Reader Case: Trying to Swim with a Boulder Tied To Your Leg

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Hey there readers! I’m writing to you from Berlin, Germany and one of the most surprising things here is how affordable everything is despite how many well-paying jobs there are! When it comes to expensive housing, everyone loves to say “yeah, but it’s a ‘World City’ and that’s why it’s expensive. You just have to deal with it”. Well, Berlin seems to buck this trend and we are taking advantage of it like crazy.  Cheers, Berlin, for being an awesome metropolitan “world city” without the “world city” price tag.

Anyhoo, before we jet off to UK for Chautauqua, here’s our Friday reader case!

Hello FIREcracker,

LOVE your blog! This one has to be the most thorough and easy to follow I have read. You have made it possible to dream into reality and you are truly appreciated for it.

Attached please find my current financial situation for you to analyze.

I do have a quick question for you. I am getting to your blog a bit late for the investment workshop. If I following from the beginning as of today will I still have success?

Ideally I am trying to figure out how quickly I can get to $1 million. Lucky for me I work for an amazing company with a 40% 401K match, so in addition to this, I would love to find out what’s the best way to leverage that with my current financial situation as well.

I am also dabbling in real estate so that will be another buffer but I don’t want to depend on that income yet. Ideally within the next 2 years I will have enough properties to cover my personal overheads.

I feel like I have money all over the place and none of it is properly working for me.



What caught my eye in this e-mail is this sentence “I feel like I have money all over the place and none of it is properly working for me.” Of all the reader cases we get, this is something we see over and over again. People end up struggling to pay down student loans with high interest rates, credit card debt, car payments, while having savings, trying to invest in real-estate AND the stock market, ALL AT THE SAME TIME.

Don’t believe me? Take a look at the spreadsheet AOTP’s talking about:

Okay, right off the bat, you can see AllOverThePlace’s finances kind of make you want to tear your hair out. But ignoring all the numbers that tend to blur and blend together if you stare at it long enough, let me point out exactly why this spreadsheet makes me want to set myself on fire and jump off a building:


21-26% interest rates on credit cards that they’re only paying the minimum on? WTF? 6.8% on 8 grand of student loans? 11.9% on the mortgage of a RENTAL PROPERTY?!

And they’re trying to INVEST?

Have you ever tried to swim with a massive boulder tied to your legs? That’s what this person’s trying to do.

There is absolutely NO POINT in investing (property or stocks) when you are paying double-digit interest rates. You’ll be lucky if you break even…which you WON’T, considering a conservative return in the markets over the long term is 6%/year on average. Which means, you’ll be regularly losing -0.8%- 20% on interest even during bull markets. During bear markets…grab some galoshes cause it’s gonna be a bloodbath.

But that’s not all…


You may remember me saying at one point that “budgets suck” and how I’m all for prioritize your spending on what makes you happy? Well, in this case, unless this person’s cell phone massages their feet and this TV/internet service also dispenses free cocaine, WHAT THE HELL ARE YOU DOING SPENDING almost $300 month on just TV, internet and phone? Do you know many space cakes you can buy with that?!

Clearly in this case the cable and phone companies are the ones getting high, not you. Read this post from fellow blogger Mr.Tako on how he saves on internet and cable.


If you add together the minimum payments for all the items in the list, you get $3145, yet when they tally their total monthly spending, they’re only getting $3526?

So items that don’t fall under debt are only $381/month? Even if I were to believe that, items like internet, utilities, and phone aren’t part of the debt list, and added together they amount to $155 + $120 + $162 = $437. That amount already exceeds $381, so there’s no way you only spend $3526/month. Unless somehow by not spending anything on food, you’re somehow making money.

Also about property taxes on the two properties you own? Or home insurance? Or how about maintenance costs?

Please, please, do me a favour. Do NOT invest in real-estate if you can’t keep your numbers straight. Seriously. Remember how I said real-estate investing isn’t simple, takes years to learn, and you could shoot yourself in the foot badly if you don’t know what you’re doing? This is exactly what I’m talking about. If you don’t keep meticulously records of all your rental property expenses, taxes you pay, etc like Paula Pant or Financial Samurai , DO NOT, I repeat, DO NOT do do real-estate investing. You’re fumbling around in the dark and have no idea what you’re doing.

So AOTP, you’re trying to swim in a pitch-black lake, with no idea where you’re going, and there’s a massive boulder tied to your leg.

This should end well….

Now, that we’ve got all that out of the way, how could AOTP get out of this situation? And is there anyway, they can get to their $1 million goal net worth? Or is it hopeless?

