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From House Payment to Student Loan Payment July 12, 2009

Posted by hamcoder in Money.
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This post is not about where to get the money.  How you steal the money and from whom is strictly your business.  I don’t want to know!

A million years ago my first wife and I made our first offer on our first house.  The deal eventually fell through.  We were lucky and learned a financial lesson while making a small profit.

At the time, our income was not quite enough to cover the house payment.  So our plan was to take $25,000 out of our investment funds and use it to increase the down payment, which would reduce the size of the house payment. It never occurred to us that our simple plan would cost us over $3,500.

As I said, the deal fell through; by the time we made an offer on another house, we had a different plan.

The new plan was take the $25,000 out of our investments in small amounts.  We would take only enough to increase our monthly income to the point where would cover the house payment – we figured that would be about $5,000 each year for five years.  By that time our income should have increased so we wouldn’t need to dip into our investments.

Here’s our arithmetic:  Assume $25,000 and a 5 year withdrawal schedule; also assume that we get 5% interest on our investments.  During the first year we make $1,250 (25,000 * 0.05)  and spend $5,000 – leaving us with $21,250.  Repeat the cycle for five years.  At the end, we will have paid our last $5,000 and still have more than $3,500 in the bank.  That’s $3,500 more than we would have had if we has used our original plan.

Fast forward a million years to today …

We know a young couple with a beautiful home, adorable normal children, a high (but normal) debt load,  including tens of thousands in student loan debt.  They are paying down their debt, but due to its nature, student loans take a back seat to most other bills.  In a few years after the kids are grown, they plan to sell the house and to use the profits to pay off any remaining student loans.  (That’s far enough down the road that the real estate market should have resurrected itself.)

They could take a single chunk of the profit from the house sale and pay off the student loans with a single check.  But I’m beginning to repeat myself.

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