What price security?

How do you put a price on security?

Well, in this post I’m going to try and do exactly that but, first MoneyMonk asks the question that all people have at the back of their minds:

As a woman, I just want to say that “to each it’s own” Women love security.

If you are not a person that love investing, and you have the cash to pay off your mortgage (considering that you plan to live their forever)

Adrian- not everyone is business oriented. Some just don’t have the business acumen to run a business. Therefore, that group SHOULD pay off the mortgage

This is the dream of home ownership: own your home outright and you have nothing to worry about.

But, do you?

Let’s say that you own a $150,000 home today … what will it be worth in 30 year’s time?

About the same as a $150,000 home today, but in future dollars!

So, let me ask you; when your kids grow up, move out, and you retire, what are you going to move into?

Probably the same, or another $150,000 home … a smaller condo or newer townhouse that will probably not give you too much change, if any, from $150,000, a retirement home that (with fees) will cost you far more than $150,000.

Your home is not your financial security; your realizable net worth is. Put it another way: you can’t live off your home, but you can live off your cash and investments.

True security comes from knowing that you can pay your monthly bills for the rest of your life, without needing to work or get handouts from friends, relatives, or the government, through up markets and down (war, pestilence, and other Acts of God aside).

I hope that you see my point …

So, let’s look at two scenarios for a $150,000 house that you just bought and locked in a 30 year fixed rate loan at 6% (a bit higher than today’s actual rates, which are still between 5% and 5.5%):

1. You pay off your mortgage early

Note: We will assume that you are allowed to pay off as little / much as you like on your loan (not the case with some fixed rate loans in the USA, and certainly not the case with most fixed rate loans in most other countries!) because it makes the math simpler.

This is great, because you ‘earn’ 6% on your money [AJC: remember, a dollar saved - in interest - is the same as a dollar earned], better yet:

- The amount you ‘earn’ is guaranteed; every year that you are no longer paying that 6% loan, you are in effect earning 6% … simple and guaranteed!

- Unlike an investment that pays you 6%, there is no tax to be paid on the 6% mortgage that you save (although, there can be a negative benefit of losing the tax deduction on your home loan interest … but, I’m trying to keep this simple), so it’s more like earning 7.5% – 8.5% (depending on your tax rate) in any other investment.

- Let’s say that you plonk the entire $150k down in one hit, you save the entire $175k INTEREST (yes, a house that you buy for $150k in 2010 will have cost you $325k, just in principal and interest, by the time you have paid off the 30 year loan in 2040).

2. You do not pay off your mortgage early

Note: Paying the loan off slower will, naturally, save you something greater than $0 and less than $175,000 … but, is too hard to calculate, here, so we will continue to use the assumption that somehow, you were able to pay that entire $150k loan off in one hit.

Well, it’s a fairly simple calculation then, isn’t it: what can you invest $150,000 in that will return more than $175,000? Let’s run some numbers and see:

Business: If Michael Masterson is right, and we gain 50% (or more) from our own business, then after 30 years you would have earned $29 Billion on your $150k ‘seed capital’.

But, MoneyMonk is right: there is extreme risk and skill involved in being successful in business … just a shame the potential reward is so low

[AJC: just a tad more than the $175k interest that you would have saved if you used the money to pay off your mortgage instead of starting a business]

Real-Estate and Stocks: Again, if Michael Masterson is right, and we gain 30% by investing in a mixture of buy/hold real-estate and stocks (naturally, continually reinvesting the rents and dividends), then after 30 years you would have $392 million …

… if that sounds a lot, remember that Warren Buffett built up a $40 Billion+ fortune over 40 years at not much more than 21% compounded.

Stocks: I agree with Michael Masterson, that if you buy stock in just a few good businesses when they are are going cheap (as the market does from time to time) and wait 30 years, you should have no trouble getting a 15% compounded (pre-tax) return so, after 30 years you would have nearly 10 million.

