By Elizabeth Kerr
Dear Elizabeth,
We are 31, married with two young kids and we have over $95k in personal debt. I know we’ve made some bad purchasing decisions in the past but I just want to rule a line in the sand and move on to getting our money machine underway.
We have two late model cars on 7-year loans at $45k and $20k. We live in our own home which has a $400k mortgage on it, and because we have no equity in it we took out a personal loan for $30k when we did the renovations.
Our personal debt loans are for seven years!!! We’ll be 37 by then. Since reading your columns I’m inspired to get my money machine underway and it seems like it will be forever before I can even get started! What shall we do? Should I invest and pay off our debt at the same time?
The thing that bothers me is that we are on a combined salary of $130k per year, and I thought we would have had more financial freedom than we actually do now. We are stuck in our jobs because we can’t afford the risk of not earning as much as we do now.
Kind regards Kylie and Rob
Dear Kylie and Rob,
I’m not a qualified financial advisor so, theoretically, I don’t know what I’m talking about. But that doesn’t stop me having an opinion, and if you and I were BFF’s sitting at a BBQ discussing your situation then I’d probably say something to the effect of the following:
First go pour yourself a stiff drink because this may be hard for you to hear.
The world is designed to make you feel inadequate. People are actually paid to advertise products and services in such a way that make you feel like you are failing, inadequate or neglectful and I can see that you’ve been suckered in like this a few times over. Once they have influence over your emotions they can effectively get you to buy anything. Before you do anything else you need to understand this and keep your wits about you from now on so that your spending decisions come from a place of financial power rather than servitude, then things will start to get better for you.
Should you pay off your debts and invest at the same time?
In my opinion NO! The debts will suck more interest out of your pocket than your investments will pay in. It’s no use planting roses if you haven’t levelled your garden and you guys first need to get out of the $95k hole you are in.
First up, I suggest you sort out your non-negotiable costs, your loan repayments and discretionary costs. Take your loan repayments and put them to one side. Secondly take your non-negotiable costs and everything else and use Rob's salary to pay for them. Rob is going to work to fund your lifestyle and you are going to work pay off your debts.
The next step depends on how much you want to get out of debt and start your money machine. If it was me I’d be racing around with the urgency akin to being chased by a Lion. It would be my sole focus to get rid of it and take my freedom back and every spending decision would be weighed up against how it would affect my debt repayment goals.
Since you’ve been reading my columns you’ll understand the sooner you start the better your outcome thanks to compounding interest. You’ll also understand that paying off this type of debt wont be able to be done in secret …people are going to know what you are doing because major life changes are likely to be necessary.
Okay, now take a deep breath in!!!
...I think you should sell both cars!!!
Remember, cars are only for getting from A-B. No one really cares what type of car you use to get there. And if they do…well, that’s a bit superficial isn’t it and I don’t need to tell you what I think of their attitude. Remember this isn’t a forever position. This is to get you out of debt as quickly as possible so you can get your money machine started.
Yes, I know you won’t get as much as you paid for them, but hear me out. Both cars were bought recently and my research indicates you’d have $13k left to pay off after you sold them. You could buy (or borrow if you have generous friends/parents) yourself a cheap runabout for six months, pay off the $13k and then sell the runabout and use that cash plus some more savings to buy a cheaper family car, as per this column here.
So hypothetically, if you were serious and going to go all out, your future 14 months could look something like this:
| Month | Income | Running total | Action |
|---|---|---|---|
| November 2015 | $4000 (aftertax) | $4000 | Pay mandatory loan payments - $1700
$2300 towards runabout car. |
| December | $4000 | $6300 | Pay mandatory loan payments - $1700
$2300 towards runabout car. |
| January 2016 | $4000 | $8600 | Pay mandatory loan payments - $1700
Buy 2nd hand car $6000 Sell both cars – refinance remaining $13k debt onto personal loan. |
| February – Dec 2016 | 11 x $4000 | $44,900 | Pay off entire personal loan |
| January 2017 | $4000 | $5,900 | $5k towards new car
Sell older car and use funds to buy $10k car. |
You see, in 14 months you may have paid off all your debt.
