YNAB BLOG

When you finance anything, you finance everything.

ball-and-chainUntil you’re completely debt free, everything you purchase is financed at the rate of your highest-interest debt.

What an awful (and important) thing to realize.

After Tuesday’s post about the concept of “afford” being useless,  Kate and I were discussing our desire for garage gym equipment. I asked her how she felt about the fact that paying cash for the equipment while we have debt at 10% interest is the same as swiping a 10% credit card and carrying the balance.

“That’s not right,” she said. “It’s not the same thing. We’d never put it on a credit card.”

“Right, but that’s exactly what we’re doing by buying it before our debt is paid off.”

“Well, that’s not true for essentials like groceries. It’s not like we can go without food.”

“Yes,” I told her, “it is true for groceries. Whether the purchase is essential or not is irrelevant. When you spend a dollar on something other than reducing the debt, you’ve financed that dollar. Every penny we spend is financed at our highest interest rate.”

“So, what now? You’re saying we can’t buy gym equipment until the debt is all paid off?”

“I’m just fully accepting the idea that we’d be incurring new debt by choosing not to pay down the old debt.”

“Well, we have to live. Where’s the balance?”

Where’s the balance, indeed.

The “balance”, it turns out, was wrecked when we decided to spend money we didn’t have. How interesting that we and other debtors are so comfortable getting out of balance by swiping the card or signing for the new car, but feel entitled to a “balanced” approach in how we repay the debt. We humans are funny that way.

Where does this realization leave me? I now have to consider a new, interesting, uncomfortable question every time I go to buy something:

Would I make the purchase on a credit card and carry the balance?

(Reminds me of a conversation I overheard at the gym a few weeks back. Actually I only heard one sentence:

“Yeah, we’ve decided it’s worth it to us to go ahead and put it on the credit card and pay it off over time.”

Maybe he was talking about a kidney transplant, but I don’t think so. I wanted to back-hand the guy, grip him by both shoulders and scream “Don’t do it man! Debt wrecks everything!” Maybe, after wiping the bits of spittle off his face, he’d have come to his senses. Or maybe he’d have throat-punched me.)

Anyway, back to our new, interesting, uncomfortable question. I’ll tell you what – it’s a game changer.

Would I put groceries on a credit card and carry the balance? If I had to, yes. But I’d probably have to give up my pre-cooked bacon from Costco. (Now I’m really in a terrible mood.)

I guess I’m finally realizing why people like Dave Ramsey and Mr. Money Mustache – however much those two don’t have in common – advise us to run from debt like a gazelle from a lion, and to treat it like a swarm of killer bees covering our entire bodies. It’s because, while we have debt, it casts a shadow over every purchase we make – or wish we could make. Especially that most important of all purchases: saving for the future.

The scripture tells us not to run faster than we have strength. That seems like wise advice. It doesn’t, however, tell us to avoid running. And it really doesn’t tell us to go backwards.

55 Responses to “When you finance anything, you finance everything.”

    • mark

      Sarah – we’re in the same boat. It’s okay to get depressed about it – for about five minutes. Don’t beat yourself up. I’m not. I’m just letting the reality of my debt sink in so I have the right attitude about attacking it and becoming debt free.

      My advice for any kind of debt is to be rid of it as fast as humanly possible. I’m in the ongoing process of figuring out how to implement the advice in my own life!

      Reply
  1. Thought I was out of BS2...

    Wow!!! It’s true, but to read it from that perspective… Wow!!!

    We are currently in Baby Step 4 (DR’s plan) but have been saving up to replace a car (and to go on vacation). Now I hear that we are borrowing that money at 2.75% (Our mortgage rate)… Wonder if I can get my wife to understand/agree with this reasoning. After all, how long could it take to pay off 173k???

    Reply
    • mark

      You’re exposing my cowardice. I’ve only let myself mentally apply this principle to my balances other than my first mortgage at 3.99%. I’m really having to work my way into the full implications of this concept. Math is harsh.