But, all of this has some risk / skill associated with it … so, maybe paying off the mortgage and snaffling that $175k is still the way to go for all of those risk averse people [AJC: Like me. True!] out there?

But, wait, what if we just do the ‘no brainer’ thing and plonk that entire $150k in a set-and-forget-low-cost-Index-Fund?

Here’s the good news: paying off your mortgage is a 30 year investment (you have forgone 30 years of being locked in to a loan and paying 6% interest year in, year out), so it’s only fair that we buy $150k of Index Fund units and don’t even look at our portfolio for 30 years, right?

Well, that’s an ideal strategy – THE ideal strategy – for Boglehead set-and-forget investors! So …

Index Funds: Over 30 years, the markets (hence the lowest cost Index Funds) have averaged something more than 12% – set and forget (!) - so, after 30 years you would still gain close to $3.5 million!

But, wait … we’re all about security here: you can’t live off averages, right? What happens if there’s another crash like 1929 and 2008 the day after I plonk my entire $150k into an Index Fund?

Well, you lose half your money immediately

But, we don’t care what happens immediately, this is a 30 year set-and-forget plan … and, there has been NO 30 year period where the stock market hasn’t returned AT LEAST 8%.

Now, isn’t 8% (since we have to pay tax on it) exactly the same as the equivalent after-tax 6% mortgage (give or take 0.5%)?

Yes!

The lowest possible return that we can get with any reasonable investment strategy that we can come up with is exactly the same as the best possible return that we can get by paying off our mortgage early.

Now, isn’t that interesting?

When is cheap debt expensive?

Dave Ramsey says to use Gazelle Intensity to pay down all debt, before even thinking about investing. Yet, would he consider running his (rather large) business without an overdraft, or leased cars, equipment, and/or furniture?

I doubt it … he needs to preserve his capital, and put it to better use by growing his business investment (more stock; better marketing; more staff; more training; etc.; etc.)

So, why should personal finance be any different?!

But, Dave Ramsey would argue to pay off all debt, whether it is ‘good’ (e.g. produces income) or ‘bad’ (e.g. credit card loans for consumer goods, like that LCD TV that you just bought).

If you are a regular reader of this blog, by now you will know that my view differs markedly; I say:

Once the debt is incurred, it is no longer ‘good’ or ‘bad’ … it becomes either ‘cheap’ or ‘expensive’.

And, as I mentioned in a previous post …

You should only pay off your ‘expensive’ debt!

What makes a debt ‘cheap’ or ‘expensive’? What is the yardstick interest rate? 2%? 5%? 11%? 19%?

Any, all, or none of the above. You see, it’s relative:

- Debt only becomes ‘cheap’ when you have something that produces a better after-tax return [AJC: probably, a MUCH better return to account for the fact that paying off the debt is a GUARANTEED return].

- Otherwise, by default, all debt becomes ‘expensive’ and you should do as Dave Ramsey suggests.

Fortunately, finding suitable investments to offset the need to pay off relatively low-cost debts such as student loans and home mortgages is as easy as finding some great value stocks, a cashflow positive real-estate investment or three, or a small business to buy or begin …

… provided that these are things that you are:

1. Passionate about,

2. Educated in, and

3. Convinced are needed in order to achieve your Required Annual Compound Growth Rate to reach your Number.

I recommend that – if you are pursuing a Large Number / Soon Date - you must pursue your investments with Cheetah Focus … a great example is provided by Eric [AJC: emphasis added]:

I graduated college 2008 from the University of Texas. worked at an oil and gas company in Houston named Flour Daniels. they had massive lay offs in 2009. I worked for a year and managed to save well over 50% of my pay. I reinvested it all into the stock market. I set up a regular investment account and a Roth IRA.

To date my Reg. Stock account is up 30%+ and my Roth IRA is up over 60%. and I still have another month to increase my yearly gains for it

I have had no prior experience with investing/trading. I played safer stocks/ETFs .. Bought on dips and sold when it would pop.