If you carry on as you are now you will be 37 before you are finished. I think ripping the plaster off quickly and doing it over 14 months is much harder but better – and hey at the end of it you own your own car that you paid for in cash AND you can start on your money machine. That’s gotta be worth celebrating. If at that stage you wanted a more expensive car, then sure, use your cash and buy one and I’ll just look the other way. At least you aren’t financing it.
But wait there’s more!!! After 14 months you are still just 32 and you are personal debt-free. Why don’t you keep going in this fashion and put your $60k salary towards your personal home loan and knock that one over? Totally debt free by 37 is awesome and there are people who would give their left arms to be in that position, and with a bit of commitment and mindful spending you can do it with no trouble at all.
And I say mindful spending – not going totally frugal. From looking at your budget, $70k is more than enough to support you all. Remember, as you pay down your mortgage this $70k will stretch a lot further. If you’re feeling hard done by then I imagine it's nothing more than an attitude adjustment and some serious grateful thinking that is required.
Keep in touch and let me know how you go.
Warm regards
Elizabeth
PS: The readers will no doubt have a few opinions on this as well so do check back in and see what they say...
39 Comments
I'd pay to get an e-valuer report from qv to see what your house may be worth. Could get a RV to value it, if it comes out higher that could allow you to up your mortgage to pay off all the high interest personal loans and convert them into 4.35% mortgage debt.
Selling cars either way and buying a cheap run about still the way to go unless you're worth 10mill plus and are happy to throw away 10k plus per year in depreciation on a new car, and even then leasing might work out better
With cars, if you have a moderate amount to spend, it is best to buy a top of the line nz new vehicle, ideally one owner with low kms. At 5 years old you can generally buy at about 75% below the original price, but still young enough to purchase an extended warranty for 4 years.
That way someone else does most of the depreciation for you and you get the best use out of the vehicle.
And that's why my daily driver is a car that was $150k new, which I bought with only 40,000 k's on the clock.
I have to disagree, buying a 5 year old car is fine, but no need to buy a top of the line car. What you want is a common, reliable car. Top of the line does not mean more reliable, possibly the opposite since they often pushes new technology.
A $150K car is still going to cost you $37k at 75% off, you can by a very good car that will get you from A to B for about $10k-$15k (at auction). Not only it is going to cost you more buy it is going to cost you more to repair when something does go wrong, you can get cheaper non-brand parts, or get parts from wreckers, something unlikely to happen with a luxury car.
The person asking the question is in massive debt, they do not need a status symbols they need a way to get around. Judging from initial value of their two cars they are probably the main reason they are in so much debt in the first place. If fact depending on their situation it maybe better for them not to have a car at all, simply take the public transport, cars are expensive to maintain.
People need to stop taking pride in how much they can spend, and start taking pride in their ability not to be sucked in to this never ending consumerism.
Since we are comparing cars, I just bought a $4.5k car (after the 1994 model started costing too much to repair) I have 2 houses, no mortgage. For me I am proud of that. I think it is time people become a bit more like me (not completely like me, I am a bit crazy), and are proud of their intelligence not the trinkets they can buy.
Cars don't liquidate very well.
If you were silly enough to buy cars you couldn't afford, it is going to be mighty uncomfortable selling them at a loss.
Buying a sensible safe reliable older vehicle is a good bet, but the running costs can be high, so you need a well maintained nz new (ideally) low km car, with a good safety rating and excellent fuel efficiency (a 2000-2003 5 series BMW or a 2000-2005 e46 3 series spring to mind. Both of which are often available around $5k or under.
Realistically this couple need to get totally debt free ASAP. I can not understand people who take large mortgages just for their own home. Live modestly and build up your income first. Perhaps buy in your dream location, but rent the house out and live in a flat downstairs or out the back etc.
A couple on $130k are on very modest incomes, so need to live a modest lifestyle.
Household income of $130K is "very modest"? Are you sure? According the statistics database, the average household income is $88,660 (median of $73,684). Considering these are close to the central measure of tendency, I think that 130K is not modest.
http://nzdotstat.stats.govt.nz/wbos/Index.aspx?DataSetCode=TABLECODE755…
Perhaps you want you want to say that a couple on $130K is not "rich."
Use as much income as possible to pay off that debt while the interest rates are at their lowest in history.
Once you've finished paying off the debt continue saving as if you were still in debt. By that time the saving and lending rates may be alot higher and you'll experience wonderfully high interest on your savings and the magic of compound interest.
wow 130K combined income and 65K for two cars, they must be an important commodity for you..
