Strike It Rich By Mining Your Debt: There’s Gold In Them Thar Loans!

Strike It Rich By Mining Your Debt: There’s Gold In Them Thar Loans!

A mining cart on rails, illustrating the potential wealth made possible by mining your debt with extra payments.
1 Ton Mining Cart” by Niall Kennedy, CC BY-NC 2.0 license

The topic of debt usually gets pretty rough treatment in the personal finance blogging community. And for good reason – if not handled with care, it can be as dangerous as a short-fused stick o’ dynamite.

But if you’re already in debt and your money situation feels as cramped as a claustrophobic miner trapped deep underground, you’re already acutely aware of how dangerous debt can be. So let’s pivot and instead explore a far more encouraging aspect of debt – it’s hidden wealth potential.

Yep, you read that right. If you’re in debt you are sitting on a potential mother lode of riches. So without further ado, let’s stake out your debt claim and discover how you can strike it rich by mining your debt.

In Pursuit Of Profit – The ’49er Mentality

The 1848 discovery of gold at Sutter’s Mill triggered the famous California Gold Rush. In all, over 300,000 aspiring miners left home behind in pursuit of profit and riches in the California gold fields. Those who did so would later become known as “49ers”, a reference to the year many arrived in the state (1849).

Just like a ’49er, you should be in pursuit of profit – in the gold fields of your monthly budget. At this point in the Master Your Money series, we’re working on using the net profit of your monthly budget to identify and fund savings goals in support of your ideal future lifestyle. The bigger the profit, the faster you will achieve financial freedom!

But if your net profit currently seems far too low for you to ever be able to afford the items on your financial freedom shopping list, you might be somewhat discouraged. If that’s the case, chin up! Because like a mining boomtown that simply springs up overnight, you can grow the monthly net profit of your household budget explosively by mining your debt.

The Greatest Mining Boomtown In American History

The year was 1859. Virginia City, Nevada was born overnight after the discovery of the Comstock Lode, the first major silver deposit identified in the U.S.

In a span of just four years, Virginia City grew from a mere loose collection of tents to a bustling industrial destination with a burgeoning population of 15,000. By the mid-1870’s, it had grown to 25,000. Its growth was unrivaled by that of any other mining boomtowns in history.

Nevada obtained territorial status in 1861 and statehood in 1864 thanks in part to the booming wealth and population of Virginia City. Within just a few years, Nevada’s statehood played a key role in the passage of the 13th & 15th Amendments to the U.S. Constitution.

The Richest City In America

By the 1870’s, more than half of all precious metals produced in the U.S. originated from Nevada, and Virginia City was known as the richest city in America. Much of the profits from its mines were used to invest in the development of San Francisco real estate, building the metropolis that we know today.

Silver was actually demonetized by the U.S. government via the controversial Coinage Act of 1873 in part due to a surplus of the precious metal resulting from Comstock Lode mine production.

In all, nearly 7 million tons of silver and gold ore were extracted from the Comstock Lode over a period of just twenty years. From 1859 – 1878, production totaled $320 million, the modern-day equivalent of $9.6 billion.

The Typical Household Debt Mother Lode

The typical American household possesses an amount of debt reminiscent of the seemingly unending veins of ore in Virginia City’s Comstock Lode.

According to The Balance, the median mortgage size for homes purchased in 2017 was $211,500. At a 4% interest rate and 30-year term, that puts the average monthly mortgage payment at $1,009.73/month. This doesn’t include items such as property tax, home insurance, or PMI.

Meanwhile, the average new car loan balance in 2017 was $30,294, with a 69-month term. The 43% of Americans who have an auto loan are making an average monthly payment of $509 for new autos and $367 for those purchased used.

The average outstanding student loan balance is currently $26,700, while the the Federal Reserve reports that the average monthly payment now rings up at $393.

Finally, the 38.1% of households who carry credit card debt month-to-month do so with an average balance of $10,955. The national average interest rate of 16.41% and a middle-of-the road 3.5% minimum payment calculation puts the required monthly payment on this debt at $383.43.

Add up the typical mortgage, auto loan, student loan, and credit card debt from above and you have a grand total of $279,449 in common household debt.

There’s Gold In Them Thar Loans!

Chunks of quartz containing visible gold flakes, illustrating the wealth of potential riches contained within your debt.
VG Means Visible Gold” by Mike Beauregard, CC BY 2.0 license

Virginia City is known as the birthplace of Mark Twain, as it was here that local newspaper reporter Samuel Clemens first used the famous pen name. The fact that Twain originally worked as a Comstock Lode miner before trading his pick-axe for a pen is an oft-overlooked historical nugget.

Mark Twain’s mining background shows in his use of the now-famous “There’s Gold In Them Thar Hills” mining expression in some of his writings. In a similar vein, there’s gold in them thar loans as well. The key is to start viewing your loans as sources of potential income and wealth, akin to the old Comstock Lode mines in their heyday.

