Author Topic: Reader Case Study - What should I do? Pay Off vs Save/Invest More  (Read 4120 times)

tinylittlemonkey

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Now that I make a little bit of money, I'm deciding what to do with it: pay off (and what) or invest more. Honestly, I am not used to living with more money than I spend! Anyway, here are my stats:

Life Situation:
IRS filing status - Single
Number & ages of dependents - N/A
Anything else - Single 34-year old female that resides in Texas (no state income tax, 8.25% sales tax)

Gross Salary/Wages:
Annual Salary: $65,000

Individual amounts of each Pre-tax deductions:
401k - 10% per check - $270.83 per check
HSA - $40 per check/$80 per month/$960 per year

Adjusted Gross Income:
$1793.43 twice a month/$43,042 a year

Taxes:
Federal - $399.42
state/local - $0
FICA - $204.65

Current monthly expenses:
Mortgage - $450 (includes escrow and insurance)
Owe: $57,400, Interest is 4.5%
Dues - $180
Car - $400
Owe: $15,000, Interest is 2.49%
Cell/Internet - $60
Energy - $75 max
Car Insurance - $113
Student Loan - $0
Owe: $92,000, Interest is 6.5%

Assets:
Home: $140,000
Car: $20,000
Roth IRA: $26,000
Traditional IRA: $9,500
Vanguard: $5,000
Savings (cash): $2,000

Debts:
House: $57,400, Interest is 4.5%
Car: Owe: $15,000, Interest is 2.49%
Student Loan: Owe: $92,000, Interest is 6.5%

Specific Question(s): Where should I allocate my extra payments? Extra payments right now are about $1000 - $1200 a month.

Notes:
Not interested in moving as I am still debating on making my property a rental.
Not selling my car. It's my only hobby. I'm stupid, I know.

I can update this post with any info I missed... this is my first try! Please help me. :)

Tuskalusa

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #1 on: December 18, 2017, 09:56:37 AM »
First off, youíre doing great!  Youíve got a very manageable housing situation and you have extra cash flow at the end of the month. Well done!

For next steps, here are some things to consider.

1. Your mortgage interest seems high. Maybe look at what rates would be for a refi.

2. Iíd personally look at paying off the car first. While itís the lowest interest rate, itís also the smallest debt. You could pay that off quickly and then free up cash to start tackling that student loan.

3.  Good job investing in the 401k and HSA. You might want to look at bumping these up, since this is tax deferred income. Maybe increase them by a couple percentage point in 2018.

Good luck!

Laura33

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #2 on: December 18, 2017, 10:27:20 AM »
First, are you comfortable with your emergency fund?  If not, figure out what level would make you comfortable and allocate some of your excess to that.

Second, I suspect your biggest bang for your buck would be to contribute more to your pre-tax accounts.  In particular, 10% to your retirement savings is not going to get you enough to retire on any time soon, especially given that you are already in your mid-30s.  See this:  http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ -- a 10% savings rate will get you to retirement in about 50 years.  I would recommend getting that up to at least 20%, or more if you want to retire any time before you'd qualify for full SS. 

Then again, the interest rate on the student loan is high enough to make that a close call.  So if you wanted to split the difference and throw some of your extra money at that, I wouldn't object too strenuously.

And speaking of the student loan, I see you are in fact not paying anything -- why is that?  If that is in deferment or in arrears and is accruing interest and penalties while you are not paying it, priority number 1 has to be getting that back on track.

Finally, your listed expenses have a lot of gaps in them.  Is the $1000-1200 leftover an accurate figure based on tracking your expenses for several months/years?  Or is it what you think is left after writing down the bills you are thinking about.  If the latter, you need to track your expenses first to figure out how much is really left to invest/pay down debt.
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tinylittlemonkey

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #3 on: December 18, 2017, 11:25:26 AM »
First off, youíre doing great!  Youíve got a very manageable housing situation and you have extra cash flow at the end of the month. Well done!

Yes! I made sure I was set up in a good situation since at the time I purchased I only made 30K a year. Now, no matter how much I earn, I can afford it!

For next steps, here are some things to consider.

1. Your mortgage interest seems high. Maybe look at what rates would be for a refi.

2. Iíd personally look at paying off the car first. While itís the lowest interest rate, itís also the smallest debt. You could pay that off quickly and then free up cash to start tackling that student loan.

3.  Good job investing in the 401k and HSA. You might want to look at bumping these up since this is tax-deferred income. Maybe increase them by a couple percentage point in 2018.

Good luck!

So a few questions, if you don't mind!

1. Should I pay for closing costs again just to save a little bit of a percent? My interest rate is a little high because I bought a home with no money down. But is losing a couple grand right now really worth saving 0.5% or less? It is a condo and they have different rules than houses do.

