Drowning in debt

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miamivice
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Drowning in debt

Post by miamivice » Thu Jun 01, 2017 9:47 am

Apparently, I've made a series of decisions that while individually were good, collectively they have resulted in significant debt that I've taken on. First I bought a house a couple years ago and rather than taking out the mimimum loan (due to low interest rates) I took out the maximum loan possible. Then recently I opened a HELOC as an "emergency fund" / home repair fund for some big ticket home repairs that needed to be done. But, I ended up paying cash for some of the home repairs and used the entire HELOC to make a large purchase.

So, I've maxed out the HELOC, have no emergency fund*, maxed out on loans, and if anything dire happens (like I suddenly need to replace my car (it currently has 210,000 miles) then I will need to liquidate stocks to pay the bills.

* I do have a $17,500 untapped personal line of credit that I could use if needed. It's variable interest rate around 9%.

The numbers:

Home loan - $430,000 outstanding / 3.25% fixed for 30 years / $3000 monthly payment (PITI)
HELOC - $140,000 outstanding / 4.00% fixed for 15 years / $1050 monthly payment
Taxable account - $600,000 / 9% Personal Rate of Return over last 10 years

Both the HELOC and Home Loan are generally tax deductible, so figure a 25% deduction on interest rate.

My question is: Should I liquidate part of my taxable account now when stocks are high, to allow me to pay off the HELOC and regain some flexibility on emergency funds?

The upside to liquidating a portion of the taxable is better peace of mind and preparedness for an unexpected financial toll, like needing a new car. The downside is that interest rate that I'm paying on the loans is much less than the stock market return has been, so I'm generally ahead to leave the money in the stock market rather than paying off the loans from a financial perspective.

Suggestions?
Last edited by miamivice on Thu Jun 01, 2017 9:55 am, edited 1 time in total.

Tamalak
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Re: Drowning in debt

Post by Tamalak » Thu Jun 01, 2017 9:54 am

The interest rates are low enough that if you were a robot, the correct move would be to not liquidate from your taxable to pay down this stuff, IMO.

But you're not a robot. You suffer stress, too much stress causes health problems, and health problems are a material liability. How much would you pay for a good night's sleep? Well every time you suffer a sleepless night from your debts, subtract that amount from the return of your taxable account.

Sell to the sleeping point.

Lobster
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Re: Drowning in debt

Post by Lobster » Thu Jun 01, 2017 9:56 am

miamivice wrote:For almost all of my adult life, I've heeded that advice and it has taken me a long ways. No student loans, no car loans, no revolving credit card debt.
Good work!
miamivice wrote: The only exception that I made was for "good" debt, that is housing related debt.

But apparently, I've made a series of decisions that while individually were good, collectively they have resulted in significant debt that I've taken on. First I bought a house a couple years ago and rather than taking out the mimimum loan (due to low interest rates) I took out the maximum loan possible.
miamivice wrote: Then recently I opened a HELOC as an "emergency fund" / home repair fund for some big ticket home repairs that needed to be done. But, I ended up paying cash for some of the home repairs and used the entire HELOC to make a large purchase.
Neither taxing out a larger loan than necessary, nor spending 'the entire HELOC to make a large purchase' were good individual decisions. It's important to recognize when you've gone off course, so you can course correct!

I recommend Dave Ramsey's Complete Money Makeover, just don't take any of his advice on investing!

Go back to your original attitude about debt. Live below your means, establish an emergency fund, pay down the HELOC, and don't go down that path again!

Good luck :sharebeer
Submit to the relentless rules of humble arithmetic and avoid the tyranny of compounding costs.

miamivice
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Re: Drowning in debt

Post by miamivice » Thu Jun 01, 2017 9:57 am

Tamalak wrote:The interest rates are low enough that if you were a robot, the correct move would be to not liquidate from your taxable to pay down this stuff, IMO.