Think of each of your loans as a gold mine. The required monthly payment for each loan represents the potential income you can re-claim by working that particular mine until the loan is paid off. The remaining interest you’ll pay over the life of each loan represents the vast store of potential wealth in each mine which you can claim for your own.

Extra payments constitute the pick-axe and shovel which you need to extract these riches. Like a golden glitter on the side of a mining shaft, this warrants a closer look.

Give Yourself A Raise By Working The Debt Gold Mine

The entrance to a gold mine shaft, illustrating how mining your debt with extra payments can lead to both income and wealth.
Photo by jtsinclair, CC0 1.0 license

The typical daily wage for a miner was $.25/day during the mid-1850’s. But the Comstock Lode mines of Virginia City paid a wage of $4/day, 16x the going rate. This gave miners the opportunity to cash in on the wealth of the Comstock Lode by boosting their income.

Your debt offers you a just as lucrative but far less dangerous means of effectively increasing your income. Consider the payments of the four common household debt line items referenced above:

  • Mortgage Payment – $1,009.73/month, $12,116.76/year
  • Auto Loan Payment – $438/month (average of new/used), $5,256/year
  • Student Loan Payment – $393/month, $4,716/year
  • Credit Card Payment – $383.43/month, $4,601.16/year

Eliminating even the smallest of the above payments translates to almost $400 per month of additional breathing room in our example household’s monthly budget.

Paying off your loans has the effect of increasing your discretionary income and the net profit of your monthly budget, even if you don’t earn a single penny more. This household can effectively give themselves a raise of $513.27/week, $2,224.16/month, or $26,689.92/year by eliminating their debt.

How much of a weekly, monthly, and yearly raise can you give yourself by eliminating the sum of the monthly payments on all of your loans?

Unlike your actual job, whether you receive such a raise is entirely up to you. Working the mines of the Debt Mother Lode can pay large dividends – all you need to do is put in the sweat needed to reach pay dirt.

Your Debt Gold Mine – A Lucrative Long-Term Investment

Increasing your discretionary income and the net profit of your monthly budget is only one benefit of mining your debt through the use of extra payments. The other holds the potential to pay off even more handsomely.

When you purchase something on credit with an interest rate greater than 0%, you allow the compound interest double agent to start working against you. And as if that wasn’t bad enough, there’s another, even larger danger of debt known as opportunity cost.

Like dynamite with a short fuse, compound interest makes debt something to avoid if at all possible. But if you already HAVE debt, it’s too late to simply avoid it. So rather than beating yourself up about the money you’re losing to interest, view your loans as money-making investments instead.

How much of the interest you have yet to pay on each of your loans can you avoid by paying the loan off ahead of schedule? This represents the potential earnings of each mine on your debt claim.

With each dollar of extra payments that you invest in working a given mine, you can expect a return. And unlike the risks and uncertainties of mining, when it comes to your loans your return is guaranteed.

A Debt Gold Mine Survey

A gold mine entrance with railroad tracks leading to it, illustrating the need to survey the wealth of your debt gold mines.
Off The Rails” by James Marvin Phelps, CC BY-NC 2.0 license / Modified from original

The mining value of a given debt is determined by the amount of interest you have yet to pay over the remaining term of the loan, as well as the opportunity cost of that interest. Let’s use the four common household debt line items referenced in the Debt Mother Lode section above as an example:

  • Mortgage – $211,500 balance, 4% interest, 30-year term, $1,009.73335/month
  • Auto Loan – $30,294 balance, 5% interest, 69-month term, $509.00/month
  • Student Loan – $26,700 balance, 6% interest, 84-month term, $393.00/month
  • Credit Card Debt – $10,955 balance, 16.41% interest, $383.432/month

Using this cost of debt calculator and a 7% return on investments, we discover the potential value of each of these hypothetical debt mines is as follows:

  • Mortgage – $802,166.38 (!!)
  • Auto Loan – $10,623.25
  • Student Loan – $14,359.83
  • Credit Card Debt – $6,537.47

The total combined loan interest and opportunity cost of this debt is an incredible $833,686.93. While some might view this total with dismay, you should be rubbing your hands with ’49er glee. This value represents the amount of riches you can potentially claim by mining the debt in this example with extra payments!

Each extra payment made on this debt lowers the loan interest as well as the related opportunity cost of that interest. Think about it – NOT paying something you would otherwise have to is effectively the same as EARNING that same amount. This is where the concept of striking it rich by mining your debt comes into play. Are you seeing the gold in them thar loans yet?

A Credit Card Gold Mine

Let’s use the average credit card balance information from the Debt Mine Survey section above to illustrate the potential returns on extra payment investments in a credit card gold mine.

Using this cost of debt calculator, we find that if we simply make the required minimum payment of $383.432 on our $10,955 balance at 16.41% interest, we’ll pay off the balance in 37 months and pay $3,032.47 in interest and $3,505.00 in opportunity cost along the way, a total penalty of $6,537.47:

Cost of Debt Calculator results indicating loan payoff timeline as well as total interest and opportunity cost of this credit card loan.

