There has been a lot of talk lately on some of the groups and blogs about “F-You” money. I must admit that I haven’t really thought a lot about “F-You” money before because I generally really like my career. My job is (was) a pleasure. However, there have been a number of things at work recently that have made me feel demotivated. I’m not going to get into them, but it’s generally made me think about the usefulness of “F-You” money as a back-up: as an opportunity to switch to part time, or as a means to just not work if you didn’t want to. I imagine that usually people come to FIRE thinking yes, I want to do this retire early thing because I hate my job and or want financial freedom. I feel like I am coming at it from a place of “well I currently love my job, but that may change, so maybe it would be good to have a back-up plan so I don’t end up destitute?” In the end, it doesn’t matter how you get there, just that you get there?
So now the bank (rather than the landlord) owns most of our house. We own a small share of it and have a 25 year mortgage. This was (is) one way that I tried to invest in us and our sense of security. Assuming that I can come up with the mortgage payment, they cannot take my house away. (The insecurity of not yet being a permanent resident of the country I now own a home in is a whole other story, but Im not sure I want to get into that).
So now that we have the house, I have to switch focus on (1) paying down debt, (2) building an emergency fund, and (3) savings. And, because I am 40, I feel like I have to do it all at once not in incremental stages.
According to one article I read, I should be looking at trying to save about 20K a year: “If you are in the fortunate position to be able to put £20,000 into an ISA every year, and the average return is 5 per cent, after 24 years the pot would be worth just under £1m – and that is in today’s money.”
To do this, that means getting our savings over 1667 pounds a month. We can probably do this if all our debt was gone. And therein lies the conundrum, how to do everything at once?
So the basic advice is to split your debt into tranches (if you haven’t heard this word since the peak of the U.S. financial crisis, apologies) of High, Medium, or Low debt. Usually it looks something like the following:
High Debt: i.e. Credit Cards > 10% and higher
Medium Debt: Student Loans, Car Loan between 5 and 10%
Low Debt: Personal Loans, Mortgage < 5%
Before you do anything, see if you can reduce the interest rate from the debt in the High and Medium categories to the Low categories. This might mean refinancing or balance transfer or it might mean calling the place and asking for a lower interest rate.
Once you have done that, I think you should try to pay off debt that is higher than what you think the market investments will return (or some other arbitrary cutoff point that makes you feel good) plus a penalty for how much risk you are taking.
For example, assume, as the above, you think that you will earn about 7% on average, you should try to pay off any debt that you have that has interest payment more than 7% plus some penalty amount in case your bet on 7% is too high (maybe 7% of the remainder just to keep it easy). If, on the other hand you think that you will earn about 14% on average (because you are willing to take a lot of risk) then you should pay back anything with interest more than 14% plus an ever larger penalty (maybe 14%). Alternatively, if you are in hard core debt mode and want to pay off anything greater than 3%, then pay off that but with a much smaller penalty. How much penalty you pay is then dependent on the size of the debt and the rate of interest you are paying. I personally wouldn’t worry so much about any debt with interest rates higher than inflation^1 unless you are doing it for the pleasure of being out of debt and or you owe friends or family money. I would also work on each tranche at a time and be sure to celebrate when you have no more debt in the High and Medium tranches too.