But you're not a robot. You suffer stress, too much stress causes health problems, and health problems are a material liability. How much would you pay for a good night's sleep? Well every time you suffer a sleepless night from your debts, subtract that amount from the return of your taxable account.

Sell to the sleeping point.
OK that makes good sense. I think maybe $30,000 would be fine because then I'd have a decent emergency fund if needed.

Replacing my vehicle (the one with 210,000 miles) is my biggest worry.

Carefreeap
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Re: Drowning in debt

Post by Carefreeap » Thu Jun 01, 2017 9:59 am

What did you purchase with the $140k HELOC?

onourway
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Re: Drowning in debt

Post by onourway » Thu Jun 01, 2017 9:59 am

I would sell enough to pay off the HELOC and then use the $1000/month to first rebuild your emergency fund and then start putting it back into the taxable account. Things will move along pretty quickly saving that much monthly, and I bet you'll feel a lot better for it.

miamivice
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Re: Drowning in debt

Post by miamivice » Thu Jun 01, 2017 10:01 am

Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.

Admiral
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Re: Drowning in debt

Post by Admiral » Thu Jun 01, 2017 10:04 am

You have $600k in a taxable account...that is alot. Is that ALL your savings? Do you have nothing in a tax advantaged account?

You seem like you're feeling pinched with these monthly payments, but don't note your take home pay or other expenses.

Most people with a half mil in a taxable account would not be sweating buying a new (or used) car. You could buy a nice one for 5% of that 600k.

UNLESS, that is, they don't have enough saved for retirement and are not, say, in their 30s any longer.

What is your complete financial picture?

Jack FFR1846
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Re: Drowning in debt

Post by Jack FFR1846 » Thu Jun 01, 2017 10:06 am

miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
I sure hope this isn't gold. If it is, prepare for it to lose money. (I bought silver coins some years ago and am hoping to get more than 50% of what I paid......not $140k worth, though)
Bogle: Smart Beta is stupid

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bligh
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Re: Drowning in debt

Post by bligh » Thu Jun 01, 2017 10:11 am

miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.

Haha seeing as your name is "miamivice", I assumed it was a boat... until you mentioned that last sentence. Definitely not a boat. :D

If I were you, I'd pay off the HELOC using appreciated stocks. At the very least I would stop investing any further money into taxable (ie. continue to use up all available tax advantaged space) until the HELOC was gone.

Beyond that you shouldn't be stressing too much. Your taxable portfolio would be your emergency fund. Especially if you also hold some bonds in there.

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hand
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Re: Drowning in debt

Post by hand » Thu Jun 01, 2017 10:11 am

Your intuition is telling you that you are overleveraged / have poor cash flow. This is almost certainly true, however impossible for us to judge without view to your income, retirement savings and monthly expenses including debt service.

I'd recommend the following:
1) Pause your consumption - effective today, only purchases are necessities (food, housing, debt service) until you have a sustainable plan forward. First thing to do when trapped in a hole is stop digging.

2) Honestly evaluate your financials in terms of where you are now and where you should be: Income, Expense, Debt, Retirement, Emergency Fund

3) Determine comfortable level of monthly expense that leaves room for and appropriate total debt, and make a plan to adjust debt to the level appropriate.

4) Sell taxable to reduce debt (beware taxes, may make sense to spread over 2 years for tax reasons).

Good news is that your financial mistakes regarding consumption and debt (be honest, these are not good decisions that turned out poorly) likely helped you. Borrowing money to invest in taxable and housing for the last 3 years likely provided a really good return. You have a great opportunity NOW to fix many of your mistakes with minimal penalty.

Admiral
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Re: Drowning in debt

Post by Admiral » Thu Jun 01, 2017 10:13 am

bligh wrote:
miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.

Haha seeing as your name is "miamivice", I assumed it was a boat... until you mentioned that last sentence. Definitely not a boat. :D

If I were you, I'd pay off the HELOC using appreciated stocks. At the very least I would stop investing any further money into taxable (ie. continue to use up all available tax advantaged space) until the HELOC was gone.