2. This is what I was actually thinking so thanks for the unknown validation! :)

3. What would you suggest for the 401K percentage? I am currently on a plan where I am not fully vested for 4 years... I'm more than meeting my percent to match. Just not sure what to do there?

Thank you so much for the input and feedback! It is very much appreciated.

tinylittlemonkey

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #4 on: December 18, 2017, 11:36:02 AM »
Hello! Thanks for reading and taking the time to respond! :)

First, are you comfortable with your emergency fund?  If not, figure out what level would make you comfortable and allocate some of your excess to that.

Right now I have $7K in quickly liquidatable funds. I actually got laid off in July and was on unemployment for 8 weeks. Yikes! But, it did show me that because my house note is so low, that my savings are good (but not fantastic). I never once felt like I was going to lose my home or car or anything... Any insights or advice there? I can always save more!

Second, I suspect your biggest bang for your buck would be to contribute more to your pre-tax accounts.  In particular, 10% to your retirement savings is not going to get you enough to retire on anytime soon, especially given that you are already in your mid-30s.  See this:  http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ -- a 10% savings rate will get you to retirement in about 50 years.  I would recommend getting that up to at least 20%, or more if you want to retire anytime before you'd qualify for full SS. 

Thanks for the link and tip!

Then again, the interest rate on the student loan is high enough to make that a close call.  So if you wanted to split the difference and throw some of your extra money at that, I wouldn't object too strenuously.

I thought about paying off my car (by August EOM by the latest) and then refinancing the student loans to a 5-year plan. I would have to keep the retirement accounts as is...

And speaking of the student loan, I see you are in fact not paying anything -- why is that?  If that is in deferment or in arrears and is accruing interest and penalties while you are not paying it, priority number 1 has to be getting that back on track.

They are on $0 repayment because of me getting laid off last July. They will turn back on and when they do I will be on a plan where the payments that do not even cover the interest. Unacceptable.

Finally, your listed expenses have a lot of gaps in them.  Is the $1000-1200 leftover an accurate figure based on tracking your expenses for several months/years?  Or is it what you think is left after writing down the bills you are thinking about.  If the latter, you need to track your expenses first to figure out how much is really left to invest/pay down debt.

What do you mean by gaps? I have been tracking my spending in Mint for about 5 years now. 1000-1200 is the extra cash per month after paying bills, groceries, gas, and so on. Please let me know what I am missing.

If you were in my shoes, you would up the 401k to 20% and pay on the student loans?

Laura33

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #5 on: December 18, 2017, 01:46:44 PM »
Finally, your listed expenses have a lot of gaps in them.  Is the $1000-1200 leftover an accurate figure based on tracking your expenses for several months/years?  Or is it what you think is left after writing down the bills you are thinking about.  If the latter, you need to track your expenses first to figure out how much is really left to invest/pay down debt.

What do you mean by gaps? I have been tracking my spending in Mint for about 5 years now. 1000-1200 is the extra cash per month after paying bills, groceries, gas, and so on. Please let me know what I am missing.

If you were in my shoes, you would up the 401k to 20% and pay on the student loans?

I just meant that the categories above didn't include a lot of things that other people tend to break out.  But if this is based on Mint data, that is awesome.

And, yeah, if it were me, I'd up the 401(k) and pay down the student loans (especially if the new payment plan will be interest-only).  The math says you will save more money long-term by paying your highest-interest-rate debt first.  The reason to pay down the smaller-size/lower-interest debt first would be if you needed to clear room in your monthly budget (like if you were worried about getting laid off and wanted to keep your mandatory monthly costs as low as possible just in case).  But that doesn't sound like your situation at all. 

The other thing to keep in mind is if worse comes to worst, you can let the fancy car or the house be repossessed, but you will never be able to get those student loans discharged in bankruptcy.  So when in doubt, go after the loans that will stay with you and keep earning interest until you die, instead of the ones where you can just hand the keys back, walk away, and recover within a few years. 
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tinylittlemonkey

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #6 on: December 18, 2017, 02:54:36 PM »
I just meant that the categories above didn't include a lot of things that other people tend to break out.  But if this is based on Mint data, that is awesome.

And, yeah, if it were me, I'd up the 401(k) and pay down the student loans (especially if the new payment plan will be interest-only).  The math says you will save more money long-term by paying your highest-interest-rate debt first.  The reason to pay down the smaller-size/lower-interest debt first would be if you needed to clear room in your monthly budget (like if you were worried about getting laid off and wanted to keep your mandatory monthly costs as low as possible just in case).  But that doesn't sound like your situation at all. 

