Thursday, December 07, 2006

My Personal Experience With Debt

Although we have never had any credit card debt, I do and have used other types of debt as a means to cover high cost living needs (e.g. home or car) or long term goals (e.g. education).

House mortgage – This is the only debt we currently have. It also the biggest debt we’ve ever had. For both homes, the mortgage was about 2 times my gross salary. As I’ve written in previous posts, I use vanilla fixed rate mortgages. No ARMs for me. We never paid off the mortgage on the first house. Interest rates were declining at the time. So we refinanced periodically to lower our payment and take out cash for improvements. We currently have a 30 fixed loan for which we are making accelerated payments against principal to pay off the loan in 15 years.

Student loan – When I graduated from a private university, I had loan equal to about one year’s tuition, room and board. The loan amount was about 40% of my gross starting salary. The monthly payment was about 4% of my gross monthly salary. While manageable, I still remember looking forward to day when the debt repayment ended. I paid off the loan after 10 years.

Car loan – After starting my first job, I couldn’t wait to buy my first new car. After driving the 13 year old family car for two years, I purchased my first car with a bank loan. The loan was for about 25% of my gross annual salary. I recall paying off the four year loan about 1 to 2 years early.

I have occasionally used “1 year same as cash” credit deals. However, I now just ask for a cash discount. I have thought about using 0% APR credit card balances to fund investments such as a real estate down payment. However, I have not yet used this approach.

Finally, I don’t assign the designation of good or bad to debt. To me, all of the above uses of debt were just a means to acquire an important and necessary asset in an economically sound way, a business decision as my father would say.

Photo Credit:, Mary R. Vogt

This is not financial or debt advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC


Anonymous said...

Super saver, the first thing I notice is your major debts have been "manageable": mortgage 2 times the gross salary and car loan 25% of gross certainly made some good choices there.

Use the 0% APR credit card balances with care. If you invest the balance in assets that cannot be easily converted to run the risk of having to face high interest rates when the 0% offer expires. Also, a single late payment usually brings the rate back to default, in which case you must pay back the entire balance immediately to avoid large finance charges.

Super Saver said...


Thanks for your comment and credit card tip.

Individually, the mortgage and car loan levels did feel confortable at the time. Even so, I did feel stretched for a short time when I was paying down all three debts simultaneously for a 2-3 year period. Also, I will not likely spend that much of my gross salary for a car again:-)

Thanks for the coaching tip on 0% APR credit cards. For investments, it seems that 0% APR credit cards would be best used as a bridge loand - i.e. if I don't have the money now but I will for sure in the near future. The benefit, of course, is zero interest for the short term loan. Still I would want to be careful in using debt:-)

MoneyFwd said...

One year's tuition at a private univ that was only 40% of your gross starting salary. I wish I was that lucky. I came out of a private univ with a year's worth of tuition, without room and board, and it was 81% of my gross salary at my first job (3 years ago). I guess it depends on job and major and everything. But this can show how ridiculous college costs are increasing.

Super Saver said...

Money Forward,

I agree the key reason is the rate of increase of college tuition. I graduated over 10 years ago. Today, one year's tuition at my alma mater is about 60-65% of the average starting salary for my major.

More reason to agressively save for our daughters college fund :-)

Anonymous said...

Have you opened a 529 Account to for educational costs?

I opened an account with Upromise, they offer Vanguard mutual funds for investment options.

Super Saver said...


Yes, we started contributing to a 529 account last year. We invested in four Vanguard mutual funds. I am impressed with the Vanguard offerings. The 529 account is up 16% this year. I wish all my other investments were doing as well:-)