Beyond that you shouldn't be stressing too much. Your taxable portfolio would be your emergency fund. Especially if you also hold some bonds in there.
Gold-plated boat.

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DaftInvestor
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Re: Drowning in debt

Post by DaftInvestor » Thu Jun 01, 2017 10:14 am

maimivice - sounds like you've done well saving up until now. $600K in taxable is great. If you have an even greater amount in tax-advantaged if I were you I'd take the $140K out of taxable and pay off your loan if that would help you sleep better at night. If the market has a 30% downturn in the coming weeks/months you'll end up regretting not doing so. Make sure you sell your taxable using specified lots to lower the cap-gains.

(PS - I assumed you bought a boat as others did as well when I initially read this thread - sounds like that isn't the case).

hexagon
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Re: Drowning in debt

Post by hexagon » Thu Jun 01, 2017 10:16 am

+1 for onourway's plan. Pay off the HELOC and build the emergency fund from cashflow. Also it seems unlikely that equity returns for the last 10 years will be like the next 10 years; in any case, I would not base my plans on continuing a 9% return. If I was comparing rates of return I would compare with bonds of similar duration.

There are tax issues (cap gains in taxable and interest deduction) that might suggest otherwise, but in the current environment deleveraging seems the prudent course.

runner540
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Re: Drowning in debt

Post by runner540 » Thu Jun 01, 2017 10:18 am

OP had another thread yesterday about investing in a hot real estate market viewtopic.php?f=2&t=220097&newpost=3390346

miamivice, you should calculate your net worth, and cash flow. Make moves only if they increase both, and you will feel more secure.

If you have $600k in taxable and are stressed about replacing a car, something else is wrong in the financial picture.

How is your income/employment?

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Chan_va
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Re: Drowning in debt

Post by Chan_va » Thu Jun 01, 2017 10:21 am

miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
Sell the asset and pay off the HELOC. You are arbitraging a potential gain of 5% vs. a certain loss of 4%. Sure you get a tax deduction now on the 4%, but you will also pay taxes on the other end on the gain.

The arbitrage math doesn't work out at 100bps on 140k. Either you have to lever up and go all in with much more than 140k to make it worthwhile, or just take the safe 4%. You are in no mans land now.

retire57
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Re: Drowning in debt

Post by retire57 » Thu Jun 01, 2017 10:28 am

You don't mention your income or living expenses. Have you considered cashing out enough from your taxable for 3-6 months of living expenses (emergency fund) and going scorched-earth to pay off the HELOC? How long would that take? Should you need another car, buy a junker until you get out of debt. This is the painful route, but your 62-year-old self will be much happier you didn't lose the opportunity cost on your 600K.

deltaneutral83
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Re: Drowning in debt

Post by deltaneutral83 » Thu Jun 01, 2017 10:31 am

Check out the returns of the market from May 2000 to now as long as we're cherry picking. Take the guaranteed 3-4% and pay it off and sleep well. Either that or leverage yourself more to be consistent. How much is enough in the leverage arena? And how would one compute that amount?

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tyrion
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Re: Drowning in debt

Post by tyrion » Thu Jun 01, 2017 10:32 am

As others have noted, it's really hard to give advice without the full financial picture.

But assuming you are just feeling a little tight on cash flow, I would do the following:

Change all taxable accounts to NOT invest dividends and use those to pay down the HELOC.
Check what you can sell in your taxable account without incurring taxes. Sell enough to pay the HELOC down to a level where you sleep well at night.
Once you pay off the HELOC, build up your emergency fund.

an_asker
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Re: Drowning in debt

Post by an_asker » Thu Jun 01, 2017 10:35 am

runner540 wrote:OP had another thread yesterday about investing in a hot real estate market viewtopic.php?f=2&t=220097&newpost=3390346

miamivice, you should calculate your net worth, and cash flow. Make moves only if they increase both, and you will feel more secure.