Well, judging but how tied down they are with all that high interest debt, and assuming that they are actually only spending $3526 a month (I highly recommend AOTP redo my calculations after they find out the REAL number), that means they would need $3526 x12 x 25 = $1,057,800 to become financially independent, thereby meeting your $1 million target.

And since they have $66,036 in assets to invest, and a savings rate of $59,501 – $3526*12 = $17,189/year or 28.89%, their TTR (time to retirement) is:

YearBalanceSavingsPortfolio GrowthTotal

That’s 24 years from now. Yikes, that’s not so good.

BUT what if they were to get rid of the debt ASAP? See, the funny thing is…according to AOTP, the two properties they own are worth $300,000 and $110,000. If they were to sell these properties, subtracting 5% and $1000 for agent and closing fees, they’d be able to net ($300,000 + $110,000) x 0.95 – $1000 = $388,500 towards their debt!

And given that they owe -$341,842 which means they’d all of sudden have $388,500 – 341,842 = $46,658! So instead of being in massive amounts of debt to the tune of over 300K, they actually be ahead almost $59,501 + $46,658 = $106,159!

But that’s not all! By paying off their debt, they no longer have those pesky minimum monthly payments in their expenses.

That means, by getting rid of their debt, they’d be able to reduce their $3526/month spending to $2411/month (Assuming, instead of the house payments, they can now rent a place for $1570 + $155 in utilities. Again since this is an assumption, AOTP needs to redo the calculations with a more accurate number). Which means they would only need $2411/month * 12 * 25 = $723,300 to become FI. This also bring up their savings rate from 28.89% to 51.38%!

And since they’ve gotten rid of all their debilitating debt, that means their starting point is now much higher.

What does this do to their TTR (Time to Retirement?)

YearBalanceSavingsPortfolio GrowthTotal

That’s only 12 years! Holy shit. By getting rid of all that debt, AOTP ends up shaving their time to financial independence by 13 whole years, cutting that time in HALF!

And in order to achieve this, no sacrifices had to be made. All AOTP needs to do is MURDER those debt monsters! Because just by doing that, they significantly reduced their monthly expenses AND increased their base investment amount, allowing them to become financially independent in only 12 years!

Now, I know AOTP asked about 401k and the 40% employer matching, and I would definitely advise taking advantage of that, but seriously GET YOUR DEBT under control first! Once you figure that out, then add in the 401K and 40% matching amounts to see what that does to your time to retirement. But don’t make things even more complicated until you have a handle on your finances.

So the moral of this reader case? Let’s summarize:

  1. Don’t invest in real-estate if you can’t keep track of numbers.
  2. Don’t carry tons of debt at 20% interest rate while trying to save and invest. Trying to swim with a boulder on your leg doesn’t work.
  3. Don’t use questionable expenses when trying to calculate your FI number. Add everything up and make sure you’re not missing something crucial.

What do you guys think? What would you do if you were AOTP?

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35 thoughts on “Reader Case: Trying to Swim with a Boulder Tied To Your Leg”

  1. Berlin! We spent 40h there last year and it was far far too short, so we’re making plans for a full week next summer. Visit Mauerpark if you’re around on a Sunday because is the best thing ever. Two closing words: RAUSCH SCHOKOLADENHAUS

    12% interest on a rental property… that’s, like, some 600-point credit score stuff right there, and “dabbling” is not a good word to use when working with six-figure expenditures. Pull the ripcord and jettison the assets. They will net neither happiness nor wealth.

    1. GAH! I wish I’d know about the bear pit karaoke while we were there! But unfortunately didn’t see your comment until after we flew out. That’s okay, we’ll put it on the list for when we return.

      And yes, the 12% interest on the rental property is scary as shit…

  2. Yikes. I can relate to the temptation to want to invest even when you have “smart” debt (i.e. my now abolished student loans). Thankfully my partner gave me a stern talking to and convinced me to sell my TFSA and pay off as much debt as possible. Instant $200/month savings on interest alone. Seriously, listen to Firecracker and sell whatever you need to sell and get rid of your debt. It is a liberating feeling and will propel your financial independence quest further than trying to hold on to the investments while being in debt. I believe it was Gail Vaz-Oxlade who said that you can have everything you want…. just not at the same time!

    1. “…convinced me to sell my TFSA and pay off as much debt as possible. Instant $200/month savings on interest alone”

      Nice! It’s an awesome feeling to murder the debt monster!

