatsDifferent]

You've definitely made awesome progress and each person's financial journey is definitely his or her own.

I think the reason for the backlash is because the whole premise of this website/forum is for people to understand that they should be completely out of debt and try to avoid it in the future at all costs (at least in terms of consumer debt).

Again you have made great progress, and I do not think at all this was done for impression but I guess in most simplistic terms it's as though you treated yourself "for a job well done" but actually the job isn't done yet.

Regardless continue to keep up the progress!!

+1

[thebudgetbloggo]

You've definitely made awesome progress and each person's financial journey is definitely his or her own.

I think the reason for the backlash is because the whole premise of this website/forum is for people to understand that they should be completely out of debt and try to avoid it in the future at all costs (at least in terms of consumer debt).

Again you have made great progress, and I do not think at all this was done for impression but I guess in most simplistic terms it's as though you treated yourself "for a job well done" but actually the job isn't done yet.

Regardless continue to keep up the progress!!

That's fair, but the reality is I WILL be out of debt...buying the car just moved the needle a bit.  Sure, I could have waited 5 years till I could buy it with cash, but buying it now allows me to enjoy it 5 years earlier and still own it outright by then.

I realize this forum is focused on being debt free but the journey is going to be different for all of us.  I'm not trying to justify my actions or choices...my destination can be the same as yours even if we take different routes to get there.  Cheers!

[MrThatsDifferent]

I guess that presumes that you don’t keep adding more and more debt, while justifying it. I’d imagine that what got you in the hole was a similar type of thinking. With a mountain of debt, you’ve convinced yourself that your happiness is conditional on a $65k car. A vehicle that gets you from A to B. If you’re still thinking like that you may be prone to more thinking, which motivates you to continually value things that work against your goals. Of course it’s your life and we get it, whatever you do for you is valid for you. However, this is the MMM site and forum and the type of excess your living is at its core antithetical to the ideas here, so adding a brand new $65k car, that you can’t afford (when you’re still carrying so much debt) and you have a paid off car is extreme excess. Of course people will call you and out and challenge that. If you’re posting here, you should know that. It would be as negligent for us to do not do so, as it was for you to make that purchase. Maybe there’s other ways you can enjoy happiness in your family for 5 years without a $65k purchase just for yourself?

[charis]

Why do you have a "dream" car at all? Why not a functional car in good shape at a good value suits your needs? It might be worth examining why you get pleasurable feelings from an expensive purchase that you can't afford.

[caracarn]

Why do you have a "dream" car at all? Why not a functional car in good shape at a good value suits your needs? It might be worth examining why you get pleasurable feelings from an expensive purchase that you can't afford.

I assume this poster, like me looks at cars the same way.  "A tool to get me from point A to B".  Therefore I do not ever "dream" about any car anymore than I dream about my toothbrush or my shoes.  It is something I need in my life, and I too choke at the car purchase.  However, I also live in the world and understand that some people enjoy the "clown car" (MMM definition). 

When I was in the C-suite at several companies I would regularly get asked by colleagues "Why don't you get a Mercedes or BMW like me?"  I would always reply to them "My Hyundai has the same or more features than your car that costs three times as much.  You've been in my car.  What is better about yours?"  I usually got a blank stare, a couple of half words, and then a head nod and "good point".  This I think is where the "who are you trying to impress" points are coming from because you can get a brand new car for much less money that stacks up very favorably to the $65K cars if you want that chance to not own a beater.  Also, on this board you'd get less questions from a $15K purchase of a decent used car (read "not beater") that still could give joy but have let you bank $50K.

All that said, it is your life, and so no judgment, just sharing perspective that is different.

[thebudgetbloggo]

Why do you have a "dream" car at all? Why not a functional car in good shape at a good value suits your needs? It might be worth examining why you get pleasurable feelings from an expensive purchase that you can't afford.