If you have $600k in taxable and are stressed about replacing a car, something else is wrong in the financial picture.

How is your income/employment?
+1!

OP:

I'd assume that your house has appreciated significantly based on yesterday's post. I suggest you sell that house to get out of debt, then move to a rental. The hot housing market might be smoking hot for some time, but then go up in smoke! I bet that's what Dave Ramsey would suggest.

That said, I don't know about your HELOC asset, which is a whole different can of worms!

[edited to add]: Waitaminute! You have $600k in your taxable account and have a personal ROR of 9%. What are you complaining about? You are not drowning in debt. You've consciously decided to respond to the oft-quoted Dave Ramsey question - "if you've a paid off house, would you take out a mortgage to invest in the stock market?" You've done exactly that, and have even rationalized the decision saying that your returns are better than the percentages you are paying on the loans. Any advise that anyone here - whether it is to a) sell your house, b) get rid of whatever you've purchased from your HELOC or c) sell your taxable investments - would give would be going absolutely against the grain w.r.t. the decisions you've made, fruitfully for you if I may add!

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Meg77
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Re: Drowning in debt

Post by Meg77 » Thu Jun 01, 2017 11:18 am

miamivice wrote:
Tamalak wrote:The interest rates are low enough that if you were a robot, the correct move would be to not liquidate from your taxable to pay down this stuff, IMO.

But you're not a robot. You suffer stress, too much stress causes health problems, and health problems are a material liability. How much would you pay for a good night's sleep? Well every time you suffer a sleepless night from your debts, subtract that amount from the return of your taxable account.

Sell to the sleeping point.
OK that makes good sense. I think maybe $30,000 would be fine because then I'd have a decent emergency fund if needed.

Replacing my vehicle (the one with 210,000 miles) is my biggest worry.
If replacing your vehicle is your biggest worry, then I would proactively go ahead and replace your vehicle. Sell, say, $10K in stocks and buy yourself a solid used car with less than 100k miles on it. Between the value of your current car and $10K, that should be a big upgrade from where you are which is good enough for now. You can upgrade again if you like once you've rebuilt your emergency fund.

Here would be the steps I'd take:
1. Sell enough stocks to fully fund your emergency fund to the tune of 3-6 months of basic expenses.
2. Sell enough stocks to upgrade your car to the point that you feel safe and secure.
3. Stop spending and focus on replenishing rebuilding investments while you make the minimum payments on your HELOC and mortgage.*

We don't know your age or financial situation so it's hard to advice specifically beyond "rebuild investments." If you'd rather pay down the home equity loan that is certainly not a bad idea, but depending on your self-discipline, income and current investment balance it may be better to let it ride.
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bigred77
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Re: Drowning in debt

Post by bigred77 » Thu Jun 01, 2017 11:40 am

In the below I am assuming your income is enough to service your debt load. If it isn't, then the following does not apply.

I would about things this way: You made the decision to make some sort of mystery investment (my guess is undeveloped land or some sort of collectible?) that you stated you expect a 5% return on. You chose to finance that investment via a HELOC instead of selling taxable investments. Why did you make that decision at the time? Has anything changed since then? If you sell taxable investments now based on the reasoning "I'm uncomfortable with my debt load" then I think that's a bad decision. I would sell that mystery asset before liquidating any taxable investments. Why keep it if you expect 5% per year unless you expect your taxable investments to return even less (and I wouldn't have that expectation of a portfolio with any reasonable AA).

PS: I think financing that investment via HELOC instead of selling taxable investments was the correct choice (assuming you already decided to make the investment either way and were just choosing a way to finance it).

PPS: I suspect deep down you are really asking for permission to time the market. You want to sell some taxable investments because the market is "high". Speculation on my part but that's my impression.

