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Debt Repayment Strategy

Home Personal Finance and Budgeting Debt Repayment Strategy

  • Avatar EntrepreneurMD 
    Participant
    Status: Physician
    Posts: 407
    Joined: 06/10/2019

    Is there a general rule regarding debt repayment, or is it specific to one’s own circumstances (income, NW, tax benefits of debt, etc.)?

    Commercial loan $1.4M 10 year (no balloon) 3.5% fixed, 8 years left, payment is $17K/month

    Home loan $350K 5 year arm 2.75%, resetting 11/1/2019, payment is currently $1700/month

    Car loan $65K 6 year loan 1.75%, 3 years left, payment is $1700/month

    Credit card debt $45K 0% intro term, resetting 1/2020, 4/2020 split about 50/50 on two cards, minimum payment is currently $470/month.

    CD interest income 2.65%-3% 12-18 month CD terms, savings interest 1.5%-2.3% with combined interest income about $50K/year on $2.1M cash flow reserves for annual expenditures (not expenses) about $1.9M.

    Pay off highest interest rate debts off first? Pay off smallest loans first to decrease monthly payments/improve cash flow? Pay off non tax-advantaged auto loans first? Pay off by riskiest attached asset? Pay off everything and wipe out reserves? Pay off debts as they reset from low to high interest rate (5 year ARM, credit cards) or refinance them to pay off highest debt rates first.

    Do not recommend I invest it in these markets instead, you all know how I feel about the current markets, it’s not 2009. I’m more interested in debt repayment strategies. However I proceed, I wanted all debts paid off in next 2-3 years.

    How would you tackle? Thanks in advance.

    #237603 Reply
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4715
    Joined: 01/08/2016

    Do it the mathematically correct way.

    #237608 Reply
    CordMcNally CordMcNally 
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    Joined: 01/03/2017

    A lot of it is personal. I would never carry a balance on a card (i.e. pay it off monthly) regardless of any kind of introductory interest rate. I would also never have a car payment. The commercial loan and home loan wouldn’t bother me as much. However, given your situation and that you want all of your loans paid off in the next 2-3 years, I would pay off the car and credit card today followed by whichever out of the commercial and home loan ends up having the highest effective interest rate for your scenario.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #237609 Reply
    fatlittlepig fatlittlepig 
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    Status: Physician
    Posts: 1313
    Joined: 01/26/2017

    Your finances are a mess, I feel bad for you. I would suggest reading one of these “personal finances for dummies” type of book. Good luck. (Not meant to troll you, actually being serious here)

    FLP

    #237613 Reply
    Liked by BCBiker
    Avatar EntrepreneurMD 
    Participant
    Status: Physician
    Posts: 407
    Joined: 06/10/2019

    A lot of it is personal. I would never carry a balance on a card (i.e. pay it off monthly) regardless of any kind of introductory interest rate. I would also never have a car payment. The commercial loan and home loan wouldn’t bother me as much. However, given your situation and that you want all of your loans paid off in the next 2-3 years, I would pay off the car and credit card today followed by whichever out of the commercial and home loan ends up having the highest effective interest rate for your scenario.

    Click to expand…

    Thanks for the objective feedback. I’ve been doing 0% no transfer fee cards for 25 years, thought more physicians may be doing this. In any event. You are correct, I certainly plan to pay off this debt or transfer it at 0% before the intro term expires.

    An explanation of the car loan, as I agree car loans are not the best other than low interest rates. When I built the commercial office, the consultants warned me about cash flow with such a big project. They probably didn’t already understand how paranoid I am about risk anyway. So, with future cash flow unknown, I took on some extra debt as an insurance policy, and that’s the only reason I took out the car loans about 3 years ago. Now two years into the building, cash flow is better than I expected. These loans didn’t actually cost me anything, as my CD and some savings interest rates gave me a better return on the money than the loan rate.

    It feels natural to me to pay off the smallest debts first as you suggest so definitely a strong strategy consideration, with the benefit of lowering monthly debt payments immediately (part of the reason why I diversified the loan in the first place, in addition to lower rates on this debt). Thanks again.

    #237622 Reply
    Avatar EntrepreneurMD 
    Participant
    Status: Physician
    Posts: 407
    Joined: 06/10/2019

    Do it the mathematically correct way.

    Click to expand…

    Sounds like you feel highest rates first after tax impact and rate resets factored. That would likely still be the commercial loan over the personal home loan. I’m torn as this makes the most sense but will take much longer.