  3. Ouch, it looks quite messy indeed. First priority should be definitely to get rid of all those credit card debts and the 6.8% student loan. Then I’d sell the car and find something cheaper that I can buy for cash (they owe more than the value of the car!).
    I would do some serious math on the rental. 11.9% interest rate? Can’t they refinance? A new, much better deal on it might make it worthwhile to keep it…
    Same applies for the mortgage on their home. They should be able to find deals below 4%…

    1. I don’t get why it’s 11.9% either…and even if it were refinanced, I’d worry about them being able to track all the expenses. If they can’t keep track, they need to reduce complexity rather than add to it. Pay off the debt, THEN worry about learning how to invest.

  4. I can never understand why most people treat consumer debt like it’s some kind of necessity. And worse, did not seem to mind the double-digit interest rates that they are paying.
    On the other hand, it makes me wonder how we can be on the other side of the fence, and reap double-digit returns from those that don’t mind paying 😉

    1. It’s because debt is addicting. It actually changes your brain chemistry to think you’re not spending real money. That’s why it’s so dangerous.

  5. Wow, that was indeed all over the place. It’s crazy how sometimes people are paying credit card interest rate as high as 20%+. I think the good news is that this reader has very good bones to work with, i.e. good salary with high 401(k) match. Most importantly, he or she is wanting to make progress by contacting you guys. I am sure this reader will get to his or her goal in no time.

    1. I agree that with a good salary and high 401k match, this reader has lots of options. Especially since they were brave enough to reach out for help. I hope they pay off their debt and clean up their finances, and with lots of readers are giving good advice, they’re in good hands.

  6. Yeah this persons numbers are so all over the place it’s difficult to give an accurate response. The interest on their debt alone is about $1,500 a month, which I don’t see being included in their expenses anywhere, so you can probably add a big chunk to their monthly expenses.

    That rental property is a major sinkhole if the interest rate isn’t a mistake, so they should get rid of that thing asap and use the proceeds to pay down all their remaining debt then invest the rest. Their car is a total waste of money too, I’d also sell that and buy a cheaper one (not with debt) personally.

    They also have, what, almost 10 credit cards and a line of credit, most of which have a balance? Use some of your savings to pay every one of them down and get rid of them all except one or two for their cashback/travel benefits. Not only will this help reduce interest, it will make tracking your money considerably easier.

    Overall, this person just reeks of being a major consumer/debt junkie that needs to get their spending and debt under control. I wouldn’t worry about investing yet as they clearly have no idea how to do it with a 12% interest rental property. Worry about that when the debt has gone away.

    1. Totally agree. Don’t even THINK about investing until debt is paid off…especially at those interest rates.

  7. A good way to think of it is every dollar you use to pay down the mortgage on the investment property is a guaranteed 12% return– higher than you will likely ever get in the stock market. And every dollar used to pay off those credit cards is an even yuge-er investment return.

  8. You guys should write an entire post on how credit cards should and shouldn’t be used. I am shocked that someone would carry a balance on a credit card and spend money on other savings/investments… even in the 1980s it wouldn’t have made sense. At the very least get a HELOC or loan and pay that shit off before anything else!
    Credits cards are for getting free travel (and because we put everything on it, also a handy way to track expenses) – if there’s no money in the bank to immediately pay it off, don’t buy it. Unless you are desperate but even then… This all reminds me of the Last Week Tonight episode about payday loans. Just don’t do it!

    1. We did write a post on killing the debt monster…I guess maybe they didn’t read it that far back. Looks like we’ll need to rehash that lesson again in the future.

  9. Hey guys,

    I know you had mentioned a while back that your working on making your excel spread sheets public, have I missed that post?

    Also, we have used a few different calculators (firecalc etc…) and they all result in a pretty good results, having the probability of having more in the accounts at the end of life than when we began FI. When that happens, we plan on either donating a little and leaving the rest to kids. Do you know if there is a way to lock the money forever and only give access to the dividends to the heirs? I was thinking our one life cycle of financial smartness can leave a lasting impact to generations to come. I’ve ran the #s for 100 years after we die and it is amazing what slow and steady can do.


    1. Try an endowment trust, this would be what you’re looking for. As an accountant, I see these lots in retirement situations. It locks in the initial investment balance as “do not touch or face legal consequences!” And then you can choose beneficiaries who can receive the dividends. Talk to your accountant or Lawyer and you’ll be set.

  10. To address the question they asked about the financial workshop, I believe it is set up in such a way that you can basically start it at anytime and have success with it as that seems to be how the index investing strategy works and it has been said many times on this blog that it’s not about timing the market but the amount of time in the market that is going to help you in the long run.