Oh and I also took out a loan from Citi bank.. who sent me a 10,000 loan offer in the mail with a 2% interest for the life of the loan. LOL.. I had to take it. I threw that into stocks also.

Any how my point is. If i had focused on paying off my $28,000 college debt I would have missed all of last year gains. I just made it a goal to beat my debt interest. and I did!

Currently I have enough money to pay off all my debt. but of course i’m not going to do it. I took out 2K from my portfolio to invest in an online woman’s clothing site. We have great style at affordable prices. we are not making huge profits.. but we are selling and that is encouraging.

Did you notice in the image (above) why the gazelle has such intensity?

It’s because the cheetah is coming up fast and furious on his tail ;)

Pay yourself first or last?

Adam (a staff writer at Get Rich Slowly) wants you to “challenge yourself” by replacing the the standard ‘pay yourself first’ advice with:

Only pay yourself first if you deserve it.

Now, Adam isn’t suggesting that you stop saving that 10% to 15% of your gross income that the bulk of the personal finance blogosphere recommends …

… what Adam is really asking is:

Should You Stop Funding Retirement to Focus on Debt?

[This] is one of the most heavily debated dilemmas in personal finance. Unlike “spend less than you earn” or “track every penny you spend”, there’s no cookie-cutter answer to this question. Variables such as age, career, risk tolerance, and even personality type make each individual situation unique.

This is a good line of questioning – and I encourage you to read his article – but, unlike Adam, I think there is a “cookie-cutter answer to this question”:

You should always ‘pay yourself first’ …

… but, where you place that money depends on where you earn the greatest after-tax return.

Keeping in mind that a “dollar saved is a dollar earned”, it could be in:

- Your 401k, potentially earning 8% plus the value of any employer matches (in an earlier post, we calculated this as providing another % point or two to your long term return),

- Your debts, potentially saving 10% to 30% interest on high-interest car, credit card, and consumer loans,

- Your real-estate investment strategy, potentially earning 15% to 25% in long-term rental increases and capital appreciation,

- Your seed capital for your new business, potentially earning 50%+ in future profits and windfall gains on the sale of the business,

- etc.

But, is unlikely to be found in paying off low interest student loans (saving 0% to 5%) or mortgages (saving 4% to 6%) or in investing in low interest savings such as bank accounts, bonds, or CD’s (earning 1% – 5%).

Blindly plonking your money into your 401k, or paying off debt, or paying down your mortgage is not the way to get rich(er) quick(er) … 7m7y readers always look at their options in terms of greatest contribution to reaching their Number.

Never borrow to buy a new car …

You think you need to dig yourself further into debt to get that new car? Think again …

… there’s always another way [Hint: even if a Higher Power doesn't simply drop one into your lap, you could try saving up for one ]

What’s behind Door Number 2?

There’s nothing wrong with being debt free …

… which seems like I am flipping, when I should be flopping, about debt. Until you realize that I can just as equally claim that there’s nothing wrong with being in debt, either.

You see, it depends.

In fact, what I contend is that the majority of my readers NEED to be in debt … but, that’s not the same as advocating debt for debt’s sake.

Confused?

Let me explain by introducing you to a new reader, Lee, who asks:

I’ve been reading about this 20% rule and it does make sense, but after what happened with real estate over the past 18 months do you still think this is a good approach? Right now, I have about 55% equity in my home. To get my home to only be 20% of my networth I would need to refinance it to 80% LTV. I have a pretty low rate (4.625%) and only have 9 years 8 months left on my mortgage. Would you still recommend someone in my situation refinancing?

After a lot of confusing to’ing and fro’ing [AJC: you can go pack to that post and read all of the comments ... in fact. I would encourage it, because this is one of my Top 3 most widely read posts], I asked Lee what I think are the critical questions:

1. Do you have a Date in mind, when you REALLY want (nay, NEED) to stop working so that you finally have time to live your Life’s Purpose?