    Still, definitely considering. Interesting to see what the consensus will be. Thanks!

    #237625 Reply
    Avatar Peds 
    Moderator
    Status: Physician
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    Joined: 01/08/2016
    as this makes the most sense but will take much longer.

    Click to expand…

    what does time mater when you save the most money?

    #237629 Reply
    Liked by Tim
    Lordosis Lordosis 
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    Status: Physician
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    Joined: 02/11/2019

    Is cash flow an issue?  If so pay off a smaller loan to free some up.  If not pay off the highest rate.

    “Never let your sense of morals prevent you from doing what is right.”

    #237631 Reply
    fatlittlepig fatlittlepig 
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    Joined: 01/26/2017
    So, with future cash flow unknown, I took on some extra debt as an insurance policy, and that’s the only reason I took out the car loans about 3 years ago.

    Click to expand…

    So your expenses are too high so you took on a lot of debt and because of that debt you took on extra debt as an insurance policy, hmm makes perfect sense.

    #237633 Reply
    Avatar EntrepreneurMD 
    Participant
    Status: Physician
    Posts: 407
    Joined: 06/10/2019
    Splash Refinancing Bonus

    Your finances are a mess, I feel bad for you. I would suggest reading one of these “personal finances for dummies” type of book. Good luck. (Not meant to troll you, actually being serious here)

    FLP

    Click to expand…

    Thanks for the feedback. I have noticed from your posts, you seem to consider every (at least large) expenditure as an expense.

    I know you consider all these loans taken out as an expense, in order to acquire the commercial office building. Consider it is currently bringing in about $360-370K/year and given that I’m in my mid 40’s. That can go on for 20, 30, 40 years. Given I want all the debt paid off within 2 years, and with all building expenses approximating 25%, that means potentially $280K in additional annual income (in todays dollars of course) for life well into retirement. Maybe some less as I don’t expect all suites to be leased all of the time. There are also attached significant tax breaks and deferments for many year freeing up cash flow for further investment. I’ve seen doctors sell their business in retirement to a large corporation (UHC, Davita, Private Equity) I’ve seen locally and continue to enjoy perpetual rent from a secure corporate business in retirement.

    Same with the investments into the business to implement more comprehensive services. It’s money spent but there is an expected perpetual return on a new line of business or new provider, in addition to growing the value of the business.

    I don’t like these big loans either, that’s why I’m asking for help in paying them down. I want to get back to no recurring debt, as I was before the building was conceived. Thanks again.

    #237635 Reply
    fatlittlepig fatlittlepig 
    Participant
    Status: Physician
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    Joined: 01/26/2017

    Why someone in your situation laden with this complex debt situation would even think about buying “supercars” and all of the other crap I have no idea. Fatlittlepig’s balance sheet is very simple no debt, no mortgage, large nest egg.

    #237636 Reply
    Avatar EntrepreneurMD 
    Participant
    Status: Physician
    Posts: 407
    Joined: 06/10/2019

    Is cash flow an issue?  If so pay off a smaller loan to free some up.  If not pay off the highest rate.

    Click to expand…

    Thanks! Another vote for highest interest rate.

    At this time I do not think cash flow as an issue. Wasn’t sure in the scary construction phase, writing $200K checks monthly until construction loan kicked in, with no certainty on the final project costs until completed. Like all of you just concerned about the long term impact of the disruptions in our health care system on our businesses (telemedicine, Minute Clinic, insurer owned clinics, ACO’s, Medicaid expansion). So far things seem to be holding steady pending the healthcare politics debates.

    #237640 Reply
    Avatar Panscan 
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    Status: Resident
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    Joined: 03/18/2017

    I don’t get your question. You say you’re on track to pay off all these somewhat large loans ahead of schedule IIRC, obviously making a ton.

    I think it’s clear you know what you’re doing

    #237641 Reply
    wideopenspaces wideopenspaces 
    Participant
    Status: Physician
    Posts: 1213
    Joined: 01/12/2016

    All the different payments would drive me bonkers. Is there any reason you couldn’t pay off the mortgage, cc and car today and still have 1.65M in the bank? Then pay 1/3 construction loan Jan 1 for the next 3 years? Based on how much you are making, your cash reserves would probably hover around 2M the whole time.

    #237643 Reply
    Avatar AR 
    Participant
    Status: Physician
    Posts: 873
    Joined: 03/10/2016

    Do it the mathematically correct way.

    Click to expand…
    what does time mater when you save the most money?

    Click to expand…

    This is correct.

    #237645 Reply

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