      Reply
      • MYDWY

        A mortgage rate at 2.75% is /not/ the same as financing on a credit card. It has a few things going for it that CCs do not: (1) It is not compounding interest (huge distinction); (2) You will make the same payment over the life of your loan; (3) 2.75%, adjusted for tax benefits, is far below the going rate of inflation (approximately 3.6% right now)–that means that effectively the bank has given you free money to put into your house.

        Let’s not treat all debt the same. That’s dangerously oversimplified thinking, and as the comments are showing, entirely too depressing.

        Reply
          • Robert

            but still. the sad part is that no matter how “good” the deal is for paying off the mortgage in a longer run, you could still be kicked out of your home as long as you don’t own it. And the bank really owns it until it’s payed off. :(

            Reply
            • MYDWY

              Robert, I don’t know who’s trying to scare you, but you cannot be kicked out of your home unless or until you fail to comply with your obligations. If you make your mortgage payment every month, that house is yours.

              Of course, if you over-leverage yourself and manage to get liens on your home or take out second, third, and fourth mortgages on it, you could lose your house if those creditors sue you for failure to live up to your obligations. But again, that’s all on you.

              But even assuming that the worst does happen, and one of those creditors can foreclose on your home, you are entitled to both the equity you put into it (after the foreclosure sale of course) and to pay off the creditor before the foreclosure is finalized.

              If you want to own your house free and clear, that’s fine, and I respect the desire to have that security, but just be aware that you’re trading peace of mind for a much better investment if you’re willing to be patient.

              Reply
              • Robert

                yeah i understand and respect your point of view as well. :)

                we never know what the future will bring, that’s why i feel it’s better to pay it off as soon as possible since if times go really bad and a day comes when we can’t pay the mortgage, they are entitled to get that money from us and the dream home will be gone.

                Reply
        • Christian

          MYWDY, I’m not sure you’re really taking all things into account. If we were to follow your logic then it makes sense to take out mortgages on our homes for the purpose of investing the funds elsewhere.

          The bank has not “given you free money”. More accurately, the bank has let you borrow money against your future earnings and taken a chunk of it for themselves. That you have found a way to use that money more effectively does not change this fact, but it does doll it up a little bit.

          I’m not saying your calculations are worthless – they’re just not worth as much as you may think. By keeping your mortgage and investing it at a higher rate (or paying it back with inflated future funds) you may be gaining a small percentage of benefit, but you have traded some gain for more risk.

          Consider what would happen if you lost your income, the market took a nose-dive, you retire, or any other number of scenarios. For many of us, we would rather give up the meager 1-2 % investment gain and not have to make the monthly mortgage payment.

          Reply
          • Mark DeNio

            I don’t have a mortgage but I have student loans. I took the advice and wound up neither paying off the debt or investing. 14 years later I still have the loans. My other issue with the investment idea is taxes have to be included in figuring the return. Paying off the debt (up to 30% in my case) is earning 30% tax-free!

            Reply
            • MYDWY

              Also, whoever gave you bad advice to not pay off the debt (at 30%!) and not invest was smoking something.

              Reply
          • MYDWY

            Mark–

            It is truly free money in the long run. Inflation runs at about 3.5% each year now. If you have locked in your house at a rate lower than that, you will be ahead of inflation since it’s locked in at simple interest.

            I don’t think my logic advocates taking out “mortgages” in order to invest. That’s a silly extension of the sounder logic I’m employing. That is, rather than pay off your mortgage early, invest the extra. Even under a very conservative return, that investment will get you more benefit than simply throwing money at simple interest.

            Reply
    • LeiraHoward

      Yeah. My grandmother’s house smelled like bacon all the time. Definitely a good smell! Why would you want to have it precooked and miss out on the yummy goodness of freshly cooked bacon?

      Mmmm… BACON!

      Reply
    • mark

      Hm – didn’t even think about it. I because I think of Dave Ramsey as a podcast, not a website (since that’s my only interaction with him). Thanks for the reminder – adding a link now.

