About My Credit Card Debt
Newer readers may be alarmed by my high levels of credit card debt. In short, I’m borrowing money for free and keeping it in safe investments while earning me 5-6% interest. Along with other things, this helps me earn extra side income of thousands of dollars a year. Recently I wrote up a series of step-by-step posts on how I do this. Please check it out if you are curious.
About My Goals
I haven’t explained the goals in the progress bar on the top right of this page recently, either. First, I have a mid-term goal of $100,000 in net non-retirement funds (everything but IRAs/401ks). This is designed to help us save for a house downpayment. We’ll also need enough for any closing costs plus some for our emergency fund. Second, we have a long-term goal of one million dollars in total net worth by the age of 45. This is not our end goal, as we plan to keep working past 45, but it is something for us to work towards. 65 is just too far away, as are crazy numbers like $3,000,000 🙂
These goals were set more than two years ago, and while our situation has changed a lot since, I am still keeping them around. I may revise them later, especially if we buy a house near the end of this year.
Commentary
- Our investment portfolio blipped back up in March. Honestly, this is becoming the only time of the month I even catch a whiff of what’s going on in the markets.
- We had some pretty large pseudo-unexpected expenses this month. Coupled with our planned Vegas trip, we put a lot of stuff on the credit cards this month. (We never carry a balance though, it’s just for the rewards.)
- Still, we continue to save more than half of our take-home income while our housing costs are lower. We did track our expenses for February, which was a helpful exercise. I think our spending is in an acceptable range for now. But anything to help us grow that downpayment is good!
- Other stats: $51,600 in net cash and $60,900 in total non-retirement assets.
You can see all my previous net worth updates here. I’m getting excited about starting to look at houses, if only to keep an eye on the real estate prices.
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Great Progress!
Your dilligence to savings is great. What time frame are you looking at buying a house? Just waithing till you hit exactly 6 figures in savings?
$100,000 seems like a lot for a down-payment on a house. Are you trying to put the full 20% down to avoid PMI insurance? That would mean you are planning on buying a $500,000 home? Do you live in California and have to pay that much?
Seems like you would want to put as little down as possible at a low interest rate mortgage and put your money into something more agressive, especially with the housing slump of late.
What are your thoughts?
Hey Jonathan
What is your opinion about buying a house in seattle area considering anyone with a shack on the land is asking 1/2 a mil for it.
Broke – We are looking at the end of 2007, if the price is right.
Robert – We definitely are looking in a very expensive area. After some thought, we are leaning towards 10% down, and then having enough for closing costs, other housing expenses like furniture and Home Depot trips, and also a healthy emergency fund.
Remember, this is ALL our money, so I don’t want to put every penny into the downpayment and lose flexibility. We can then get rid of any PMI within a few years.
SeattleHawk – I think that you just have to look for a good deal. Houses are selling for a lot less than asking these days. If the shack has potential and is on a good-sized lot in a nicer neighborhood, I might buy it for 1/2 mil 🙂
But if it isn’t worth it to me, I’ll be happy sitting on the sidelines and being patient.
I highly recommend going with ING Direct for your mortgage, I was really happy with their simple process, and I didn’t have any closing costs (which helped me a lot being a 24 year grad student) and they are still dirt cheep. They only offer 5/1 and 7/1 hybrids though; so I guess if you’re looking for a 30-year fixed this might not be the best deal.
I don’t get it – how are you growing your cash savings by nearly $6000 a month? Or is that $2400 in credit card debt being added to your cash savings via your 0% APR method?
~$3000 a month in cash savings I can see, but $6000 is just huge without being on a $150k salary. (I assume you’re floating somewhere near $100k.)
The problem is that a good chunk of our income is erratic, so I can’t say that I would necessarily make $150k per year. Next month could be much less, or it could be better. But our overall income has increased from six months ago, yes, and actually should increase even more by the end of the year.