    I agree with what everyone else has said about dumping the debt and then starting to invest and I feel like if this person had read all of the posts on this blog that is a conclusion they should be able to come to own their own assuming this reader case was submitted somewhat recently since the rent more, own less article could refute a lot of this on its own.

    1. “I believe it is set up in such a way that you can basically start it at anytime and have success with it as that seems to be how the index investing strategy works and it has been said many times on this blog that it’s not about timing the market but the amount of time in the market that is going to help you in the long run.”

      Well said, my young grasshopper. You have learned well 🙂

  11. This person has a 5% line of credit but is carrying balances on credit cards with over 20% interest rate… the very least they can do right away is increase their credit limit to the line of credit and use it to pay off other debt with higher interest. That being said, they have enough savings to pay off a lot of the debt they have completely… you’re right, it doesn’t make sense to save when you have so much debt… especially debt that you have to pay interest on. They also have a Capital One that apparently has 0% interest? I’m curious about that… if it’s really the case, why not transfer debt over to that one so that you don’t need to pay interest on it?

    1. I’m confused as to why they have the Capital One along with other high-interest credit cards as well. Though I suspect the 0% interest has some sort of catch or is temporary.

  12. I would sell the primary residence and the car. Refinance the rental if possible and move into it. Spend 5k cash on a reliable car, cut the cable and renegotiate everything else, and kill the debt! Good for you, reaching out for advice. Best of luck to you!!

    1. Thanks for your 2 cents, Stephanie! I agree that it took a lot of guts to reach out for advice and I’m glad they wrote in.

  13. Wow, these finances are a terrible mess. One layoff away from the bankruptcy cliff.

    Seriously — sell the rental immediately and pay-off the high interest debt. They’ll make no real progress in life until that’s taken care of. Period.

    People shouldn’t buy rentals in today’s market unless they have a great credit score. A couple extra percentage points can make or break an investment purchased with borrowed money. In this case, 11.9% is terrible.

    My rule of thumb: Never purchase a property with a mortgage until you have sufficient assets to pay it off completely… should circumstances require it.

    1. “Never purchase a property with a mortgage until you have sufficient assets to pay it off completely… should circumstances require it.”

      Good rule!

  14. What I don’t get, is why isn’t their 0% credit card maxed…It has a 10,000 limit which is basically interest free.They should definitely look at consolidating their debts at lower rates.

    1. That’s what someone else asked too. I’m also confused as to why they’re aren’t using this card instead. Unless the 0% is temporary or has a catch…

      1. Honestly I think anything with 0% interest has a catch. If you miss one payment goes up to 30% or something.

  15. I want to echo these sentiments. If AOTP doesn’t want to get rid of the properties (or at least one) they should sell the rental, pay off the credit cards, car, and get close on the line of credit. Then tackle the student loans. They might be able to refinance with SOFI lowering their interest rate. Then they would have $800 per month to put toward debt or investing (which is what I would do if you can refinance get your student loans down to 4%).

  16. There’s info missing from this picture – the most glaring of which relates to the rental property. What are the costs of maintaining (insurance, taxes and general upkeep) and what is the rental income? Everyone assumes that it’s a giant drag on the finances, but we only have one side of the “rental” ledger – the expense side (albeit an incomplete expense side).

    I’d suggest (1) using savings to take out the CC debt and 6.8% student loans – leave Capital One in place until the promotional period expires, but make sure you are paying a monthly amount so that it is extinguished completely at the end of the promo period, (2) use savings/investments to payoff the 5% LOC, and (3) do a cash-out refi on the primary residence to pay off the rental property (there’s enough equity in the primary residence to meet an 80/20 LTV and hopefully continue to qualify for a ~4% rate, plus, the interest is deductible). Flame me if you want, but unless he can rent another house/apartment for the amount he pays for interest and insurance on the mortgage (which leaves the equity portion of his current payment to save and invest), then respectfully, I don’t want to hear it.

    As for the rental, what’s the friggin rental income!? Inquiring minds want to know.

    The car loan is at 2.49% and the other student loans are at 3%. Either sell the car and buy something cheaper with cash (recommended!) or keep the car – but don’t pay it off. That’s a lousy 2.49% return on the amount it would take to pay it off. You’re better off keeping that money in the markets. Same goes for your 3% student loans.

    At the end of the day, you’d have a single mortgage, possibly a car payment (although ideally you would have sold your car and bought something cheaper), and student loans at 3%. Once you’ve cleaned up your balance sheet and income statement, then, and only then, will you be allowed to invest beyond the 40% match of your 401(k).

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