2. Do you have a Number in mind, that represents how much you need in your nest egg (be that the bank, ‘passive’ investments, your house – although, you may need to think how you plan to access those funds to live from – etc.)?

If not, I suggest that’s your first task: think about your Number and Date. Already (or just) got them?! Good … now;

3. Will your current financial plans and strategies get you to your Number by your Date?

To which Lee responded:

As far as retiring by no later than 55, yes my current path will easily provide for that. If I choose to the pursue the passion I mentioned earlier, then that would impact the amount of money I would need in the short term, but would not affect my long term retirement goals.

If your current financial strategy is working for you – i.e. in that you are happy with your current work and financial arrangement, and believe that you can achieve your Number by your Date – why would you even think about changing anything, Lee?!

So, let me go back and clear up the confusion about debt for my other readers:

- If you can achieve your Number by your Date WITHOUT the use of debt then PLEASE do so,

- Otherwise, what choice do you have but the wise application of debt?

… I just happen to believe that for the vast majority of my readers, Door # 2 (‘wise application of debt’) is the one that holds their prize

I think we’re screwed …

If you needed any evidence that the ‘global financial crisis’ – on a global macro level – and problems with the US real-estate market – on a global micro level – are still affecting people in the their day to day lives, you need read no further than Rischa in Seattle’s comment [AJC: I've added punctuation for your reading pleasure]:

From what I’ve read I think we’re screwed, but I’m not even sure what we can do. Here is the scenario: my husband and I bought this house about 10 years ago in the boom here; with both of us working we could afford the mortgage and our lifestyle easily. I’ve [since] been laid off and we’ve been living on my savings, which is now gone and I’m on unemployment, which is fast running out.

We’re about $100K upside down, we got a trad. loan 30 yr fixed, but without 2 incomes we’re sinking fast. We don’t necessarily want to stay in this house, in fact we want to move to a part of the country where the cost of living is less.

Any clues? What should we do? How do we get out of this when getting out would cost more than we have, even if we spent our retirement to get out? We would have less than nothing left!

Of course, it’s difficult to give Rischa personal advice – and, I wouldn’t do it – but, I could suggest that she go back to that post and reread the bit where I said:

Ask yourself the following TWO questions:

i) Can I afford the payments? If so,

ii) If I were to invest in a house right now, given my current net worth, is this the house that I would invest in ?

If the answer to both questions is YES, then stay. If the answer to either question is NO, then sell/move … be it into a rental or to purchase another (provided that the changeover costs/hassles are worth it).

In Rischa’s case, the answer to the first question appears to be NO … and, she would prefer to be moving to a cheaper part of the country (and, cheaper house?), anyway …

So, it’s obvious that she can’t afford her existing house, but what would you do? Hang on to a losing proposition? Or, cut your losses?

The Cash Cascade ™

I wrote a series of posts about Dave Ramsey’s Debt Snowball, and have found this great summary / illustration on Blueprint for Financial Prosperity’s blog (does he just sign his checks BFFP to save ink?):

One of Dave Ramsey’s most popular ideas is that of a debt snowball. The idea is that you pay off your smallest debts first, then roll that debt’s monthly payment into the next smallest. When the next smallest is paid off, you roll the two former payments into the next smallest debt.The snowball grows and grow with each debt that’s repaid.

Here’s a real life example; here are your three debts and minimum payments:

• $10,000 @ 20% APY, $500 minimum monthly payment
• $4,000 @ 10%, $200 minimum monthly payment
• $1,500 @ 12.5%, $75 minimum monthly payment + EXTRA PAYMENT

The debt snowball method states that you should put all extra debt payments towards the $1,500 balance. When you finally pay off that debt, your new payment schedule should look like this:

• $10,000 @ 20% APY, $500 minimum monthly payment
• $4,000 @ 10%, $200 minimum monthly payment + $75 + EXTRA PAYMENT
• $1,500 @ 12.5%, $75 minimum monthly payment

I have only added the words “EXTRA PAYMENT” to both examples, because I want to clarify – then expand upon – BFFP’s example.