      Reply
  2. bill

    Can’t imagine what it must be like to live a Mark’s house. To scrutinizing every financial detail must be exhausting. On the other hand, it is for a good cause. (eliminating debt, and material for writing a blog)

    Keep up the good work and thanks for presenting new perspectives.

    Reply
    • mark

      I read your comment to my wife. She laughed (pretty loud), confirmed the sentiment, and sends her thanks.

      (and you gave me a great idea for a blog post, so I thank you, too.)

      Reply
      • allabee

        I gotta say, you’re a very gracious blogger in the way you respond to comments! I think I’d be much too defensive for this line of work. All of which is to say: great job and keep it up!

        Reply
  3. B-Ster

    This is a very harsh reality. But this is how to get the anger required to HATE your debt. I don’t feel like we HATE our debt enough. It would/could be eliminated so much sooner.

    Reply
  4. EL @ MoneyWatch101

    Great story how your personal debt is a cloud and will make future purchases that much more difficult. I believe the choice to draw a line in the sand when it comes to adding new debt will be the deciding factor between those that succeed at attaining debt freedom.

    Reply
  5. Alex

    I realized this truth a few months ago. I’m running from debt as far as I can, but I find that I don’t have the resources to do quickily. Would you recommend cashing out a 10K IRA Roth to pay off 10K in credit card debt to be debt free? Or do you recommend paying 200 a moth for however long it takes to get rid of the 10K debt (at 8% interest)? I really want to be debt free.

    Thanks.

    Reply
    • mark

      Hey Alex –

      I’m glad you want to be debt free, but I’m not qualified to comment on cashing out Tax-advantaged retirement accounts to pay off debt.

      Reply
    • Jesse

      Hey Alex, keeping any tax penalties in mind (Roths are a bit different from traditionals), would you borrow 10k on your credit card at 8% interest in order to invest in a Roth IRA? That’s the basis of this thinking, and it tends to turn things on their head :)

      Reply
    • Christian

      Penaties aside, I would not recommend this, mainly because it enables you to accrue more debt if you haven’t resolved the issues that caused you to run up the debt in the first place.

      Keep your IRA Roth funded. It’s too easy to fall prey to the mindset that you’ll “just take a little out”. Eventually you will have nothing there. Instead, treat it as untouchable, a one-way-valve for money, so when you retire, it will be there for you.

      Reply
  6. Robert

    This is so awesome. I just talked about this with my wife the other day and here it comes as a blog post. :) Anyways… It really got me thinking again on what is the best way for us to go forward. Spend money to make money to pay off loans with, or just pay off loans. off course we have maintanence and such.. and that can become a big black hole even if you’re on a tight budget ;)

    we just moved kind of “off grid” a few months ago, to start a new lifestyle. the one we’ve dreamed about since we got married 5 years agi, we’ve got chickens, soon we’ll have 2-3 sheep that will give us some nice lamb in the springso we’re really anxious to use as much as possible to get this going, so we can be as self-sustaining as possible. But yeah we do have loans. our awesome little tiny farm with 2 acres of land was actually cheaper than our combined student loans and they’re all att low interest over here in Sweden. the biggest interest is right around 3%.

    So we’ve started to talk about how to maximize the effect of whatever we do. the farm is old so we need to take care of it, and our few animals (only for household needs, no business, yet..) ..and we also want to pay as much as possible on the student loans since those have no security. nut no loans on cars or anything.