In fact, that’s really the only way we can afford to live where we want to live. If I didn’t expect a better income, we might choose to live somewhere else, even if it doesn’t mean living next to family. There are lots of great places to live that aren’t entirely expensive 🙂
I’d be interested in hearing others’ opinions, but as far as housing goes, I am a very strong advocate of not getting yourself into any PMI situation unless you have no other choice. Further, while I agree that you should take advantage of relatively low rates historically, my main criteria when considering how much to put down is what kind of a monthly nut I’m going to have. I want to feel confident I can swing the payments. Secondly, I start to think about what kind of mortgage interest I’m going to be paying out…for a long time. While the effective rate is not bad after paying taxes, I will still be thinking about what the spread is between what I’m paying in interest and what I think I can reasonably get with alternative investments. If not much (without a lot of risk), then I’m fine to plow it into the house and get a lesser (but safer return).
Granted, I realize I may be a bit more risk averse than some (like to have the sense that I can still afford my house even if I lose my job)…each person has their own level of tolerance. At the moment, I am considering the purchase of a house ($500K range) and considering putting down about $250K…am I crazy?
Regardless, again, stay away from that PMI…waste of money unless you have no other alternative.
I’ve been mulling over housing thinking over the possible scenarios. One possibility I see in my crystal ball is interest rates will rise significantly. We’re understating inflation, the value of our currency is dropping constantly — and some point, the economic pressures will override the political pressure to keep rates low. The rising rates will drive prices down even further. For the general population, the lower prices won’t be a benefit since the more expensive cost of borrowing money will be a wash. Which means to take advantage of this scenario, you will need a lumpsum to put 50%+ down — or perhaps even buy outright in cash. When rates do finally drop, you can then take out a HELOC to put into investments.
It’s probably mentioned somewhere in one of your posts and I just missed it, but do you worry about any effects on your credit score from having such a high amount of debt on your credit card? I had thought that you’d be dinged for having 1) using such large percentage of your available credit and 2) doesn’t getting to such a high credit limit also ding your credit, through asking for credit increases?
I realize successfully paying off the balance with no late payments might improve your score, though.
ed:
Yes, he’s talked about it before, in his posts on credit card arbitrage. Basically, yes, his credit score is affected somewhat by his high credit card debts. But two months before he plans on purchasing his home and taking out a mortgage, he will end credit card arbitrage and completely pay them all off. That will improve his score sufficiently to get a good mortgage rate.
I see PMI as just another form of interest. I’ll compare the costs of a 2nd mortgage if we go 10% down – 10% 2nd – 80% Primary mortage vs. paying PMI since both are tax-deductible now. We’ll see what the damage is, and we can see how aggressively we want to pay off early to get to 20% equity.
Regarding credit scores – Rick pretty much sums it up. My score is dinged right now, but it’s a temporary situation. Once you pay off the balances and it gets reflected in your credit report, your score just pops back up. Credit scores are just a mathematical formula based on the info on your credit report, and compare your last month’s ending balance with your credit limits. I think having higher credit limits actually helps your credit score, as it lowers your utilization ratio.
In addition, my wife’s score is pretty much perfect, and unless the lending requirements get significantly stricter, last time we looked she could qualify for the loan amount we want on her income alone.
All this talk of PMI and piggyback loans… you might consider seeing if there are any programs that would allow you to avoid having either of those. Such programs do exist; I know because I am currently using one. I just bought a condo for $340,000, I put nothing down, and I have a 30yr fixed with a rate of 5.625%… all without PMI or a piggyback loan. The APR ended up being about 5.8%. I went through a Bank of America program called “Community Commitment”.
I could be wrong but I don’t believe PMI is tax-deductible except for very specific cases, and its only in effect for 2007.
I like your way of thinking — my husband and I love finding ways to make $100 here and there and interest on borrowed money — but how does opening a lot of credit cards affect your credit score? I thought that the more cards you open (the more hard inquiries there are), the lower your score goes. Sorry if you already explained this somewhere. Thanks for the great site!