First, though, what Dave Ramsey is saying – and, what BFFP is trying to illustrate – is the concept that you take one of your debts (the highest interest rate in the traditional ‘Debt Avalanche’ or the smallest balance owing in Dave Ramsey’s more psychologically-friendly ‘Debt Snowball’ method) and pay that down completely … merely making the required minimum payments on any other loans (but no more!) to stop them from going into default.

The credit card companies will love you for this!

Then when that loan is paid off in full you apply the payment that you USED to make on the first loan that you tackled to the next remaining debt, and so on …

… it ‘snowballs’ because you are applying more and more to each remaining debt, while never having to commit more (or less) to debt servicing than when you first started budgeting.

So, in both examples we are paying $775 (i.e. $500 + $200 + $75) towards debt repayment until all debts are paid off … THEN – conventional financial wisdom will tell you – you get to start INVESTING that $775 a month and you are FINALLY debt free and on your way to … what?

Well, let’s go back and make the small correction: if you only make the minimum payments, you will never pay off any of the debts (or, way too slowly), so you need to find some extra money and make some extra payments to the first loan that you decide to tackle; let’s use an example of $225 a month as an extra payment …

… and, from now on you commit to that monthly $1,000 i.e. $500 + $200 + $75 + $225 EXTRA PAYMENT + C.P.I. + 50% of any ‘found money’ (second jobs, part-time business income, loose change, IRS refund checks, etc., etc.) for your entire working life!

So, we are on the road to success! Or, are we?

The problem is that we have to decide where we’re heading: if our aim is to become a Ramseyesque Debt-Free=Happy clone, then well and good. Your financial plan is set.

[sign off now]

But, if we intend to get rich(er) quick(er)™ we have two huge limitations, neither of which the Debt Snowball or Debt Avalanche address:

1. Time to invest, and

2. Money to invest.

Time

We all know the time value of investing early and investing often:

If we lose just 10 years to our investing plan by delaying investing while we pay down ALL of our debt and/or pay down our mortgage we can halve our potential return.

Do you think that might be significant?

So, we don’t want our debt-repayment strategy to unnecessarily delay our investment strategy.

Money

Where are we going to get the money to invest?

Sure we can accumulate $1,000 a month (after paying off debt) – and, grow that amount through C.P.I. and ‘found money’ strategies -but, will that really set us off on the path to financial riches?

The same graph shows that for every $1,000 A YEAR we invest, we can expect $100,000 after 20 years … so, our $1,000 A MONTH strategy should yield $1.2 Million over the same time period … unfortunately, that won’t be enough for a DEPOSIT on the Number that you really need …

… and, inflation will take at least a 50% chunk of that (not to mention taxes)!

So, the solution for most people – who don’t want to lower their expectations to match this depressing, but debt-free (!) scenario – is to move INTO debt … to invest!

This is so-called ‘good debt’ and I’m not sure what Dave Ramsey and Suze Orman’s take on this is, but most financial pundits call it ‘good debt’ for a reason. Assuming that you agree, read on [AJC: if not, I'm guessing that you hit <delete> about 4 or 5 paragraphs ago]

So, here’s what we need …. a different mind-set:

Since we already know that we will more than likely need to incur SOME ‘good debt’ as part of our investment strategy (i.e. some safe level of leverage for investment purposes e.g. a loan on a rental property) …

… why pay off OLD debt now in order to accumulate NEW debt later?

It doesn’t make sense, does it?

We merely waste time and money … instead, we should resolve the following:

1. To treat all Consumer Debt as ‘bad’ and incur no further such debt, unless it’s not really Consumer Debt at all (e.g. we need to buy a car to run our catering business, and public transport or a bike really won’t cut it)

2. To apply the minimum required payments + extra payment(s) + c.p.i. + ‘found money’ not merely to the lesser goal of paying down debt, but to the greater goal of helping us get to our Number (i.e. the financial representation of our Life’s Purpose [AJC: if you don't buy into that philosophy, then simply insert the words "helping us become financially free"])

3. To, from this day forth, look at all debt as an INVESTMENT in your financial future: and, simply ‘invest’ where you get the greatest returns: is that in paying off an old debt? Or, is it in acquiring a new debt?

