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I recently posted on focusing our efforts on debt reduction. The uncertainty of my job plus our constrained cash flow has me focused on paying down debt to improve our monthly free cash.
The reality is that interest rates are at all time lows and there is currently no immient signs of increasing interest rates/inflation. I feel pretty confident we have as a worst case at least a year before interest rates start really rising. Given that does it really make sense to keep focussing on paying down our variable mortgage debt?
We currently have about $31,000 financed in IELOC/HELOCs. My thinking behind focusing on debt reduction is consuming our current cash flow it will still take us another 2+ years of 100% of our typical monthly free cash flow to pay off all our IELOC/HELOC loans with variable interest rates. So if interest rates start to climb rapidly we may be caught carrying debt at variable interest rates with limited ability to pay it off unless we sold some other investments.
On the other hand - what are our other options in regards to allocating our monthly free cash flow?
- Build cash - I would be the first to admit we need to grow our cash position to $75,000-$100,000 to handle a future car replacement, our emergency fund (1-2 years of living expenses), and future investment opportunities.
- Pay down our fixed rate mortgage(s) - Our highest fixed rate mortgage (happends to be on an investment property) is currenlty at 5.6% which is much higher than our current variable rates, but the current balance is ~ $109,000. Paying this mortgage offer would significantly improve our monthly free cash flow.
- Stock/Equity Investments - The market seems awefully strong right now and Im hesitant to invest more money than our current monthly contributions via DRIPs or retirement accounts. However I would like to be in a position where we are ready to make some major investments if there is a market correction (ie build cash).
- Invest in more real estate - I haven't explored recently, but we could consider making further investments in real estate. I would suspect if we bought a rental property today the cash flow numbers would indicate a high rate of return than we see/have seen on our current rentals.
- Spend It - The reality is it wouldn't hurt to spend some of the cash flow on ourselves and reward ourselves for getting through the past year and half. We have really cut back and not had much opportunity to travel/vacation or buy furnishings (like kitchen table, surround sound, a replacement car). Spending money in some areas that would re-energize us a bit may be a wise expirament as continue to shift into the next phase of reaching our finanical goals.
We've moderated a bit since I posted we were focusing on debt reduction and are now spreading our monthly free cash flow across a number of these areas.
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Comments (2)
Thanks for your well thought out post.
1) If I was in your situation - I would think long and hard before purchasing any more real estate.
2) You wrote, "I feel pretty confident we have as a worst case at least a year before interest rates start really rising." I'm not as confident as you that this is true, when they do start rising they often rise a substantial amount rather quickly. However, you HELOC is only $31,000 thus even a substantial increase in the rate should not have a large impact on your overall finances.
Good luck with your MANY possibilities, I look forward to reading about what you decided.
Posted by David M | April 3, 2010 5:18 AM
I can tell you my family is currently in the same situation. I look at it as a risk reward. I am currently aggressively reducing variable debt and will be shortly focusing on our HELOC into a rising rate environment. An extra $1,000 will pay more principal now than when rates increase to 6.00%+ in the coming years.
My strategy is to pay non-deductible interest first, then deductible variable interest. Once I get my debt to only cash flowing investment real estate debt and the 4.75% fixed rate mortgage, I will build additional cash and investments reserves.
As a side note, I have used notable low interest margin in the investment accounts to take advantage of the recent bull market to enhance returns (I invest in primarily dividend related businesses and entities so the margin gets paid down rather quickly from organic cash flow).
It doesn't look as clear from this post but it has allowed us to pay down well in excess of 10% of our debt in the past several months.
Posted by Andy | April 3, 2010 7:36 AM