The other thing to keep in mind is if worse comes to worst, you can let the fancy car or the house be repossessed, but you will never be able to get those student loans discharged in bankruptcy.  So when in doubt, go after the loans that will stay with you and keep earning interest until you die, instead of the ones where you can just hand the keys back, walk away, and recover within a few years.

Awesome! Thank you for taking the time to read through my situation and offer advice. :)

MrSpendy

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #7 on: December 18, 2017, 03:22:07 PM »
In the absence of other information that may change my mind, I think you should shuffle your assets/debt around as follows. I think carrying $92K of debt at 6.5% at your level of income is counterproductive when you have other assets at your disposal and I don't understand why you'd slowly pay off the car at lower rate before making the student loans more sustainable and less burdensome. I think your existing assets/income/spending allow you to make this all sustainable today, but that tackling it piecemeal will take a lot longer.

While you're using that extra $1K a month to pay off the car loan over 15 months, $500 a month of interest will be accruing on your student loans. I think more radical action is called for.

1. If you can, get an 80% LTV 30 year mortgage, $112K, let's say $3K goes to fees for $109K of proceeds used to pay down $58K existing mortgage and $36K to decrease the student debt, $15K to pay off the car loan. So you have $56K of student loans now and your mortgage goes up by ~$400 based on an estimate of what portion of your payment is taxes and insurance (would be more accurate if you broke out those).

2. Raid your Roth. Assume 1/2 is contributions so applying a 5% penalty to the $26K (10% on the gains) gets me to $24.7K. Use that to pay down your student loans. Now you have $32K of student loans. Normally, I'd say "don't squander your precious limited years of contributing to a roth" but I think accruing 9% of your gross income on unsecured student loan interest is a worse outcome than missing out on growth in the roth.

3. Re-fi your remaining student loans to longest term possible. I'll guess 20 years at 7%. that'd be a $248 monthly payment

So we've added ~$648/ month to your payments (more mortgage to pay off the car loan + actually servicing your reduced student loans). But we've eliminated the ~$300-400 car payment and given you the ability to spend less on car insurance since you'll own it outright (I personally wouldn't get rid of collision but I'd run a higher deductible than insurance co's will allow).

So your cash flow has decreased by maybe $200-$300 / month ($648 additional debt service less the car payment less insurance savings), but you are fully servicing your debt and have concentrated your debt in long term fixed rate tax deductible form. You mention you value flexibility, but wouldn't paying ~$300 / month more to have a fully paid off car and fully amortizing your debts be better.

I'd then evaluate some mix of increasing emergency fund, HSA, 401k, and accelerated payoff of the now very manageable but nevertheless high cost student debt. I can't really tell what your actual monthly non-mortgage non-debt expenditures are, but it seems to me like you could definitely max out your HSA, and possibly increase your 401k to the max while still having some left over, but it's hard to tell what your monthly spending is.

It just seems weird to me to have all that home equity and accessible investments when you are running $15K of car debt and $92K of high (ish) cost student debt. Am I missing something here? Is your home actually worth $140K?

 If so, go monetize that shit and reduce the less favorable debts.*

You mentioned putting your $92K loans on a "5 year plan". That would be $1,700 / month at a 5% rate ($1,500 / month at 0%). You can't do that, nor should you, if you have other options available. Put what you can on a 0 year plan by raiding the roth and a 30 year plan by re-financing your mortgage...if possible.

*I was torn on applying all of the excess mortgage proceeds to the student loan or paying off the car completely and less of the student loans. There are many variations, maybe you can only get $100K mortgage...or $80K...my point is that all the home equity and all the high cost non-dischargable debt are suboptimal and I don't think you've got the income to address that $92K slowly, but you do have some assets to do so. Also I think the car loan is more costly than its interest because its taking up precious cash flow that could be used to increase tax advantaged savings or pay down the student loans.




« Last Edit: December 18, 2017, 04:49:12 PM by mrspendy »

MMbergmann

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #8 on: December 18, 2017, 06:58:08 PM »
In the absence of other information that may change my mind, I think you should shuffle your assets/debt around as follows. I think carrying $92K of debt at 6.5% at your level of income is counterproductive when you have other assets at your disposal and I don't understand why you'd slowly pay off the car at lower rate before making the student loans more sustainable and less burdensome. I think your existing assets/income/spending allow you to make this all sustainable today, but that tackling it piecemeal will take a lot longer.

While you're using that extra $1K a month to pay off the car loan over 15 months, $500 a month of interest will be accruing on your student loans. I think more radical action is called for.

1. If you can, get an 80% LTV 30 year mortgage, $112K, let's say $3K goes to fees for $109K of proceeds used to pay down $58K existing mortgage and $36K to decrease the student debt, $15K to pay off the car loan. So you have $56K of student loans now and your mortgage goes up by ~$400 based on an estimate of what portion of your payment is taxes and insurance (would be more accurate if you broke out those).