PPPS: Why would you worry about buying a new car or any other cash requirements with 600k in taxable assets? It doesn't make sense.

denovo
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Re: Drowning in debt

Post by denovo » Thu Jun 01, 2017 12:14 pm

miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
Alright, so you used debt to buy two assets that generally (hopefully?) appreciate. Your home and this item. I don't think you're drowning in debt or should be panicking, but maybe that's easier said than done if debt bothers for for personal reasons. I'd sleep with no worries if I were you.

ddurrett896
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Re: Drowning in debt

Post by ddurrett896 » Thu Jun 01, 2017 12:19 pm

miamivice wrote: * I do have a $17,500 untapped personal line of credit that I could use if needed. It's variable interest rate around 9%.
Forget this even exists and close it down! No need for this with $600k in taxable.
miamivice wrote: Home loan - $430,000 outstanding / 3.25% fixed for 30 years / $3000 monthly payment (PITI)
HELOC - $140,000 outstanding / 4.00% fixed for 15 years / $1050 monthly payment
Taxable account - $600,000 / 9% Personal Rate of Return over last 10 years

My question is: Should I liquidate part of my taxable account now when stocks are high, to allow me to pay off the HELOC and regain some flexibility on emergency funds?
Yes, sell whatever you purchased for $140,000 and pay that off.
From the $600k, cash out 6 months of expenses and stick in a bank.

denovo
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Re: Drowning in debt

Post by denovo » Thu Jun 01, 2017 12:25 pm

Chan_va wrote:
miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
Sell the asset and pay off the HELOC. You are arbitraging a potential gain of 5% vs. a certain loss of 4%. Sure you get a tax deduction now on the 4%, but you will also pay taxes on the other end on the gain.

The arbitrage math doesn't work out at 100bps on 140k. Either you have to lever up and go all in with much more than 140k to make it worthwhile, or just take the safe 4%. You are in no mans land now.

This seems like the best advice. IF OP is uncomfortable with leverage ,he should get rid of this new asset and dump the heloc.

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gasdoc
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Re: Drowning in debt

Post by gasdoc » Thu Jun 01, 2017 12:27 pm

I can't think of any investment that would justify taking out a loan for its purchase. In my opinion, you are promising to pay a given amount of interest for something whose investment prospects cannot exceed its risk of decline (assuming an efficient market).

gasdoc

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Re: Drowning in debt

Post by FelixTheCat » Thu Jun 01, 2017 12:42 pm

miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
My suggestions:
  • Sell the asset.
    Pay off the HELOC.
    Close down the HELOC.
    Build up an emergency fund. I suggest I bonds.
Felix is a wonderful, wonderful cat.

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gasdoc
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Re: Drowning in debt

Post by gasdoc » Thu Jun 01, 2017 12:58 pm

FelixTheCat wrote:
miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
My suggestions:
  • Sell the asset.
    Pay off the HELOC.
    Close down the HELOC.
    Build up an emergency fund. I suggest I bonds.
+1 (I bonds optional).

gasdoc

miamivice
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Re: Drowning in debt

Post by miamivice » Thu Jun 01, 2017 1:22 pm

I would like to clarify something.

The 9% personal rate of return for the 10 years is not a cherry picked number. Vanguard only shows personal rate of return for a max time period of 10 years. I wish they would do 15 years but sadly they do not.

Based on my personal financial history, 9% would also be pretty close over the last 15 or 20 years, as I did not have much investment back in 2002 when I started investing. I understand that future market corrections will have a much bigger factor in my net worth than the great recession of 2008 did back then.

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gasdoc
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Re: Drowning in debt

Post by gasdoc » Thu Jun 01, 2017 1:46 pm

miamivice wrote:I would like to clarify something.

The 9% personal rate of return for the 10 years is not a cherry picked number. Vanguard only shows personal rate of return for a max time period of 10 years. I wish they would do 15 years but sadly they do not.

