Hey everybody, Erik here. For those who know me, you know that I am a huge fan of extreme sports. Snowboarding, mountain biking, whitewater kayaking, rock climbing… the list goes on. My wife, Jessie, thinks I’m a little nuts and that I take too many risks. Here’s the real truth. I am also a safety nut. I won’t even ride a bike around my neighborhood without a helmet on. In every extreme activity I do, I am meticulous about my safety equipment. I love the challenge of these sports but I also want to protect my body (and my life) so I can continue to do them as long as I can! So what does that have to do with Debt Structuring? Glad you asked!
Becoming debt free has almost become an extreme sport in it’s own right. People are doing all kinds of extreme things to save money and pay off debt. I actually had an Uber Driver the other day who told me he slept in a hammock in his garage so he could rent out the rooms in his house.
Many personal finance groups recommend aggressive debt paydown strategies like those promoted by people like Dave Ramsey. They include suggestions like refinancing your mortgage to a 15 year loan in order to save on interest and pay it off much faster. I’m a fan of Dave to a certain extent but 2020 has taught me some new lessons.
The unprecedented COVID-19 pandemic and subsequent economic slowdown caught many of us off guard. Some people who followed this particular advice have found themselves in a tough situation. Many could not afford their mortgage and had to apply for assistance such as forbearance. If they are not able to pay all of the back due payments in one lump sum once the forbearance period ends, they might end up facing foreclosure.
Instead, consider structuring debt so that the required monthly payments are relatively low. This, plus an emergency fund, is your “safety equipment.” Then, go aggressive by paying extra on the principal each month. Get the 30 year mortgage but pay the same amount or more than you would have paid on a 15 year mortgage every month. You may have a slightly higher interest rate and pay a little more over the course of the 15 years, but the benefit is that layer of protection. If you encounter a financial struggle, your required monthly debt burden is smaller. You can make the lower required payments until you get back on your feet. You may get set back a year or two on your debt pay down plan, but that’s a much better alternative than losing your home through foreclosure! This strategy may take a little extra discipline to make those extra payments each month, but doing so will give you the peace of mind that you can weather the storm (or a worldwide pandemic) a little more easily.
If your goal is to pay off debt, I recommend treating it like an extreme sport. Be aggressive with plenty of safety measures in place.
Cheers to a better financial future! Feel free to reach out or comment.
-Erik & Jessie
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