2. Raid your Roth. Assume 1/2 is contributions so applying a 5% penalty to the $26K (10% on the gains) gets me to $24.7K. Use that to pay down your student loans. Now you have $32K of student loans. Normally, I'd say "don't squander your precious limited years of contributing to a roth" but I think accruing 9% of your gross income on unsecured student loan interest is a worse outcome than missing out on growth in the roth.

3. Re-fi your remaining student loans to longest term possible. I'll guess 20 years at 7%. that'd be a $248 monthly payment

So we've added ~$648/ month to your payments (more mortgage to pay off the car loan + actually servicing your reduced student loans). But we've eliminated the ~$300-400 car payment and given you the ability to spend less on car insurance since you'll own it outright (I personally wouldn't get rid of collision but I'd run a higher deductible than insurance co's will allow).

So your cash flow has decreased by maybe $200-$300 / month ($648 additional debt service less the car payment less insurance savings), but you are fully servicing your debt and have concentrated your debt in long term fixed rate tax deductible form. You mention you value flexibility, but wouldn't paying ~$300 / month more to have a fully paid off car and fully amortizing your debts be better.

I'd then evaluate some mix of increasing emergency fund, HSA, 401k, and accelerated payoff of the now very manageable but nevertheless high cost student debt. I can't really tell what your actual monthly non-mortgage non-debt expenditures are, but it seems to me like you could definitely max out your HSA, and possibly increase your 401k to the max while still having some left over, but it's hard to tell what your monthly spending is.

It just seems weird to me to have all that home equity and accessible investments when you are running $15K of car debt and $92K of high (ish) cost student debt. Am I missing something here? Is your home actually worth $140K?

 If so, go monetize that shit and reduce the less favorable debts.*

You mentioned putting your $92K loans on a "5 year plan". That would be $1,700 / month at a 5% rate ($1,500 / month at 0%). You can't do that, nor should you, if you have other options available. Put what you can on a 0 year plan by raiding the roth and a 30 year plan by re-financing your mortgage...if possible.

*I was torn on applying all of the excess mortgage proceeds to the student loan or paying off the car completely and less of the student loans. There are many variations, maybe you can only get $100K mortgage...or $80K...my point is that all the home equity and all the high cost non-dischargable debt are suboptimal and I don't think you've got the income to address that $92K slowly, but you do have some assets to do so. Also I think the car loan is more costly than its interest because its taking up precious cash flow that could be used to increase tax advantaged savings or pay down the student loans.






Just want to note, she mentions in a later reply that this is a condo. I know it is hard to get a loan for these, so refi may be somewhat hard too.

tinylittlemonkey

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #9 on: December 19, 2017, 06:55:38 AM »
Yes, I spent all night looking into refinancing options for my home and it is damn near impossible! :(

thedayisbrave

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #10 on: December 19, 2017, 08:03:17 PM »
If I were you, I'd be attacking those student loans with every spare cent.
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Ben Kurtz

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #11 on: December 21, 2017, 05:23:04 AM »
My tactical suggestions are below. But before going into those, you need to look hard at yourself in the mirror, punch yourself in the face three times, and really re-think your "non-negotiables" and your overall life priorities.

You have a positive net worth, which is a good start, and you have no "hair on fire" credit card debt bearing double digit interest rates, which is also a good start. But you are fifteen years into adulthood, and your total lifetime financial accomplishments could fit inside a late model used Jaguar with room to spare (unless there is a massive 401k or HSA balance that you've omitted from your asset list -- but I'm assuming that you just started a new job and that your monthly contributions to those items are going into accounts that have just been opened and have negligible balances at the moment). A $38,100 net worth is something you should have at age 25, not 34 (e.g. $40,000 starting salary out of college, single-person living expenses of $25,000, you do the math...).

Do you realize that your debt-heavy lifestyle is costing you $9,000 a year in interest charges? That's right up there next to the tax man.

You admit: "Honestly, I am not used to living with more money than I spend!" People coming from that sort of background, who end up posting on this forum, do so often because they've come to realize that there might be better life strategies than "join the rat race for 40 years, spend most of what you earn mostly on needless consumerist crap, fret about retirement, and move to an 'active seniors' community at age 65." I'm supposing you're posting here in order to get advice on how to improve your financial position -- because you want seriously to increase your range of options in life, and not just have a bit extra put away so you can have slightly nicer pants to wear while playing shuffleboard in your old age.

With that in mind, here's my advice:

You car is off the hook for someone in your financial position. You really need to ask yourself if you can be passionate about some other hobby, and honestly acknowledge that pursuing this one is adding a huge drag to your financial life. It's adding years if not decades to your mandatory working career.