Based on my personal financial history, 9% would also be pretty close over the last 15 or 20 years, as I did not have much investment back in 2002 when I started investing. I understand that future market corrections will have a much bigger factor in my net worth than the great recession of 2008 did back then.
I understand. Well done. That said, you don't get anything for nothing. The risk is there. You are paying someone a guaranteed 5% interest to invest in something that MAY return 9%. YMMV. I would rather have the guaranteed 5% then the maybe 9%. Anyway, in my opinion, that willingness to borrow for what you think may be a good investment may be what has gotten you into your present predicament. Just trying to help.

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bluebolt
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Re: Drowning in debt

Post by bluebolt » Thu Jun 01, 2017 2:06 pm

Investing with borrowed money works until it doesn't. At least you're not doing leveraged investing with borrowed money (At least I hope not). That can end in a very ugly way.

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HomerJ
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Re: Drowning in debt

Post by HomerJ » Thu Jun 01, 2017 2:21 pm

miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
I would have paid cash for this from taxable. Do that now. Cash out 140k, and pay off the HELOC.

Take an extra 60k from taxable, replenish your emergency fund (can be used to buy a new vehicle).

That still leaves you with most of your money in taxable. Guaranteed 4% return on the retired debt, and most of your money is still in stocks. This is a good compromise.

This is what I would do. I would not gamble that the stock market will continue to out-pace my debt. The stock market could crash tomorrow. You could lose your job tomorrow. And you will still owe that money.

But you are not me. You don't have to follow my advice. The odds are good you will have more money doing it your way in the long run.. But there is a non-zero chance that you could have less. I'd rather sleep at night.

The fact that you call it "drowning in debt" is a sign you are not sleeping at night. The next 5% drop of the stock market is going to give you a LOT of stress, as you wonder if it's the start of a 30% drop.

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Re: Drowning in debt

Post by sunny_socal » Thu Jun 01, 2017 2:31 pm

miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
Classic car? A bag of rolexes?
Timeshare? Granny flat? Vacation home? Cottage?

Whatever it is, sell it.

IlliniDave
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Re: Drowning in debt

Post by IlliniDave » Thu Jun 01, 2017 2:37 pm

I'm in the pay off the HELOC camp. Preferably, sell the mystery asset that you borrowed money to buy. If you're emotionally attached to the mystery asset, liquidate part of you taxable investment account to pay for it. But there's a lot of vagueness in the scenario you've laid out, so the confidence I have in my thoughts is pretty low.
Don't do something. Just stand there!

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HomerJ
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Re: Drowning in debt

Post by HomerJ » Thu Jun 01, 2017 2:42 pm

sunny_socal wrote:
miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
Classic car? A bag of rolexes?
Timeshare? Granny flat? Vacation home? Cottage?

Whatever it is, sell it.
Or just buy it outright. He has the money in taxable. If he's really sure it will appreciate around 5% a year (of course, no one can be sure), it seems like a decent investment. Nothing wrong with diversifying his investments. Borrowing is just adding more risk that he doesn't need. It may indeed give him better returns to borrow and keep the rest of his money in stocks, but it's more RISKY. The odds are higher (although maybe still small) that this will blow up in his face.

Lots of people have told him to sell the mystery asset, but I don't see that as necessary. But I don't think owing money at 4% for a chance to make 5% is a very good idea at all. Paying off that debt is a guaranteed 4% return.

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Re: Drowning in debt

Post by Carefreeap » Thu Jun 01, 2017 2:46 pm

miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
I think you're the poster who bought the lot next door to his house. If so, the main problem with your situation is that you have debt tied to illiquid assets. When market turns (and it will) the value of those assets will go down. I would think the main risk is the potential for losing your job and/or possibly relocating out of the area. Could you rent out your house for enough to cover the PITI for both loans?

KlangFool
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Re: Drowning in debt

Post by KlangFool » Thu Jun 01, 2017 3:07 pm

OP,

Please explain to me how does this make any sense?

