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Posted by Mike on August 16, 2007, 5:53 pm
Hello,
I've been lurking on the list for a few months and I want to first and
foremost thank
everyone for the great advice that I've gleaned from the many posts
over that time. I
have a question of my own that I'm not too sure what I should do and I
appreciate any
help I can get.
I am working on reducing my debt (better late than never) and I'm
kinda lost on how I
should proceed with paying it down, or (and this is the big question)
should I bother
paying it down in advance...
My debt is structured like so:
$7,000 - credit cards
$33,000 - personal loan (0% interest for life, paying $500/mo, owed to
a family member
who's not too concerned with it being paid back early)
$55,000 - student loans (3.35% interest (locked in), paying $290/mo)
$112,000 - mortgage (6.5 or 6.75% interest (not sure off the top of my
head, but locked
in), paying $1020/mo)
I am working feverishly on paying down the credit card debt, and it
will be gone by
January. But after that, I have no idea where to put the roughly
$1000/mo disposable
income that I have left.
In my thinking, the mortgage rate is not bad, the student loan
interest is not bad at
all, and the personal loan interest can't be beat. Given that the
mortgage and the
student loan interest is all tax deductible, should I even bother
paying any of them off
early? Or should I sock the money away elsewhere? What would be more
beneficial in the
long run?
Thanks again for any help!
Mike
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Posted by joetaxpayer on August 16, 2007, 6:31 pm
Mike wrote:
> My debt is structured like so:
> $7,000 - credit cards >>>>>GONE BY JANUARY
> $33,000 - personal loan (0% interest for life, paying $500/mo, owed to
> a family member
> who's not too concerned with it being paid back early)
> $55,000 - student loans (3.35% interest (locked in), paying $290/mo)
> $112,000 - mortgage (6.5 or 6.75% interest (not sure off the top of my
> head, but locked
> in), paying $1020/mo)
>
> $1000/mo disposable
First, I'd be negligent to not ask;
What is the status of your retirement savings? 401(k) maxed? Does your
employer or your wife's offer matching? You see, a 50% match is worth
more than even paying down that CC debt. Even with the 401(k), do you
fund your IRA, Roth or regular? Do you have kids? Planning to?
If you've been lurking you know what's missing, age, marital status,
goal for early retirement, and likely a few other tidbits.
Kids can cost the time your wife is out, as well as all the new expenses
a baby brings. A cash nest egg is appropriate for such an event.
Here's a thought: Your numbers imply a 15 year mortgage. An extra $1000
to the mortgage would pay it in full in 6 years. I can offer you the
lecture that says the market will likely return 8%+ over the next 10
years, and at cap gains rates, net you a 6.8% return post tax. But wait,
with only $6500 or so in interest, can you even itemize? You have enough
property tax and state tax to be over the standard deduction? If not,
the chance to make 6.8% vs a sure 6.5%, well, sounds like no-brainer to
me. No one ever complained they paid off their mortgage too soon. (And
yes, Elizabeth, I've come to see this the right way, your way, mostly)
good luck.
JOE
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Posted by Mike on August 17, 2007, 10:56 am
> Mike wrote:
> > My debt is structured like so:
> > $7,000 - credit cards >>>>>GONE BY JANUARY
> > $33,000 - personal loan (0% interest for life, paying $500/mo, owed to
> > a family member
> > who's not too concerned with it being paid back early)
> > $55,000 - student loans (3.35% interest (locked in), paying $290/mo)
> > $112,000 - mortgage (6.5 or 6.75% interest (not sure off the top of my
> > head, but locked
> > in), paying $1020/mo)
>
> > $1000/mo disposable
>
> First, I'd be negligent to not ask;
> What is the status of your retirement savings? 401(k) maxed? Does your
> employer or your wife's offer matching? You see, a 50% match is worth
> more than even paying down that CC debt. Even with the 401(k), do you
> fund your IRA, Roth or regular? Do you have kids? Planning to?
> If you've been lurking you know what's missing, age, marital status,
> goal for early retirement, and likely a few other tidbits.
You're right, I did leave out some details... here's the bigger
picture:
I'll be 30 in a few months. I'm divorced, have two kids that I have
half time, and I get to claim one of them each year on taxes. I also
have a live-in girlfriend and her daughter, both of which I claim come
tax time too, but our finances are separate. Not planning to have any
more kids.
I've made some dumb moves on my retirement savings in the past, having
cashed out some 401k's when leaving jobs (I know, I know). So my
retirement savings with my current company is a little over $3k,
putting in just 3% which is the max my company will match (100%). I
have no other retirement savings, and I have just over $1k in the bank
for a mini-emergency fund.
The mortgage is actually a 30 year that I just got last month, the
1020/mo includes Insurance & Taxes.
The family member who loaned me the money and I have a healthy
relationship ;) And paying off my debt is definitely a goal, however,
that debt alone will be paid off in 5.5 years just making the normal
payments. It's the 30yr mortgage and 30yr student loans
(consolidated) that I'm worried about.
Thanks again for everyone's time.
Mike
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Posted by Elizabeth Richardson on August 17, 2007, 11:36 am
>
> I've made some dumb moves on my retirement savings in the past, having
> cashed out some 401k's when leaving jobs (I know, I know). So my
> retirement savings with my current company is a little over $3k,
> putting in just 3% which is the max my company will match (100%). I
> have no other retirement savings, and I have just over $1k in the bank
> for a mini-emergency fund.
>
Good for you to be getting your debt paid so that you can even be asking
this question! If I were you, my priorities for this increased disposable
income would be:
1. Increase your retirement savings. Contribute to an IRA, a Roth if your
income will allow, and max it out. My personal preference is Vanguard, but
both Fidelity and TR Price are other good companies. Increase your
contribution to your 401k.
2. Build up your emergency fund. Many experts say you need 3-6 months
expenses. Evaluate your job security and the employment picture in our area
to determine the right level for you. Also think about what could go wrong
and how you would pay for it - major home repairs/damage not insured, major
auto repair, that kind of thing.
3. You don't mention a car loan and I congratulate you. But how will you pay
for the next one? Put a little aside.
4. Pay an additional amount to the principal on your mortgage. As little as
$100 a month will get that sucker paid off early and allow you to get out
from under while you're young, yet old enough to be able to consider a
shorter work week.
5. If there you still have a few dollars left after the above, start some
sort of account for your children's education after high school.
I'm the Elizabeth that Joe referred to, so readers may be surprised to see
I've put paying the mortgage in the 4th position. But you can see that I
think you can do all of the things on the list by carefully splitting up
that $1000. And, when you get that personal loan paid, you'll be able to do
even more.
Again, congratulations!
Elizabeth Richardson
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Posted by joetaxpayer on August 17, 2007, 12:13 pm
Elizabeth Richardson wrote:
> 4. Pay an additional amount to the principal on your mortgage. As little as
> $100 a month will get that sucker paid off early and allow you to get out
> from under while you're young, yet old enough to be able to consider a
> shorter work week.
> I'm the Elizabeth that Joe referred to, so readers may be surprised to see
> I've put paying the mortgage in the 4th position.
The $100/mo will pull this mortgage in from 30 years to just over 21.
It's a remarkable thing to run the numbers. An additional $100 on top of
that only drops it to about 17.
Given the priorities, not too surprised at 4th place, and I'll vouch for
your advice here. His follow up was the missing detail needed to
formulate the better responses.
JOE
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