The student loan balance is also painfully high given that your education did not seem to land you a six-figure career; that's now water under the bridge, but it's a giant millstone you'll have contend with.

And you haven't shown the numbers of your idea of turning your current home into a rental property, but there is a very good chance that it is not worth the candle -- your return on equity invested would have to be enough in excess of 6.5% (your student loan rate, which is the one other thing I'd suggest you do with that money) to justify the risks, hassles and time-suck of being a landlord, which it probably isn't, because returns on stable, single-unit residential real estate investments aren't often much above 6.5%. Meanwhile, the equity trapped in the property would go a long way to right-sizing the student loan.

You need to radically re-think at least one if not both of the house and the car if you want to get past of that albatross of a student loan and get ahead in life.

Let's turn to the tactical choices you can make right now, while you take some time to figure those deeper questions out:

The ideal case would be to (1) cash-out refinance the home loan and use that to pay down the student loan by ~$50,000, then (2) put the student loan on the longest and lowest repayment plan possible, ideally the income-based repayment plan, while (3) maxing out your 401k and all other tax-advantaged investing accounts. Spare cash after that can go towards (4) bulking your emergency fund up to $5,000 and (5) additional student loan payments.

It sounds like you can't refinance the home loan, at least not now, so my suggested plan is to pick up with step (2), above, while checking every few months if the refinance scenario has changed.

The reason is this: A diversified 401k portfolio (e.g. 60% U.S. equities, 20% foreign equities, 20% bonds) can be expected to grow at 8%+ (nominal) per year over the long term, which is higher than your student loan rate. Plus, you are in the 25% tax bracket, which means the tax break on an extra $10,000 in annual contributions puts $2,500 right back in your pocket. Retirement contributions also reduce your Adjusted Gross Income on your tax return, which reduces the mandatory minimum payment on a IBR student loan plan. And while student loans are not forgiven in bankruptcy, 401k and IRA accounts are specially protected from creditors in bankruptcy as well, so from an asset protection point of view that's a wash. By all means, you will end up paying above the minimums, and for peace of mind you should pay at least enough to cover interest as it accrues, but the idea behind IBR is to minimize your mandatory monthly cashflow to give you flexibility month to month.

At this rate, you're going to be tied to your working career for a very long time. The best thing now is to take steps that have the best chance of maximizing your (currently small) net worth over the long term. All your loans have interest rates well below the expected long term return on investment securities, so it is not to your advantage to pay them off early. Rather, your advantage now lies in using leverage to build wealth by maximizing investments in growth assets, like a 401k account invested in a diversified portfolio -- and reaping some substantial current tax savings while doing it. A purist might say to extract the equity currently trapped in your home and invest that in securities too, rather than pay down the student loan, but I also see value in keeping your required monthly payments at least somewhat in check, to protect against external shocks (another job loss, a sudden large expense, etc.) -- plus you don't get the added boost of the tax deduction that a 401k give you -- so I'm happy enough to recommend that you keep your current leverage levels steady, without paying off loans early but also not increasing it.

Five or ten years from now, when you've built up a net worth in the hundreds of thousands, you can re-visit the idea of paying down the debts. For people contemplating some form of early retirement or semi-retirement, I frequently suggest de-leveraging and owning your house and car outright, right around the time you back away from full time work and high earnings (others recommend maintaining a leveraged position). This is to minimize as much as possible the monthly required payments, to build peace of mind and staying power (even at the expense of some potential incremental future growth) -- relying on investments in volatile financial markets to pay for basic living expenses is psychologically a lot different than relying on a steady paycheck from work.  But as long as your are working and expect to keep at it for a long time, keep low interest loans outstanding and take advantage of leverage.

Bee21

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #12 on: December 23, 2017, 04:07:18 PM »
Interesting and v radical suggestions.

I would seriously reconsider that car. You said it was not negotiable, but still....

Why is it so important for you? I live with a car and boat person ($$$$), and he argues that having a large car and boat is essential to his happiness, it enables us to do some awsome weekend adventures (true), a few weeks away every year to wonderful places the average people can't get w their econoboxes (true)....etc etc. I accepted the situation but it was not easy. I drive a 2003 toyota to balance the books (with the peeling paint. It looks crap and people poke fun at me. I don't mind as I don't want a car payment).

Why is that car (w carpayment) so important for you? What value does it bring to your life?  Do you use it to get to work? How much time do you spend in it? How many hours do you have to work to pay for it?  If you had a cheaper car, how much could you throw at your student loans? Would that improve your financial situation? Happiness?  Would you be considerably less happy if you sold it and bought a nonsexy car for say 5k cash?

Those student loans are a lot. I would do anything I can to bring that number down.