I assume this poster, like me looks at cars the same way.  "A tool to get me from point A to B".  Therefore I do not ever "dream" about any car anymore than I dream about my toothbrush or my shoes.  It is something I need in my life, and I too choke at the car purchase.  However, I also live in the world and understand that some people enjoy the "clown car" (MMM definition). 

When I was in the C-suite at several companies I would regularly get asked by colleagues "Why don't you get a Mercedes or BMW like me?"  I would always reply to them "My Hyundai has the same or more features than your car that costs three times as much.  You've been in my car.  What is better about yours?"  I usually got a blank stare, a couple of half words, and then a head nod and "good point".  This I think is where the "who are you trying to impress" points are coming from because you can get a brand new car for much less money that stacks up very favorably to the $65K cars if you want that chance to not own a beater.  Also, on this board you'd get less questions from a $15K purchase of a decent used car (read "not beater") that still could give joy but have let you bank $50K.

All that said, it is your life, and so no judgment, just sharing perspective that is different.

Appreciate the perspective, of course everyone here has been wonderful in providing feedback.

[Cb1234567]

First, congratulations on the progress. 

Second, make sure you don't fall into a two-steps-forward, one-step-back way of thinking.

From the numbers you posted, it looks like you've paid off around $135K of debt (not counting regular amortization -- focusing on the "paid off" stuff).  But part of that came from liquidating an income-producing asset, not budget cuts or such.  Now, I still agree that that was a good idea, because the house wasn't paying for itself.  But that still means that you have sold an asset to pay for (past) consumption, which is not what you want to be shooting for long-term -- it's necessary when you're that far in debt, but not desirable.

With clearing around $50K on the SFH, that means that you've covered about $85K out of your debt on your own, out of increased income and lower expenses.  Again, congrats!  That's really great progress.

But then you went and bought a new car.  Which was an *expensive* car, since you used to owe less on the $65K car loan than you do now.  So basically, it looks like you gave back around $65K of that savings and put it into a new car, a/k/a still more consumption.   

Note:  I'm sure it was less than that; I'm assuming the remaining part of the old car loan was rolled into the new one, and so that is not all attributable to the new car.  But still:  you rewarded yourself for paying off debt by taking on more debt.  Yes, you need vehicles.  But you don't need vehicles that require six figures of debt.

By way of contrast:  I live an extremely luxurious, non-Mustachian lifestyle.  And both of us like cars, very very much, and we have always bought non-cheap, nice cars, anywhere from brand-new to 2 yrs old.  We make more than you do and have no debt except for our mortage.  And despite all of that, up until a couple of years ago, we never owned cars that were even worth six figures combined (much less taking on that much debt to buy them).  Even adding our third car for the teen driver would not have put the combined cost over $100K.* 

Look, you are not me, you don't want to live my life, and you don't have to.  But the point is that your mindset and the choices you make every day drive** your results.  And as long as you continue to put nice consumption choices ahead of debt paydown and savings, you're going to continue to get in your own way towards the debt-free and financially-independent lifestyle you want. 

*Yes, we do now, because I bought my StupidCar.  But that came after we were FI, including having college costs fully covered for two kids.

**No pun intended.

Dear Laura33:  I ** thoroughly ** Loved and enjoyed reading your Reply on the very first page of this discussion and here! Wow, what a great way to articulate humble and smart choices, and how they can lead to a wonderful life. You sound like such a kind and gracious person. As shown below, I am not as nice ;-)

Unfortunately, I think we’ve lost this one. He’s stuck on having a lot of money coming in (“killing it”, as he said), A whole lot of money moving around in the accounts, and all the trappings of success such as expensive cars because “I deserve it “. I was happy to see that the SFH was sold, So that simplifies a bit. Then I hear something about business ventures and see a consolidation loan plus a new car purchase. Sorry OP, was hoping for a true paradigm shift. For your income, you should OWN more of what you have. 85K paid off in 3 years is peanuts for your income level.