    But we have the 1 moth buffer and we don’t have any credit cards, only debit cards. So we have a pretty good start. We just made a brand new budget this summer when we moved but after we’ve been at it for a few more months i think i’ll send it to Mark to have a look at it. I know thigs don’t work the same here in Seden which makes it hard to compare, but it would still be interesting to see.. :)

    anyways. don’t know where i’m going with this, but i really like this blog. my wife smiles when i’m looking at new emails, haha. She can tell when i’m reading these blog posts. :)

    Reply
  7. Jess_Esq

    This reminds me of the conversation on this blog a few posts back about investing in your 401(k) up to the point of the match because that is 100% ROI. But, it’s not really. It’s like borrowing the money from your highest interest debt. So if your highest interest debt is 10%, putting $1 in your 401(k) is really going to “net” you $1.90 invested and not $2.00… and that’s a great thing & the best ROI you can get. I still think, however, it’s important to consider that you aren’t doubling your money when you invest to get the employer match – you are doubling it LESS the highest interest rate debt you carry.

    Reply
  8. angela

    My husband and I view debt with the same regard as the plague! We do have a tiny amount of debt (interest free and to be paid off within 4 months). We weigh our options very carefully and do everything we can to avoid debt. That’s not to say we haven’t had debt. Over the years we have financed several vehicles (pre-YNAB), all of which were paid off as soon as possible. My FIL was gracious enough to let us live with them while we worked to save money for a house and put it on the family farm. This was rent free living as long as we helped out on the farm. We were able to put up a sectional home on family farmland without taking a mortgage. We realize how rare this is. We were given opportunities and we also worked very hard to get where we are. It is a frame of mind to chose not to be in debt.

    Reply
  9. Kenneth

    Consider someone with 20,000 of credit card debt at 15%. That $150 grocery trip gets stacked at the top, and may take 10 to 15 years, at minimum payments, to work it’s way down to the bottom to be paid off. So every year you are paying $22.50 in non tax deductible interest on those 3 bags of groceries!

    (Pvt. Hudson from the movie Aliens):
    Well that’s great, that’s just f”in great, man. Now what the bleep are we supposed to do? We’re in some real pretty bleep now man!

    Reply
    • mark

      Hey Kenneth – that quote perfectly sums up how I’ve been feeling the last couple of days. Luckily, I think things will turn out better for me than it did for Pvt Hudson.

      Reply
  10. Micro

    That makes a lot of sense. If you still have debt, that means every purchase you make you are deciding is more important than debt payment so you are continuing to finance. Granted for a lot of things it makes sense like food, bills, etc. Luckily, the only debt I have is student loan debt and I’m working on getting it paid off.

    Reply
  11. Jesse

    Wow. This puts a whole new perspective on our debt – a perspective that I’m not happy with, but it’s so true.

    Reply
  12. Dawn

    Great article especially since I am literally “starting over”. I’m very recently divorced, have no debt (car paid off, I rent and my one credit card paid off) and I want from this point forward to be as smart as I can with the future decisions I make regarding my finances. One thing I want to do is improve my credit score so I can some day be able to buy a house for my daughter & I. Or maybe I’m better off renting? I just want to know the best way to better my credit score (It’s not the best due to many different things). Is it to almost max out my credit card ($750 limit) each month and then pay it off each month? I just do not know. All I know is that I want to be as smart as I can with every financial decision I make. One of the smartest things I’ve done so far is having purchased YNAB. :)

    Reply
    • On the quest for a ZERO FICO score.

      Hi Dawn,

      The best way to build your credit score is to not build your credit score. If you have no open accounts, in 6 – 12 months your credit score will be a thing of the past. You are bankable for a mortgage if you a) have a great credit score -which suggests that you love debt, or b) have no credit score. Those who find themselves in the middle are the ones who have difficulty.

      To get a loan with no credit score, you simply need the lender to do manual underwriting. It is definitely doable.

      Reply
    • L Lessa

      @Dawn – Almost maxing out your card likely won’t make a difference in your credit. Coming close to your credit limit may actually ding your score by 5-10 points until you pay it off when it’s due, then it goes back up. I’ve seen this with my own score.

      It’s paying your cards off in full and on time each month that ups your credit.

      After a few months of paying it off in full, I’d call the credit card company and ask them to increase my credit line (Note – I’d only do this if I was not carrying any balances on any of my cards). Then, just keep spending low. Low spending + large available credit = lower credit utilization rate, which is better for your credit score.