But an investment in the form of making an extra $100 payment every month reduces the payoff timeline by 9 months and drops the total of the interest and opportunity cost by $1,779.78 ($6,537.47 – $4,757.69):

Cost of Debt Calculator results indicating the earnings made possible by working this credit card loan with extra payments.

In this example, your $2,800 investment in this credit card mine at a rate of $100/month over a period of 28 months earned a total return of $1,779.78. This represents 27.2% ($1,779.78 / $6,537.47) of the available precious metal in this mine which you were able to claim prior to the mine playing out. Working this debt mine with a higher rate of extra payments would result in an even higher recovery percentage!

A Mortgage Gold Mine

Let’s use the median new mortgage balance in 2017 of $211,500 over a period of 30 years at 4% interest to illustrate the potential returns on extra payment investments in a mortgage mine.

Using this cost of debt calculator, we find that if we simply make the required minimum payment of $1,009.73335 we’ll pay off the mortgage in 30 years and pay a total of $152,004.01 in interest and $650,162.37 in opportunity cost along the way, a total penalty of $802,166.38:

Cost of Debt Calculator results indicating loan payoff timeline as well as total interest and opportunity cost of this mortgage loan.

But an investment in the form of making an extra $100 payment every month cuts the payoff timeline down by 4 years and 8 months while reducing the total interest and opportunity cost by $253,747.38:

Cost of Debt Calculator results indicating the earnings made possible by working this mortgage loan with extra payments.

In this example, your $30,400 investment in this mortgage gold mine at a rate of $100/month over a period of 25 years and 4 months (304 payments) earned a total return of $253,747.38 ($802,166.38 – $548,419.00).

This represents 31.6% of the available precious metal which you were able to recover prior to the mine playing out. Working this debt mine with a higher rate of extra payments would result in a still higher recovery percentage!

Strike It Rich By Mining Your Debt

A pick-axe and other mining supplies, illustrating the need to stake your debt claim so you too can strike it rich in the Debt Mother Lode.
Photo by James Stegall, CC0 1.0 license

Mining your debt with extra payments can result in massive savings. It was this very concept that inspired Mrs. FFP and I to make quadruple payments on our own mortgage years ago, paying it off in just three years and two months start to finish.

Doing so enabled us to extract the vast majority of the wealth within our mortgage debt mine, saving thousands upon thousands of dollars in loan interest and opportunity cost. We’ve never regretted our decision to pay this loan off early, and it continues to pay dividends to this very day.

Use the previously discussed concepts of loan interest and opportunity cost to calculate the potential value of your personal Debt Mother Lode. If you feel strapped for cash, it’s time to stake your claim and grab that pick-axe so you too can strike it rich by mining your debt.

Staking Your Own Debt Claim

For those of you who have been following the Master Your Money series from the beginning, below are the next steps on your journey to financial freedom:

  1. Determine the size of your Debt Mother Lode by adding the balances of all your loans as listed on your Mint account overview.

  2. Calculate the size of the weekly, monthly, and yearly raise you can give yourself in the absence of debt by totaling the monthly payments for all of your loans as listed in Mint Budgets.

  3. Determine the potential wealth stored in each of your loans by using this cost of debt calculator and the principles of opportunity cost. You’ll need to know the interest rate, current balance, and monthly payment for each loan, which will all be available within Mint.

Extra BonusClick here for an entertaining recounting of life in historical Virginia City, as well as what the area looks and feels like today.

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JonBMr. FFPJoeHxtimeinthemarket
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timeinthemarket
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I’m on the home stretch of paying off my car loan. I threw an extra $500 last month and might throw an extra $500 or more this month as I have about 4k left and really want to get it off the books ASAP and open up that $450 in cash flow for other purposes!

JoeHx
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I like it! Although I was a little worried coming in you were going to talk about using leverage (where you take out a loan to invest), but this is much better.

JonB
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JonB

I have read and got a lot of good information from all of your posts to date. However, I have an issue with your use of the cost of debt calculator in these examples. As I understand it, this calculator is based on paying cash for something, rather than taking out a loan. The calculator provides the interest avoided by paying cash and the opportunity income gained by investing the avoided interest payments. Your examples are for additional payments for a loan or credit card balance, which is not the same thing.

For the mortgage example the extra $100 principle payment each month does avoid about $27,000 in interest charges and results in the entire principle being paid off 4 years, 8 months early. However, none of the interest avoided along the way is available as cash flow to be invested. That said, the early payout does free up a monthly cash flow of $1,009.73 that would have been paid on the loan if the additional payments had not been made. Investing this cash flow for the 4 years, 8 months at 7% results in a total value of $66,646, which makes sense to me as the opportunity gain from making the additional payments on the loan.

I used this Calculator to determine this amount: https://keisan.casio.com/exec/system/1234231998

One other consideration for the mortgage example. If the $100/month had been invested at 7% for the 360 month term of the loan, rather than applying it to the loan principle, the ending value from the same calculator is $121,997.

What do you think?