DEAR ECONOMIST: Due to a recent series of events, my wife and I have been granted access to a long-term line of credit, allowing us to borrow $500,000 at 2.97 percent. I'd like your advice about how best to invest this money.
We plan, first of all, to pay off our mortgage — a 30-year loan on which we're now paying 5 percent. After that we plan to pay off the auto loans on both of our cars.
Our home, like every home, has some long-deferred maintenance issues — aging plumbing, several dying trees threatening to drop heavy branches or to fall onto the house, the early signs of what could one day be very expensive water damage to a part of the foundation. We figure it's cheaper in the long run to deal with all of that now, rather than risking the inevitability of future calamity, and this inexpensive line of credit will allow us to do that.
Our home was built in the 1960s, so it's also badly in need of upgrades to higher standards of insulation and energy use. An energy audit tells us that investing in such improvements will yield savings that outpace the 2.97-percent cost of the line of credit. Along the same lines, this money will allow us to invest in solar panels for our roof — a step that will over time more than pay for itself and bring us closer to energy independence.
What other advice do you have for us for investing this windfall?
— T. BILL, NEW DEAL, PA.
DEAR SPENDTHRIFT: Let me get this straight — you've already got a 30-year mortgage and two auto loans and you're thinking about taking on even more debt? Are you insane? Your household debt level is obviously already too high — that's why you haven't been able to attend to the basic maintenance of the infrastructure of your home.
With massive debt like yours, the last thing you should be considering is taking on more, so Just Say No to the lure of that line of credit.
Instead, concentrate on reducing your overall debt first by getting rid of one of those cars and the car payments that come with it. Many readers claim they need such debt-financed transportation to "get to work," but that only shows the lack of discipline that comes from an addiction to debt-driven spending. If your household cannot afford two auto loans then clearly your household cannot afford two jobs.
One of you will have to quit working until you demonstrate the financial discipline to pay off the first auto loan. Then and only then should you contemplate purchasing a second car or taking on the expense of a second commute.
And frankly until you grow up and demonstrate that kind of fiscal discipline, all this talk of energy efficiency and solar power is just a pipe dream you can't afford. For goodness' sake, think of your grandchildren.
Sincerely,
— THE ECONOMIST
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