      Keeping an account in good standing for many years is also helpful.

      Reply
    • On the road to zero

      Dawn,

      We’ll try this again (as my last reply apparently did not meet moderator approval. The best way to build your credit score is to NOT build your credit score. There are 2 ways you can be bankable for a mortgage: 1) have excellent credit (FICO score) and 2) have NO credit.

      If you have an excellent FICO score, it just means that you love debt. You have revolving accounts and other lines of credit that you are timely to pay on (don’t miss payments, aren’t late). It also means that you have (what they determine) to be an acceptable ratio of available credit. If you want to get ahead, having no credit is the way to do it. Your income is your greatest wealth building tool. If you have no payments, you have more of it to build wealth with.

      If you have no credit score, then the company that writes your mortgage will have to do manual underwriting. (This is when they actually look at you, your longevity on the job and your ratios to determine if you are bankable for a mortgage. In the not too distant past, this is how mortgage underwriters did their job.

      It is the middle ground (average or poor credit) where your will find your greatest challenges. Usually, someone with average or poor credit is plagued with slow and no pays, charge-offs and bad debt. It is here that banks believe you are a higher risk.

      Reply
  13. Anonymous Credit Card User

    Interesting reading, especially as my husband and I have just decided that we have to finance more debt, even if we have to put it on the credit card and finance it over time.

    I thought I’d give our perspective so you can see another situation where this does actually make sense (at least somewhat).

    As much as we hate to do it (our long-term plan would have us debt-free including auto and student loans and mortgage in 6 years), we HAVE to waterproof our (unfinished) basement. Several reasons:

    (1) The basement floods every time there is a heavy rain, up to 6″ deep.

    (2) There is no sump pump or drainage system in the basement, which currently has to be drained by means of utility pumps placed on the basement floor, and those pumps must manually turned on and garden hoses must be run out a basement window to drain further out on the yard.

    (3) All the mechanicals (water heater, water softener, furnace, and fuel oil tanks) are located in the basement and need to be protected from rust.

    (4) Mold is beginning to grow due to the dampness (health concern, though none of the mold is currently more dangerous than what grows on bread).

    (5) Having water come into the basement is likely to weaken the foundation and destroy the house structure over time.

    (6) There is a possibility that we may have a job-related move within the next year, leaving us with needing to sell our house, or at least leave the house uninhabited for a short period of time (several months). A wet basement will drive the home value (and likelihood of a sale) WAY down, and if the house is uninhabited, there is a decent chance of major damage without someone being on site to start the water being pumped out immediately.

    Conclusion: The basement NEEDS to be waterproofed (including adding a battery-backup sump pump in case the power goes out when no one is home) before spring and the big rains come. Unfortunately, this is an EXPENSIVE job, and not one that our emergency fund will cover.

    We looked at financing, and found that getting a home improvement loan was possible, but cost-prohibitive (large closing costs, which are then rolled into the loan, would add more over the life of the loan than just putting it on a credit card and making the same size payment to the card).

    We are lucky enough to have lower-rate credit cards (ranging from 8.9%-15%). Even if we consider that we are financing at the highest rate, as described in the article, doing the math shows that it would be cheaper (less interest paid over the life of the loan) to put it on the card (assuming we DO follow our plan to make the same payment that we would have to a conventional loan) than to get the loan.

    We have investigated all options available in our area, and with our current situation and credit rating (good), that is our cheapest option, unless a possibility for getting a home equity loan works out.

    Of course, if we just put it on the card and only made minimum payments, we’d be in deep trouble, that’s another can of worms.

    But just thought I’d show the reasoning behind why someone *might* choose to use a credit card to finance debt. Not that this is what the person you overheard was talking about, of course. They might’ve been financing a boat, for all I know. :)

    Reply
    • Just say no...

      JUST SAY NO!!!