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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #13 on: December 23, 2017, 04:36:30 PM »
That is a serious student loan, with high interest. I would treat that one as "hair on fire", and get rid of it asap. You don't list all your expenses; is there something else you might be willing to cut since the car is non-negotiable? Food? Other spending?
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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #14 on: December 23, 2017, 04:52:05 PM »
I call bullshit on the condo loan "problem". The so-called "stigma" against condos is minimal. Get on it. Re-fi the condo, pull as much cash as you can out. Refi the student loans asap. Get the rate down, then set up a relatively aggressive repayment schedule. Don't scrimp on retirement saving to pay off the SL's once they're at a lower rate. The mighty ARS hit FIRE with SL's and you can, too.

Now that Trump has crammed through that abominable new tax program, all of this may be moot. Check with a tax professional, because when homeowners realize what we have lost, there's going to be a whole lot of boo-hooing going on.
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tinylittlemonkey

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #15 on: December 28, 2017, 09:35:05 AM »
Update: I haven't disappeared. I have read and reread these comments multiple times. I am currently switching insurance companies to save $300 a year and turned my student loans back on. I am looking at every single option from selling my condo to refinancing my condo and different options for the student loans including refinancing... and even what to do with the car. Oh, and I raised my 401k contributions, too.

tinylittlemonkey

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #16 on: December 28, 2017, 02:22:29 PM »
Oh gawd... I did it. I refinanced my student loans with Sofi. Now I have a solid pay down plan (and I can pay extra without any penalties) and my stupid loan balance won't ding my credit every month. I'm in sticker shock... ::gulp::

gaja

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #17 on: December 28, 2017, 04:54:31 PM »
Well done! What interest did you get?
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Smurfy

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #18 on: December 28, 2017, 07:15:33 PM »
If I were you, I'd be attacking those student loans with every spare cent.

This is the advice that you need to follow.  This and refinance those loans. Aim for interest under 5%.  The faster you pay, the lower the balance but also you can get a better interest rate.   My first refinance on my student loans dropped my rate to 5.99%. You can easily calculate out your savings on .5% interest on such a large loan.  That savings is substantial over time.  Those student loans are a hair on fire situation.

tinylittlemonkey

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #19 on: December 29, 2017, 07:59:22 AM »
Well done! What interest did you get?

Looks like 5.365% with a savings of $32,541.48 at the max pay off limit. (Obviously, plan on making bigger payments as soon as I can or maybe even a pay off if I move/refi my home.)

freya

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #20 on: December 30, 2017, 08:55:43 AM »
I completely agree that you need to refinance for as much cash as you can get out of your home - and do it ASAP.  Get a 30 year fixed and throw it ALL at the student loan debt, which will be higher interest than the mortgage.  Using a 3.5-4% mortgage to pay off a 2.5% car loan makes no sense to me.  Also:  please don't raid your Roth IRA.  That's too valuable an asset.

I don't understand why you say you can't refinance your condo.  I've refinanced my NYC cooperative apartment twice with no issues, and they're harder than condos.  Wells Fargo handles condos/coops no problem, as does Chase.  Ask your neighbors about local banks who give condo loans.  Members of your HOA board will know about recent refis, also.

fuzzy math

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #21 on: December 30, 2017, 12:00:47 PM »
Congrats on getting your loans refi-ed! Now attack that debt. I think you should post your other expenses (food etc) and also think about trying to find a side hustle to bring in some other cash. Were you originally talking about moving out of your condo to rent the whole thing or could you rent a room?

Does your new job pay as much as the old one? What is your degree in? Any chance you could look for a higher paying job in a year or so (once your resume has recovered)/
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tinylittlemonkey

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #22 on: December 30, 2017, 06:54:22 PM »
Congrats on getting your loans refi-ed! Now attack that debt. I think you should post your other expenses (food etc) and also think about trying to find a side hustle to bring in some other cash. Were you originally talking about moving out of your condo to rent the whole thing or could you rent a room?

Does your new job pay as much as the old one? What is your degree in? Any chance you could look for a higher paying job in a year or so (once your resume has recovered)/

 Yes! I was just asking in another thread what people do in their spare time and how they make extra income. I am thinking about either trying to start something up on the side, freelance a little, or just pick up a easy part time job close to home.

 The job that I have now pays exactly the same as my job last year and has all of the same benefits! My job before that had half of the pay and less benefits. I made a big move by leaving that job and I am learning a lot in my current position but I plan on moving up in a few years. I work in marketing.  And, yes, I actually have two degrees and they are both garbage.

I am eventually thinking of selling my condo. It is a one bed, one bath, one car garage so I canít have a roommate. I guess someone could live in the garage. LOL

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #23 on: December 30, 2017, 11:22:38 PM »
If I were you, I'd be attacking those student loans with every spare cent.