When I was living in Auckland I bought a 2.5 years old European car with 27,000km on the clock for 18K - new it was over 45K. Sold it 12 months later when we left for Australia for 15K. There are bundle of similar deals in Trademe, don't waste your money on new cars.
I would consider renting a house in the same street (if you like the location) and put your property up for rent, make the best of negative gearing (speak to an accountant or financial advisor). Take the savings and put it towards the highest interest rate debt. AND GET RID OF THE CARS!! It makes no sense to be throwing away good money on a depreciating asset! 8-10k you can get a decent Toyota for everyday running around and maybe get a bigger car for family trips etc. Money is cheap at the moment in terms of mortgage interest rates so I would make paying down the mortgage the last thing to tackle or throw any extra savings into higher earning assets. And remember its great to be debt free but it's better to be throwing money at wealth generating assets - long term. All my opinion but I am only 30 so could be looking at things completely wrong, time will tell.
Check the Debt Free Wanabee forum at MoneySavingExpert.com
http://forums.moneysavingexpert.com/forumdisplay.php?f=76
Its UK based but you'll find it extremely helpful in your situation. It'll also show you that you're not alone. It'll be a long road, but it can be done (I speak from personal experience) and you will get there eventually. Good luck
It's certainly a long road. But remember the exponential thing. The reduction in debt starts very small. But the next year it's twice that. Goes on a slow and boring way until about 5 years in it starts to look good.
Then it really starts to plunge.
Of course, nothing at all will happen unless there is a surplus of money in over money out. Micawber rules.
If you have spent $30k on renovations then you should get your house re-valued and add any residual debt after selling the cars to the mortgage. You still have to save aggressively to pay this off but you get to do it at lower rates. Note that any debt on a 30 year mortgage will cost you triple if you pay it off over the full term.
I looked at this already but there is no equity available to refinance. Apologies to everyone who suggested this i should have included this above. Might i also point out that moving debts to lower interest rates is good - but you still need to pay it off with some aggression or stringing it out over a 25-30 mortgage would be as much as higher interest over 7 years.
Sorry, but some of these recommendations for cars is ridiculous. Call me stingy (and I will take it as a compliment) but why do you need a car to look great or have expensive gadgets. I bought my last car a 2 door Rav 4 1995 model a few years back. The paint job not so good but it still goes pretty well. I learnt to do most of the servicing myself and the car has never given me any problems and I must have covered most of new Zealand by now. the car cost me $2500. Yearly maintenance and WOF and Rego costs $500. Better to put the extra money in mortgage
you haven't factored in fuel costs. your standard Holden volt can cost you about $300 a year in power / fuel compared to $5,600 a year for the 1995 Rav 4 ( 9L / 100 km new @ 2% efficiency loss annually = 13.4 L / 100 km ) assuming 20,000 km a year and $2.10 per liter. 20,000 km a year = 54.8 km / day which means the volt never has to burn fuel unless you are lead footing it around town.
Admittedly a new volt costs 50,000 - 90,000 depending on year model. You could just as easily do the same math using the Nissan leaf ( $ 30,000 - $40,000 new / 15,000 - 22,000 used ). Fuel savings alone would pay off your used leaf within the first 3 years.
In my opinion the biggest factor affecting the amount you can afford to spend on a car is it's running costs. If you get one of those beasts that mainly use tiny explosions to push metal rods around you are almost certainly not going to be able to afford as much as if you use a modern efficient car. Having said that some people just like the idea of spewing carbon monoxide everywhere they go while sitting on top of a large amount of highly combustible liquid. :P
Once people get over the mind set of getting rid of their expensive cars, everything else is easy. My pride and joy was a shiny black V6 Audi that cost me a total of $229.37 per month over the 2 years I owned it - repairs and parts on these things are astronomical. Then someone would open their door in the carpark and scratch it - yet another obsessive compulsive repair before I could begin to relax again! Seriously let the cars go and experience true freedom. I sold the Audi, paid off the loan, brought a tidy 2nd hand Toyota and it's cost me a couple of hundred in servicing costs per year! Now I could care less what I drive or could care less what anyone thinks about what I drive. Then get rid of all the possessions you don't use/need and use that money to get rid of debt also. Then find another hobby for your spare-time (previously mine was shopping to buy rot I didn't need) and channel that energy elsewhere, and watch your debt disappear and savings grow! Accept there will be minor transgressions but move on from them and don't let it destroy your overall goal. Mine is retirement at 55, kids through Uni and a freehold house (with the ability to start my own business and earn income by doing very little) - It's already looking very promising.