      Anonymous,

      There will always be ways to justify getting into debt or keeping debt. I submit that you are simply not ready to be out of debt. If you were, you would simply say no. It’s what we (my wife and I, and many others) have done. If you have a water-proofing issue in your basement, you have a couple (non-debt) options:

      1) go into storm-cloud mode. In storm cloud mode, the following things need to happen. First, if you are accelerating any debt payments (paying extra) that needs to be paused (temporarily). While you are back to making minimums on outstanding debt, all extra money goes to waterproofing the basement (which you haven’t given a figure on -alot of money means different things to different people). While on the subject, sell anything and everything you can. Sell so much stuff (and really it is all only stuff) that your kids think they are next (Dave Ramsey’ism). Work as much as you can. Get OT at work, get a 2nd and 3rd job. Reduce your lifestyle down to nothing (no eating out, now splurge purchases, minimal gift-giving). Now, I am not suggesting that you do this forever, you are just sacrificing short-term, for the long-term win.

      2) Do the work yourself. The internet is a wonderful place. You can teach yourself how to do anything, and there are great resources out there. I simply googled (though you can use whatever search engine you please) “How to waterproof a basement” and I got about 2.1 million results. It may not be the best option for you, but it is a viable option…

      3) Sell the house now. If you have any equity, you can discount the house to get it to sell fast. Now, I am in NO way suggesting that you should hide the fact that the basement floods. In fact, quite the opposite. Disclose it. Someone will buy the house even with the issue (because they maybe aren’t as concerned about the waterproofing issue). Or, quite possibly, it is a task they are willing to take on.

      it is possible, in those suggestions, to combine (sell a bunch of stuff, work extra jobs and do some/all of the work yourself) some or all of the steps/parts of the steps.

      I will close with this: It is easy to justify having debt, but hard to draw the line in the sand and say no more. It is scary attempt to make drastic changes in paradigm. The results, however, are worth the effort and more. Coming to the point where you say, absolutely, under no circumstances, am I ever going to be in debt again, is LIFE CHANGING. It causes you to make different decisions and will, ultimately, cause you to win with money.

      Reply
      • Anonymous Credit Card User

        Thanks for your comments. A limitation of the internet is that it doesn’t allow for complete understanding of each others’ financial situations, and it is hard to judge what is going on.

        Much of the existing debt (other than the mortgage) is due to medical items, not likely to be repeated, and is being paid off as quickly as possible under our circumstances. Unfortunately, the reality of life is that not everyone is in a situation where they can reduce expenses, as we already live a frugal lifestyle.

        We investigated doing the basement work ourselves before choosing a contractor, and due to the types of issues in the foundation, and local building codes (bah!), it is not possible to do it ourselves. Not going to expound on this further, you’ll just have to take my word for it.

        Unfortunately, after having a realtor and an appraiser out to see the property, if we do not take care of the basement issues, the house value drops to a point that we would take a loss if trying to sell it as-is. Putting the money in to take care of the basement increases the value of the home to the point that we would make a profit, even after paying off the waterproofing.

        Anyway, while you may judge me for taking on more debt, the reality (and my point in the previous post) is that there ARE some situations that end up requiring a temporary debt, unless you are independently wealthy. When those situations occur, you just have to do the best you can and then work to get out from under the debt as soon as possible.

        Reply
        • just say no...

          Anonymous,

          Thank you for taking the time to be candid (and somewhat vulnerable). After re-reading my post, I can see how it comes across a bit judgmental. I realize that we don’t know each other. The intent of my post was really to spur you on in the direction of no debt. Even with the information you have now added, I maintain that it would be possible to do what is necessary, without debt. Maybe not all of the options are ideal, and some may not even be feasible (in your circumstances) but I still maintain that it is possible.

          Sometimes, the most difficult things are the most rewarding. While I don’t know the finer details of your situation, I do know that in the same situation, with the details you have provided, I believe my choice would be different.

