Author Topic: Case Study: Investment Order / balance transfer vs. time in the market  (Read 478 times)

enderb3an

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Hi - new Mustachian here.

Quick backstory:
- 29 years old
- Failed in my first 1.5 years of business and amassed $30K of cc debt. (I know, I'm still kicking myself every single day for being a massive idiot.)
- Had a wake up call nine months ago. Did a ruthless 180 in my life. Stopped the bleeding, cut all expenses, even moved back home with my parents (I'm lucky to have that option and I deserve the embarrassment of living at home at 29 years old.)
- As of today, I've paid off $15,000+ in debt. Took on a six figure part time consulting job about four months ago. Aggressively trying to right my wrongs.
- The rest of my cc debt is spread across 0% balance transfers, which are buying me another year or so at 0% interest.
- Discovered FIRE / MMM a few weeks ago. Have been all in and learning as much as I can about living frugally, investing, taxes, etc. (Example recently transferred my old 401K ($51K) full of hidden fees to a Vanguard portfolio.) Thank you all for creating/participating in this forum.
- My business is beginning to pick up as well. It's possible I can double my income to $220K or more within the next 12 months. (Possible, but not certain, clearly.)
- I built an emergency account of $7500 sitting in a 2.05% high interest savings account. Not willing to go below $7500.

This morning I paid off the rest of my interest-bearing debt. Now I have $15K at 0% for the next 12 months or so. Trying to figure out the best way to work my money.

I'm itching to maximize my time in the market; specifically, contribute $5,500 to my new Vanguard IRA for 2018 (and ideally, for 2019 as well right in the beginning of the year)...but I'm debating whether it would be wise to do so.

The $15K is at 0% only until it isn't, and goes back up to ~20% APR. I know the "order of investing" dictates paying off high-interest debt first to lock in that guaranteed return. Right now my debt seems to be in a grey area. The return for the next 12 months is 0%...but if I screw up paying it all back, the remaining balance gets hit with a retroactive APR, and I'm back to piling on more debt. This would be the worst case scenario.

(I realize if that scenario happens, there's a big chance I can initiate another 0% balance transfer on another card at the cost of the balance transfer fee...but that's still risky in my eyes.)

So:

Option A:
1. Continue aggressively paying off my cc debt as much as possible.
2. Don't invest in the market through IRA. Lose out on time in the market.
3. Pay off my full balance in about 5-6 months.
4. Then, invest in the market as much as I can.

Option B:
1. Make minimum payments to cc debt.
2. Max out my IRA contribution of $5,500 for 2018.
3. Go back to paying off debt as quickly as I can.
(Increased probability of staying in debt.)

Option C:
1. Make minimum payments to cc debt.
2. Max out my IRA contribution of $5,500 for 2018.
3. Max out my IRA contribution for 2019 as soon as we get into the new year.
4. Go back to paying off debt as quickly as I can.
(Increased probability of staying in debt.)

Which would you do? What am I missing?

Appreciate your help.

MDM

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Re: Case Study: Investment Order / balance transfer vs. time in the market
« Reply #1 on: November 30, 2018, 06:06:00 PM »
Option B, because
- the 2018 IRA space is "use it or lose it"
- at worst, you have only $7500 of the debt to pay from cash flow within 12 months because it becomes an emergency (and thus unlocks the $7500 in the e-fund) if you haven't paid it all by then.  But even at "only" $100K/yr, paying off $15K debt while still maximizing your tax-advantaged contributions should be doable.
- you have until April 2020 to use your 2019 IRA space.

enderb3an

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Re: Case Study: Investment Order / balance transfer vs. time in the market
« Reply #2 on: November 30, 2018, 06:49:49 PM »
Thanks @MDM

Related question - apparently one can contribute to an IRA up to the tax filing of the following year. For example, I could contribute 5500 for 2018 and 6000 for 2019 during January 1st to April 15th, 2019. How does one differentiate the two contributions to the IRS, especially if made in one lump sum?

MDM

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Re: Case Study: Investment Order / balance transfer vs. time in the market
« Reply #3 on: November 30, 2018, 07:54:19 PM »
Thanks @MDM

Related question - apparently one can contribute to an IRA up to the tax filing of the following year. For example, I could contribute 5500 for 2018 and 6000 for 2019 during January 1st to April 15th, 2019. How does one differentiate the two contributions to the IRS, especially if made in one lump sum?
Don't use a lump sum.

When one contributes to an IRA in that time frame, brokerages should (and AFAIK all the large ones do) ask whether the contribution is for the current or previous year.  You should also keep your own records.  Thus, if you do contribute both amounts in Jan-Apr 2019, make one of 5500 and the other of 6000, noting the 5500 is for tax year 2018 and the 6000 for tax year 2019.