This is the advice that you need to follow.  This and refinance those loans. Aim for interest under 5%.  The faster you pay, the lower the balance but also you can get a better interest rate.   My first refinance on my student loans dropped my rate to 5.99%. You can easily calculate out your savings on .5% interest on such a large loan.  That savings is substantial over time.  Those student loans are a hair on fire situation.
. Great advice.  Attack student loan debt as hard as possible.
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Refinance Student loans with Earnest.  Theyíll pay you $200 and their rates are cheaper than SoFi.

Bee21

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #24 on: December 31, 2017, 01:08:04 AM »
Well done.

Next step?

MrUpwardlyMobile

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #25 on: December 31, 2017, 01:48:18 AM »
Well done.

Next step?

Now itís the long slog of actually paying the loans off... Iím actually aim to pay off 107k in student loans in the next 24 months with a combination of frugality and brute force working insane hours to pay off student loan debt.http://upwardlymobile.life/student-loan-debt-servitude/

The refinance is one part, but execution and follow through will get him through the 92k student loan debt.
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Refinance Student loans with Earnest.  Theyíll pay you $200 and their rates are cheaper than SoFi.

MrSpendy

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #26 on: December 31, 2017, 06:42:52 AM »
I completely agree that you need to refinance for as much cash as you can get out of your home - and do it ASAP.  Get a 30 year fixed and throw it ALL at the student loan debt, which will be higher interest than the mortgage.  Using a 3.5-4% mortgage to pay off a 2.5% car loan makes no sense to me.  Also:  please don't raid your Roth IRA.  That's too valuable an asset.

I don't understand why you say you can't refinance your condo.  I've refinanced my NYC cooperative apartment twice with no issues, and they're harder than condos.  Wells Fargo handles condos/coops no problem, as does Chase.  Ask your neighbors about local banks who give condo loans.  Members of your HOA board will know about recent refis, also.

I suggested the nuclear option of raiding the Roth since I think the debt relative to income/ left over cash here made it make sense to get a jumpstart on getting rid of the loans. Another option is to put ~$10K-whatever OP thinks is the right amount of the Roth into low risk stuff and have that be the emergency fund and then using the existing taxable assets ($7K) to pay down some of the loans. That way you don't destroy the years of contributions like raiding it would.

I agree that all else equal using mortgage proceeds to pay off the cheap car loan versus more of the student loan doesn't make sense, but the car loan sucks up a fair bit of cash flow which is crowding out contributions to tax advantaged accounts, which makes it more costly than the interest rate. Also student loan interest is deductible ($2,500 even w/o itemizing, correct?) under a certain income so the after tax cost is lower, and student loans can be extended more so than auto loans. To me freeing up cash flow to max deductions (while also servicing the debt) via tax advantaged accounts and maximize flexibility would be the goal. But ya I was torn on whether to propose using all proceeds to pay down student loan or to put most toward student  loan and some to car loan


Tiny little monkey, can you provide an updated monthly cash flow? What term did you refinance to?


« Last Edit: January 01, 2018, 10:43:22 AM by mrspendy »

tinylittlemonkey

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #27 on: January 02, 2018, 03:57:42 PM »
I completely agree that you need to refinance for as much cash as you can get out of your home - and do it ASAP.  Get a 30 year fixed and throw it ALL at the student loan debt, which will be higher interest than the mortgage.  Using a 3.5-4% mortgage to pay off a 2.5% car loan makes no sense to me.  Also:  please don't raid your Roth IRA.  That's too valuable an asset.

I don't understand why you say you can't refinance your condo.  I've refinanced my NYC cooperative apartment twice with no issues, and they're harder than condos.  Wells Fargo handles condos/coops no problem, as does Chase.  Ask your neighbors about local banks who give condo loans.  Members of your HOA board will know about recent refis, also.

I suggested the nuclear option of raiding the Roth since I think the debt relative to income/ left over cash here made it make sense to get a jumpstart on getting rid of the loans. Another option is to put ~$10K-whatever OP thinks is the right amount of the Roth into low risk stuff and have that be the emergency fund and then using the existing taxable assets ($7K) to pay down some of the loans. That way you don't destroy the years of contributions like raiding it would.

I agree that all else equal using mortgage proceeds to pay off the cheap car loan versus more of the student loan doesn't make sense, but the car loan sucks up a fair bit of cash flow which is crowding out contributions to tax advantaged accounts, which makes it more costly than the interest rate. Also student loan interest is deductible ($2,500 even w/o itemizing, correct?) under a certain income so the after tax cost is lower, and student loans can be extended more so than auto loans. To me freeing up cash flow to max deductions (while also servicing the debt) via tax advantaged accounts and maximize flexibility would be the goal. But ya I was torn on whether to propose using all proceeds to pay down student loan or to put most toward student  loan and some to car loan


Tiny little monkey, can you provide an updated monthly cash flow? What term did you refinance to?