          To your last point, I am not independently wealthy, but someday (with the decisions that I am making now) I hope to be. Worthy of note, if a large emergency comes (such as the basement repairs you are now facing) we are ready. We are not ready because we are wealthy (though we have been blessed with sufficient means), we are ready because we drew the line in the sand. We are ready because we have planned for the unexpected. We are ready because we are choosing to “live like no one else, so that later we can live like no one else”. I don’t say these things out of piety or arrogance. I say them with a desire to give hope to people in tough situations (though perhaps I could work on my delivery a bit more?). I know the challenging is possible because I have done it. I am thankful for the freedom that I know have (having made difficult choices) and my only desire is to help others to win as well.

          Reply
          • Anonymous Credit Card User

            Thanks for the reply. Yes, you always have to be at least twice as careful when writing things on the internet because of how they come across. :)

            Just believe me when I say that there are a LOT of factors going on that mean that this is our best option at the moment.

            The only reason that we are not currently further in debt is that we DID have the emergency funds in place when we needed them…. the medical costs were just more than anyone would have reasonably expected. (I’m including payment plans to the hospitals in our debt, even though those are 0% interest.)

            We’ll get back to being debt-free as soon as possible, without sacrificing our health (and therefore running up more medical bills).

            Reply
  14. Kenneth

    i don’t feel mortgage debt should be viewed thru this filter. when you take out a 30 year mortgage, you are literally taking out a death engagement (mort = death). you don’t really own your home, you are just responsible for upkeep and making the payments. there’s really not much difference between owning and renting, except you don’t have to check with your landlord if you want to do some painting or remodeling. So I wouldn’t necessarily feel badly about going out to dinner or buying your crossfit equipment if all the debt you have remaining is an under 80% LTV mortgage. You could view it as I just have to live somewhere and my home is where I have chosen to live and my payments are my monthly rent and I have fully budgeted to pay them.

    Now if I had any 10 or 15 percent debt, I would feel like my hair is on fire and I’d try to throw every extra dollar that way.

    Reply
  15. Christian

    Look up the definition for “fungible” – it describes this exactly:

    fun·gi·ble
    ˈfənjəbəl/
    adjective
    Law
    adjective: fungible

    1.
    (of goods contracted for without an individual specimen being specified) able to replace or be replaced by another identical item; mutually interchangeable.
    “money is fungible—money that is raised for one purpose can easily be used for another”

    Reply
  16. Nancy

    I’m really liking this blog. And this is why: You are real. You’re not an expert, you’re just normal like the rest of us. This is the same conversation we’ve had many times in our home. We are also in debt up to our eyeballs, and our kids’ eyeballs. Med school. I wish we could go back and do things differently, but all we can do now is move forward and be more mindful. It also helps that our shovel is a decent size, thankfully.

    Reply
  17. Kye Hittle (@khit)

    Love the title of this post – definitely stealing it!

    Not sure if this is planned for a future version of YNAB (hoping!), but it would be great if there was a “What If” module that could help quickly do the math needed to help answer the questions in Mark’s post Tuesday about “affording it.”

    Here are some thoughts on what “What If” could do:

    1. A large currency field where the user would enter the amount of the purchase under consideration. Perhaps a secondary field to optionally enter a name for the purchase (e.g. “garage gym equipment”).

    2. Once an amount is entered the module would instantly display what impact that money would have if it was instead put toward other uses:

    a. Debt: If the user has included any debt in YNAB*, the reduction of interest and amount of pay-off time saved display. (*might need to add an account setting with the interest rate).

    b. Savings: the amount compounded by a market rate (e.g. 7%, but maybe this is configurable) is displayed after being invested for 1, 3, 5, 10, 20, 30 years.

    3. A list of goal/wants *not already included in the budget* (and their corresponding amounts) could be stored/displayed in this module. If the amount of the purchase being considered equalled or exceeded any goal it could become highlighted in some way to indicate this previous goal/want could potentially be accomplished. Sometimes, in the face of (amazingly) effective marketing campaigns, we just need a reminder of our priorities. It sounds like many of us maintain such a list outside YNAB in a spreadsheet or something similar.