Example 1

In the example above, we have three debts of 20%, 12.5% and 10% (are they tax deductible? If so, look at the after tax cost which will be 25% to 35% lower than the nominal interest rates circa 14%, 8.5%, and 7% respectively) …

Compare these interest rates to the cost of money for the types of investments that you want to make …

… in this example, all three are higher than current mortgage rates so you will probably want to keep paying them off (although a good argument can be made for paying off the 20% loan first, then buying an investment property BEFORE paying off the others).

Example 2

Let’s make two changes to our example:

Let’s assume that one of the loans is a 2.5% Student Loan, and swap the amounts owing (so that the Student loan is now the ‘biggie’) and, let’s assume that we have at least 5 more years before it HAS to be paid back (so we have time to make an investment work for us); here’s our starting position:

• $1,500 @ 20% APY, $500 minimum monthly payment + $225 EXTRA PAYMENT
• $4,000 @ 10%, $200 minimum monthly payment
• $10,000 @ 2.5%, $75 minimum monthly payment

In this case, we tackle first the 20% loan; I can’t imagine an ‘investment’ that will provide such a quick & safe 20% post-tax return! Then, we tackle the 10% loan.

Again, an argument could be made for leaving it in situ; however, it is only $4k – and, we’ll pay it off in just 4 months - so let’s go ahead do just that:

• $10,000 @ 20% APY, $500 minimum monthly payment
• $4,000 @ 10%, $200 minimum monthly payment
• $10,000 @ 2.5%, $75 minimum monthly payment
• $10,000 Reserve #1 @ (1%)  + $200 + $500 + $225 EXTRA PAYMENT

See what we are doing?

Once we have paid off our two HIGH INTEREST loans, instead of paying down the low interest student loan, we continue to make its minimum monthly payment, and instead apply all of the previous / extra loan payments (from our OLD loans) to building up a ‘reserve’ in a bank account (it pays us a – low – rate of interest!) …

… at this rate, we will have a deposit on a small rental (or our own first studio apartment) in less than a year, then our financial picture will look something like this:

• $10,000 @ 20% APY, $500 minimum monthly payment
• $4,000 @ 10%, $200 minimum monthly payment + $200 + $500 + $225 EXTRA PAYMENT
• $10,000 @ 2.5%, $75 minimum monthly payment
• $10,000 Reserve # 1 @ (1%)
• $40,000 @ 6% FIXED, $240 required monthly payment
• $10,000 Reserve # 2 @ (1%) + $185 + $500 + $0 EXTRA PAYMENT + $185 Rent
  

Keep in mind that if you used Reserve # 1 to build up a deposit on a small apartment to live in, then you will have no rent to pay, so you can apply part to home ownership expenses (rates/utilities/taxes) and part towards your next Reserve!

And, if you bought a rental, then you may be in an excess rent situation and have more to apply to building your next Reserve, as well … if not, then you will need to decrease the amount going towards your next reserve to cover any rental shortfalls (e.g. mortgage payment deficits, vacancies, repairs & maintenance fund, etc.).

Now, you know why this is not a Debt Snowball, a Debt Avalanche, or even a Debt Meltdown:

It’s the Cash Cascade …

… the new way to look at paying down debt!

In the two years that it would have taken you to pay off your Student Loan and buy your first property, you now own two properties and are well on your way to financial freedom!

What do you think? Will it work for you?

Debt snowballs, avalanches, meltdowns …

I’m about to find out if you can make money online!

—

FREE eBOOK

—

(well. free to readers …. come on over and see my new blog to see what all the fuss is about)!

