One of those responsibilities is helping individuals with their problems, and there was a rather interesting problem on the operating table here at MMM headquarters last week:
A reader who happens to live in Colorado set up an appointment to meet with me to review her own finances in detail and see if I could help. This person is highly intelligent and also earns a solid income, so I figured she would probably already have everything set up pretty optimally.
But in a bit of good luck for both of us, I was quite wrong. And the experience opened my eyes to a situation that might be quite common out there in the increasingly complicated world of personal finance.
I got her permission to write about the situation, (with a few details changed to protect privacy). Check out this amazing story to see if any of it echoes in your own life:
My friend had recently run into a bunch of expenses – home repair, tax bill, and replacing a dying old car with a newer (but still used) car.When you add it all up, there were new debts of about $47,000, distributed across three different loans like this:
- $8000 on a credit card at 13%
- $20,000 on a personal line of credit at 10%
- $13,000 on a car loan at 7%.
The total monthly payments on this nasty selection were about $327 of interest, plus a few hundred in principal, making a total load of $650.
When you add in a home mortgage, it all sounds pretty bleak, right?
But then we reviewed the rest of her financial accounts. There were a lot of them. They included:
- 4 different savings and checking accounts, some of them left over from before she got married, with an average of about $1000 kicking around in each.
- A home equity line of credit with $10000 in available credit at about 6%
- Several old investment accounts left over from previous employers’ stock purchase plans, etc. (regular taxable accounts, not 401(k)s) with a balance of $20,000 that hadn’t been touched in 10 years!
- Yet another family account with $10,000 available earning no interest.
To make a long story short, the assets that were sitting around were more than enough to cover all of the high-interest debt!
We decided she would close ALL the old accounts and consolidate everything (salary direct deposit, automatic bill-pays, etc.) into just one clean and tidy checking account. This would free up those few thousand from the mostly-unused checking accounts and make life simpler to manage as well.
Then she would rake together the money from everywhere else to pay off ALL of these debts – even the car loan.
Now my friend will have NO credit card payments, NO personal line of credit, NO car payments, and will be back to just paying a conservative mortgage payment. With the extra monthly cashflow, she can start making extra payments on the mortgage and bringing the line of credit down as well to increase her cash cushion.
These results are not typical, but a similar situation IS typical. Many people (including me) sometimes hang on to multiple checking or investment accounts just for sentimental purposes, without thinking of the cost – even when there are outstanding debts that could save you big bucks if you just transfer your own money from one place to another.
Mrs. MM and I were motivated enough by this experience to do some cleaning up of our own. We sold off some of our own non-retirement index fund savings (in Vanguard) to finally wipe out the rest of the home mortgage I’ve been procrastinating on for the past few years.
There is always an opportunity cost to this, because the stock market goes up over time. But since we’re at a stage of life where simplicity will do us more good than additional money, it is just good strategy to be fully out of debt. Especially with the Mr. Money Mustache philosophy of maximizing the Good Life by minimizing stress even while you Amass a Stash of Cash.
If you have debt with an interest rate higher than what you are getting in savings, you might enjoy a bit of moneymaking simplification like this as well. If you have specific questions or situations to share, send ’em in! If you like, we can even make an inspirational story out of YOU.