Surely Kylie and Rob are joking?! "Help, we borrowed $65,000 to buy cars, what should we do?" Hmmm...
I'm single and my net worth is around $1.5m - not much considering the price of Auckland houses, but it's invested reasonably well. I was able to quit work in my mid-30s on a passive income higher than the average Auckland salary.
I'm still driving around in a 1997 Honda that I bought years ago for $5,000 cash. I could go out and buy a new Maserati tomorrow, but that would be idiotic! A car is just a box on wheels for getting around the place quickly; they cost a lot to run and new models depreciate at a scary rate. The intelligent thing to do is waste as little money as possible on liabilities such as cars.
My old Honda was cheap to buy, is reliable, has only depreciated by about $1,500 in the seven years I've owned it, and has so far cost very little in maintenance each year. Of course, people who drive late-model SUVs and shiny European cars (the most unreliable, by the way) sometimes give me snooty, superior looks when they pull up alongside. Yet while I've been free for years, typically these folks are in debt up to their eyeballs and will be working full-time until their 60s to support the car loan (and the loans on the other flashy stuff they inevitably own).
It's insecurity that makes people buy overpriced cars and other crap they can't afford - they're trying to appear high status to other people. Best get over that if you want to actually BE wealthy, rather than just appear wealthy.
Strongly suggest Kylie and Rob read the 1996 classic "The Millionaire Next Door" by Stanley and Danko.
Pete I have had 5 road fatalities in my family. Two of them would be alive if they had been in a heavier safer car. The people they hit head on survived as they were in a larger safer car. I would not go down to the dairy in your car and I would not let my kids in it. Your tightness might be your downfall one day.
I'm very sorry to hear that Gordon. Admittedly smaller cars are more vulnerable nowadays - mainly due to the high and growing proportion of large SUVs on the road. It's a kind of arms race - you're safer if your car is bigger than the majority of the others. But the average car size just keeps increasing, so where does it end?
To protect your family from those crazy NZ drivers, it is possible to buy a used vehicle a few years old with a high safety rating for well under $10K. Certainly no need to spend $45,000.
But driving inherently carries a high risk. If road safety is the number one concern, best to ditch the car altogether and find a way to get around using public transport. That's not impossible, many people do manage it, and save themselves a packet of money in the process.
I certainly would not put my children let alone myself in a 1997 Honda. The two that died in a head on were wealthy enough to have a Range Rover each but he was too tight to buy one. She drove a late model European car that was crunched by a bigger car. If you can afford it go big and go modern as your chances sure improve.
Cars are a tragic cost story whatever way you go. New costs with depreciation and old costs with maintainance. Drove my last Honda CRV for 270,000 Km over 12 years until maintainance started to hit. I get attached. Bought a new model RAV4 new for $48K. Safe car. Valued at $23K for tax just two years later. Ouch. But no maintainance cost at all so far. The plan is that I will drive it for 300000km to 400,000km. See how we go.
As for the couple that Elisabeth writes about. Their situation is not mine, but they could be in two very good cars, safe, for less than $10K each.
Whatever they do, they need to establish a surplus over expenditure. Time will do the rest. Low current interest rates are a great opportunity to get an edge and repay debt.
Search Trade Me for "5-star safety" up to $10K. Looks like about 30 or so currently listed, many with low mileage (for example, Volvo with 34,000 km asking $9,775 or Toyota Avensis with 80,000 km asking $8K).
Around the $15K mark there are about 100 vehicles on Trade Me with 5-star safety ratings.
Of course there will actually be a lot more than this available because not many sellers have included the safety rating as a selling point in their advert.
Decent wheels can be got for under 10k if you spend some time looking and negotiate hard. The breakdown risk is largely scaremongering...get AA assist for a few bucks a month if your paranoid. Learn to change your own oil, keep an eye on the water and your average 10 yr plus car will keep on going indefinately. 300 ks is common for a jap car these days.
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