A) You borrowed at 4% HELOC in order to invest in something that returns 5%. So, your net profit is 5% - 4% = 1%.

B) Meanwhile, your main portfolio is returning 9%.

Why are you doing (A) in order to earn 1% when you could invest in your main portfolio and earn 9% - 4% = 5%?

How does this make any sense? Why take a larger risk in order to make less money? Sell (A) and pay off your HELOC.

KlangFool

sharpjm
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Re: Drowning in debt

Post by sharpjm » Thu Jun 01, 2017 3:15 pm

miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
Is that 5% before or after inflation? Before or after the 4% interest you are paying? This sounds like a net 0 gain investment that is costing you stress. Possibly even a loss depending on inflation.

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HomerJ
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Re: Drowning in debt

Post by HomerJ » Thu Jun 01, 2017 3:18 pm

KlangFool raises an interesting point.

Why invest in the other mystery asset at all? Why not borrow 4% from HELOC and invest it all in 9% return stocks?

If you understand why that's a bad idea, then that should help you understand why borrowing from a HELOC to invest in a 5% return asset is a bad idea.

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DaftInvestor
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Re: Drowning in debt

Post by DaftInvestor » Thu Jun 01, 2017 3:21 pm

sharpjm wrote:
miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
Is that 5% before or after inflation? Before or after the 4% interest you are paying? This sounds like a net 0 gain investment that is costing you stress. Possibly even a loss depending on inflation.
Note that miamivice originally called this a "large purchase" not an "investment" so I'm guessing it was purchased primarily for some other non-monetary value to the OP and his family (might be a vacation home; a very expensive art-work he is enjoying; etc.) - thus the reason why OP didn't want to bring it into the discussion.

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Earl Lemongrab
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Re: Drowning in debt

Post by Earl Lemongrab » Thu Jun 01, 2017 3:30 pm

miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
There's no high-cost "asset" that has anything like guaranteed 5% increase per year that I can think of. Not to be mean, but based on your other thread you seem like the type who wants shortcuts to wealth. Sell that "asset", get a safe emergency fund, leave the home mortgage alone and begin investing to plan. Expect it to take many years.
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

WalterMitty
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Re: Drowning in debt

Post by WalterMitty » Thu Jun 01, 2017 3:33 pm

Know thy self...

Do you really feel like you're drowning in debt, or just wanting to vent?

I hated having debt, and knew that I hated it, and would feel a lot better without it. So from that perspective (with only a partial picture painted with your few facts), I would make the move to get out of debt.

Like was mentioned above, (and as an "anti-debter") I would listen to Dave Ramsey except for his investment advice.

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Mlm
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Re: Drowning in debt

Post by Mlm » Thu Jun 01, 2017 3:39 pm

DaftInvestor wrote:Note that miamivice originally called this a "large purchase" not an "investment" so I'm guessing it was purchased primarily for some other non-monetary value to the OP and his family (might be a vacation home; a very expensive art-work he is enjoying; etc.) - thus the reason why OP didn't want to bring it into the discussion.
Maybe it's a bowling alley...just a guess
Reality has a way of catching up with you

miamivice
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Re: Drowning in debt

Post by miamivice » Thu Jun 01, 2017 3:42 pm

DaftInvestor wrote:
sharpjm wrote:
miamivice wrote:
Carefreeap wrote:What did you purchase with the $140k HELOC?
For privacy, I don't wish to disclose it here. I can say it is an asset that I expect to appreciate at 5% per year and costs next to nothing to keep.
Is that 5% before or after inflation? Before or after the 4% interest you are paying? This sounds like a net 0 gain investment that is costing you stress. Possibly even a loss depending on inflation.
Note that miamivice originally called this a "large purchase" not an "investment" so I'm guessing it was purchased primarily for some other non-monetary value to the OP and his family (might be a vacation home; a very expensive art-work he is enjoying; etc.) - thus the reason why OP didn't want to bring it into the discussion.
Thank you DaftInvestor.