    4. If a name for the purchase is entered in the form described in #1 above it could optionally be saved to the goal/want list (#3) for future consideration. It would also be great if you could convert these goals into actual YNAB budget lines right from here.

    Keep up the great work on the blog and the software!

    Reply
  18. willknitforbeer

    I still don’t fully understand what you’re saying…i’ll have to read it a few more times for it to sink in. But having read the comments, i’m sure i will love this post when I fully understand. Being in debt past your eyeballs is ridiculously uncomfortable. I wish i knew then(2000) what i know now. I’ve done pretty well in the last 6 months only had to use my credit card once and i used the one with the smallest balance but still struggling to get to that point where there is never a reason to finance anything. Thanks for all the writing you do!

    Reply
  19. RH6194

    I think you are missing a couple of things about a mortgage versus savings/investing. ALL financial transactions are governed by the basic principle of the Time Value of Money.

    The difference between a mortgage and your savings is that with the mortgage your are starting out borrowing what would essentially be the same as the future value of your savings.

    Mortgages therefore DO compound interest…however since you start with a negative present value and work back to a zero balance future value, your interest compounds in reverse. That is why when you look at an amortization schedule for your mortgage, the early years of a thirty year loan are almost all interest with very little principle and the ending years are almost all principle with almost no interest.

    Conversely, with savings you start at a zero present value and work towards your savings goal future value. Over thirty years, the early years will be nearly all contributions with little interest and the ending years will be almost all interest with a comparatively very small contribution.

    The problem with the scenario of carrying the low rate mortgage and contributing the balance of what would have been your higher rate mortgage payment to savings is that you MUST make that contribution consistently (at least, for the most part) on a monthly basis for 30 years for this to benefit you.

    Most people do not have that discipline and will find things that they want during that time period which they will instead spend their savings/investment dollars for – because they think they can “afford” it.

    However if we look at even a relatively small mortgage of $150,000 at 2.5% for 30 years, while your payments would be a very affordable $563.05 (P+I), you would pay a total of $43,113 in interest over this period.

    So you would have to at least beat that amount of return on your investments in order to come out financially ahead.

    Also, there is no dollar amount that can be put on the peace of mind that comes from knowing your home is paid for free and clear.

    While $43,000 may not seem that hard to beat over 30 years, remember that I calculated this using almost unrealistically low numbers. 2.5% is probably not going to be an EASY rate to find for a buyer…and many are going to have a much larger mortgage than $150,000. This combination leads to higher monthly payments which in turn leaves you with less disposable income to save…which in turn leaves you with it becoming harder and harder to beat the total amount of interest you pay over 30 years with your investments.

    Most of you probably own Microsoft Excel. Go to the Office Online site and download an Excel template called “Loan Calculator with Extra Payments” and you can work up your own analysis using your own actual mortgage numbers.

    Long story short…for the overwhelming majority of us, paying off your mortgage quickly is still the better way to go!

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  20. RH6194

    One additional comment with regards to credit cards or other revolving debt:

    As has been pointed out, a 30-year fixed rate mortgage has the advantage of having a consistent monthly payment over the life of the loan, however as I pointed out in my previous comment, that should not be confused to believe that a mortgage does not have compounding interest.

    You can likewise have a fixed payment on any other debt object as well…including credit cards. You simply choose the amount in excess of the minimum payment that you want to continue paying and then pay that same amount in each successive month without accruing any more expenses on that particular debt.

    You can then use a Time Value of Money calculator to determine how many months it will take you to pay off your balance using the credit card’s interest rate and the payment you choose.

    The reason most people don’t get this idea is that they are focusing on the minimum monthly payment due each month which is constantly changing as purchases are charged or payments are made.

    If you commit to a fixed payment with no additional purchases, you will know exactly when than debt will be paid off. Of course, adding additional money to your fixed payment is always a good idea and will accelerate your payoff.

    Reply

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