Hello! I am aggressively documenting my spending and cash flow this month. I can post a screen shot of my spreadsheet when itís done. I donít think mint captured my spending accurately the last year and I went ape shit with my new income. 2018 is the year of getting it right, making better choices, and documenting better (to correct/prevent mistakes).

The financing option I am about to sign is for 15 years minimum. The federal loan Iím on is 21 years left. The balance on that would be dismissed but Iíd have to pay taxes on it.

tinylittlemonkey

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #28 on: January 05, 2018, 10:06:50 AM »
Hello. A lot of people suggested I refi my condo and get the cash and pay off a chunk of student loan. I was looking around and found these offers right off the bat but I don't even know how to compare... one has a low-interest rate but has mortgage insurance and some seem to have a high monthly payment.

Can you guys offer any advice or insight into this?

MrUpwardlyMobile

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #29 on: January 05, 2018, 08:09:20 PM »
Hello. A lot of people suggested I refi my condo and get the cash and pay off a chunk of student loan. I was looking around and found these offers right off the bat but I don't even know how to compare... one has a low-interest rate but has mortgage insurance and some seem to have a high monthly payment.

Can you guys offer any advice or insight into this?

I think people said refinance the student loans, not refinance your mortgage.
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Refinance Student loans with Earnest.  Theyíll pay you $200 and their rates are cheaper than SoFi.

freya

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #30 on: January 05, 2018, 10:05:24 PM »
Nope, we said refi the condo, get cash out, and throw it at the student loan.  My rule of thumb is that one percentage point in interest savings is enough to justify a refi, and you definitely should be able to do better than 4.3% for a 30 year fixed.

The internet search is just a starting point.  Call the banks on the list and ask for quotes.  Make sure you let them know you want 0 points.  They'll give you interest rate, monthly payment, fee information, and lock period.  Also call Wells Fargo and Chase - both handle condo refis.  Make sure the lock period is 30 days minimum, preferably longer, because you'll need to get board approval for the refi.

If you do this, the student loan will be down to about 1/3 the original balance, and you'll have it paid off in about a year.

PaulMaxime

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #31 on: January 05, 2018, 10:20:40 PM »
I think all these people telling you to take out a 30 year loan to pay off student loans are giving you bad advice.

You are taking a shorter term problem and making it last longer. Take everything you have extra and throw it at the student loans. They can't be discharged in bankruptcy and therefore are the most toxic form of debt.

I'm not opposed to refinancing your loans or mortgage to get a lower rate, but you can't fix a debt problem by borrowing money.
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MrUpwardlyMobile

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #32 on: January 06, 2018, 05:31:45 AM »
I think all these people telling you to take out a 30 year loan to pay off student loans are giving you bad advice.

You are taking a shorter term problem and making it last longer. Take everything you have extra and throw it at the student loans. They can't be discharged in bankruptcy and therefore are the most toxic form of debt.

I'm not opposed to refinancing your loans or mortgage to get a lower rate, but you can't fix a debt problem by borrowing money.
this. Also mortgage refinancing usually comes with far more restrictions and upfront costs. Refinancing the student loans to a low rate is the real move. 
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Refinance Student loans with Earnest.  Theyíll pay you $200 and their rates are cheaper than SoFi.

freya

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #33 on: January 06, 2018, 08:44:10 AM »
I don't see what the issue is.  The student loan refi cut interest by the same 1% that I think OP can get with a mortgage refinance.  Let's do some math.

Current debts:  $57,000 at 4.5% and $92,000 at 5.3%. 
Proposed new debt structure:  $112,000 at 4% and $39,000 at 5.3%.  (assuming $2K closing costs).

Ignoring compounding, principle paydown etc and using a brain-dead simple interest calculation:

Current annual interest cost:  $2565 + $4876 = $7441
Proposed new interest cost:  $4480 + $2067 = $6547
Annual interest saved with refinance:  $894  (a bit over 2 years payback period)

Savings will be greater if refi permits the OP to itemize, or if new mortgage is less than 4%.

OK, I'll grant that this may not be worth the effort.  I would still look into it and run actual numbers.  And, one of the reasons I would consider doing this is precisely PaulMaxime's point about student loan debt being toxic.

ginjaninja

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Re: Reader Case Study - What should I do? Pay Off vs Save/Invest More
« Reply #34 on: January 10, 2018, 10:07:09 AM »
My biggest suggestion is putting the maximum into the HSA.  You will never pay taxes on that money and it reduces your taxable income.  I know it is just a few thousand dollars but you can keep the money tax free forever!

Why are you not making any payments on the student loans?
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