You are correct and said it well. It was a purchase rather than an investment. We all have a variety of reasons to make purchases (cars, timeshares, vacations, college education for our kids, etc, etc) and many purchases are non-investment in nature.

I agree with others that borrowing 4% in order to hopefully receive 5% back would not be a good investing strategy.

delamer
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Re: Drowning in debt

Post by delamer » Thu Jun 01, 2017 3:55 pm

How much are your current debt payments as a portion of your gross income? If you needed to 100% finance a new car, how much would that monthly payment be as a percent of your monthly income?

If you are talking a 50% ratio for everything, then you have a problem. If you are talking a 20% ratio for everything, then you don't.

My point is that "drowning in debt" is a lot different than disliking debt -- just to give you an alternate perspective.

(BTW, as you may remember, you already identified a specific purchase in another thread that I'm guessing the HELOC was used for.)

miamivice
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Re: Drowning in debt

Post by miamivice » Thu Jun 01, 2017 4:02 pm

delamer wrote:How much are your current debt payments as a portion of your gross income? If you needed to 100% finance a new car, how much would that monthly payment be as a percent of your monthly income?

If you are talking a 50% ratio for everything, then you have a problem. If you are talking a 20% ratio for everything, then you don't.

My point is that "drowning in debt" is a lot different than disliking debt -- just to give you an alternate perspective.

(BTW, as you may remember, you already identified a specific purchase in another thread that I'm guessing the HELOC was used for.)
The HELOC was used for a different purchase than mentioned in a separate thread.

Well, my monthly payments right now are 35% my total pretax income. Maybe 40 - 42% after tax income. However, I also have childcare which is equivalent to an additional mortgage. If we include childcare, then I'm spending 50 to 52% of my pretax income on debt service + childcare.

delamer
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Re: Drowning in debt

Post by delamer » Thu Jun 01, 2017 4:22 pm

miamivice wrote:
delamer wrote:How much are your current debt payments as a portion of your gross income? If you needed to 100% finance a new car, how much would that monthly payment be as a percent of your monthly income?

If you are talking a 50% ratio for everything, then you have a problem. If you are talking a 20% ratio for everything, then you don't.

My point is that "drowning in debt" is a lot different than disliking debt -- just to give you an alternate perspective.

(BTW, as you may remember, you already identified a specific purchase in another thread that I'm guessing the HELOC was used for.)
The HELOC was used for a different purchase than mentioned in a separate thread.

Well, my monthly payments right now are 35% my total pretax income. Maybe 40 - 42% after tax income. However, I also have childcare which is equivalent to an additional mortgage. If we include childcare, then I'm spending 50 to 52% of my pretax income on debt service + childcare.
Does the taxable generate enough income to pay the monthly HELOC debt? Did you include that income in your ratio?

fareastwarriors
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Re: Drowning in debt

Post by fareastwarriors » Thu Jun 01, 2017 4:25 pm

It sounds like you have a good handle on you numbers... I'm not worried for you.

To me, it comes down to comfort. You might feel better if you pay off down some (or all) of your HELOC. If I was in your shoes, I wouldn't even break a sweat about it and just slowly work on the HELOC.

runner540
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Re: Drowning in debt

Post by runner540 » Thu Jun 01, 2017 4:43 pm

OP,
You also had a thread that you were close to Flagship status. Doesn't that require $1mm in assets at Vanguard? Here you mentioned $600k.

You will get more constructive feedback if you post a more complete picture off assets, debt, income and expenses.

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unclescrooge
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Re: Drowning in debt

Post by unclescrooge » Thu Jun 01, 2017 6:25 pm

miamivice wrote:
Replacing my vehicle (the one with 210,000 miles) is my biggest worry.
Can't you lease a car for $200/month?

I live in SoCal, and it seems every young kid fresh out of college and a job drives a new BMW. So I might be biased.

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