For perspective,  we never earned close to the OPs income, but life is good. We engineered our situation so that we could live on my spouse’s income of about 30K. We are so much more happy, and our monthly expenses are between 1500 and 2000 a month, including **everything** (by everything, I mean my two money-sucking horses and various other animal friends ;-). ). We could write a check and pay off the OP’s car and not feel it. I suspect that it is not the same case for him. I’d rather Live a more reasonable life - below our means - and actually have money instead of look like we have money. It’s important to us to be poised to help family and others when needed, not to mention security for ourselves.

As several said: (very) different values.

[AMandM]

I just saw this thread for the first time today and haven't read all of it, but enough to know that you've made some big changes and a lot of progress. And, more important, that you've kept at it for several months, which is huge. Congratulations!

You probably realize by now that changing your mindset is the real key to success in the long term. One aspect of this jumped out at me. Four months ago, Laura33 said

After four pages, my impression is that you tend to approach finances emotionally

and now you say

It was a "dream car" purchase for me at a time when I felt I could afford (and enjoy) it.

(emphasis added)

Whether or not you can afford a $65k car is not a matter of how you feel. It's a matter of logical, rational analysis, based on weel-defined premises.  The place for emotion is in the effects of that analysis: if you *know* (not feel) you can afford it, then you are free to enjoy it in comfort. When you spend without analysis, as you were when you started the thread, you end up with the feelings you had back then: "extremely frustrating" and "disheartening." Most of the advice on this thread has been aimed at getting you to apply more reason to your finances. That's the mindset change that will make the biggest difference to you overall, imo.

As to the matter whether, logically, you can afford the $65k car: what are your premises? On the premise that consumption is a lower priority than getting out of debt, the answer is no. On that premise, a luxury* good doesn't justify taking on debt, especially when you still have other debt outstanding. You can only afford the car on the premise that it's ok to consume now and pay (more, because of interest) later--and even on this premise, only if you have room in your budget for all the expense associated with this car after higher-priority categories such as retirement savings, emergency fund, home maintenance, etc. Most people in the US hold that premise, and maybe you do, too. Just be aware that it is not really compatible with the goal of being debt-free. To quote the wise Laura33 again,

as long as you continue to put nice consumption choices ahead of debt paydown and savings, you're going to continue to get in your own way towards the debt-free and financially-independent lifestyle you want.

But that's a friendly warning, and not meant at all to minimize the progress you have made and are making. Congratulations again!

*This car costs more than the median household income

[Villanelle]

I think the biggest part of the problem is that when someone buys such a HUGELY unnecessary and HUGELY expensive item, it strongly suggests a mindset that will mean this isn't aone off thing.  There will be another car in 5 years.  (OP, you mention that you could have waited 5 years to buy but instead you can have it now and it will still be paid off in 5 years.  I'm sure you are smart enough to know that one difference is the interest you will have paid, and another is that in 5 years this car will be 5 years older and worth probably half of what you paid before you even look at interest.)  Will you drive this car for 15 years instead of 10?  Unlikely.

And even bigger picture, when someone uses this sort of logic to buy something he can't afford (and yes, if you finance it that means you can't afford it), then it's rare that they only do it one time and for one category.  So in 5 years, you will justify another ridiculous expensive car, that you may still not be able to afford.  And you justify a new TV when there's nothing wrong with the old one.  And a housekeeper.  And...

It's almost never just one item.  Remember that next time you want to justify a ridiculous purchase.   

[Goldielocks]

Reading OP's story,  it is clear that they have not become full MMM and early FIRE mindset, but they have turned the ship around so that instead of spending more than they make, they spend less. 

Congrats.  That's huge.

All the complexity in those financial accounts adds a lot of stress over time, pressure to maintain an income even if you want something else.   Many of us here have been through this and hindsight is 20/20.... but that does not take away the achievements by OP to date.

I don't agree with a lot of Dave Ramsey, but at his core, his message is about "financial peace".  "Financial peace" means stopping the circus of money monkeys, schemes to get ahead, even when (despite when?) the numbers add up, and simplifying one's financial position to reduce stress, reduce the need to reward yourself materialistically,  and to increase focus on your true goals.

 It is a strong argument.