________________________________________________________

Now for today’s post …

There are three basic ways to deal with debt:

1. Sweep it under the carpet and hope it goes away … pretty much the middle-class American mantra

2. Peck and poke at it … barely keeping it under some sort of control

3. Systematically demolish it … the subject of this post

The methods for ‘demolishing’ debt basically all have to do with snow (Why? No idea!):

a) Snowballs – where you deal with the little guys first in order to ‘psych up’ with a few, quick wins

b) Avalanches – where you deal with the high interest debts first, so your debt repayment strategy builds up momentum

c) Meltdowns – where you try either of these methods (or some other way) and fail mid-stream

The Debt Avalanche, nicely described (and named!) here is mathematically the best way to deal with eliminating all debt. I also covered this method in a recent post.

As I said in that post, it stands to reason that if you tackle the high interest debts first, you lower your overall interest bill – hence debt. Therefore, you pay the lot off quicker …

… but, not much quicker as Dave Ramsey is quick to point out:

He says that the debt snowball isn’t terribly slower at paying off debt, but has a psychological advantage of allowing some quick ‘wins’ … by ordering your debts from smallest to largest and paying off the smaller ones first, you get to see the results that will hopefully sustain you as you start to tackle the larger debts (also, you are applying larger and larger amounts to each debt, as you have fewer and fewer ‘minimum payments’ to maintain as you go along … but, this is true with both methods).

Then you have the ‘Debt Meltdown’ aptly described by Diane, one of the Final 15 on my 7 Millionaires … In Training! ‘grand experiment’:

I’m in such a financial mess that I am working on 101 and not sure I’m going to survive that at times.  But I should.  I know I make a lot more money than many folks.  I shouldn’t be in this situation.  I could probably go back and show how it crept up because I was down to about 2k in debt, at 1.9% interest rate (sans the student loan), before I bought my house 2-1/2 years ago.  I’ve got 30k in debt now roughly and some months lately am not sure how I am going to meet all of the must-pay bills.

This is typically what happens when you start on any debt repayment schedule and something ‘comes up’ …

Diane should have stayed the course until all debts were paid off then bought her house, ensuring that her total mortgage wasn’t any more than the total monthly debt repayment schedule … if less, she should have applied the balance to her investment strategy (if she didn’t yet have an investment strategy, then she should have started that before considering the house).

All Diane can do now, is start a Controlled Meltdown …

… anyway, of all these methods, I actually like the Controlled Meltdown best  – and, for that to work you actually need to begin with the Debt Avalanche:

1. Order all of your debts from lowest interest rate to highest (regardless of size … if you have two debts at the same interest rate, tackle the smaller one first, just to please Mr Ramsey)

2. Decide how much each month you are going to apply to debt repayment (min. 10% – 15% of your net salary … after contributing to 401k … sorry no Starbucks, movies, or sushi for you!).

3. Pay the minimum on all of the debts except the one that you are tackling (always the highest interest rate loan that you have left). Put all of the rest of that month’s debt repayment into this ‘high interest debt’.

4. Repeat until …

[AJC: and, this is where a Millionaire ... In Training! differs from the ordinary folk]

5. The interest rate on the remaining loans is lower than the return that you can get by investing your money elsewhere (buy some real-estate, leverage into some stocks, start a little business) … just remember not to accumulate any more debt and keep repaying the minimum on the ones that you do have.

6. Also, don’t forget to tie the investment time period to the loan: let’s say that you have a student loan at 2.9% that must be repaid in 2 years … make sure that you can sell (or refinance) your investment to pay it back: the student loan is acting as a proxy for your investment loan, so don’t get caught out.

This is the fastest method because you don’t need to pay off all of your debt right now!

The Controlled Meltdown (patents pending) recognizes that being 100% debt-free is not a useful financial goal; being 100% financially-free is … and, to achieve real financial freedom, you are going to need some well-directed debt to help you accelerate you Net Worth to the point that it indefinitely sustains you.

Your existing ultra-low interest rate loans are a great place to acquire that debt …

… because you already have them and just need to redirect that debt towards good rather than evil