Author Topic: What would you do?  (Read 950 times)

EmergingStache

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What would you do?
« on: May 01, 2018, 09:02:18 AM »
I have a question for my fellow mustachians. Basically a "what would you do in my situation" type of question. Now, I've read all the investment order stuff, and the other steps I should take in order, but I still find myself "paralysis by analysis." I'm new to all this stuff and there is so much info that I have no idea what to do next.

DEBT (Student Loans):

     1.) $3386.00 @ 6.55%
     2.) $2614.00 @ 6.55%
     3.) $2826.00 @ 6.49%
     4.) $5528.00 @ 4.41%
     5.) $5329.00 @ 4.41%
     6.) $2212.00 @ 4.41%
     7.) $2420.00 @ 4.04%
     8.) $2640.00 @ 3.61%
     9.) $4079.00 @ 3.61%
     10.) $3438.00 @ 3.15%
     11.) $2931.00 @ 3.15%

MORTGAGE: $139,000 @ 4.1%

We have only about $2000 saved up for an emergency fund. No credit card debt, and no car loans.

We just found out my wife's father has an IRA set up for her that currently has about $31,000 in it. So my question is, should we use that IRA to pay off debt? What is considered high interest debt? Should we just pay minimum on student loans since the interest rate isn't very high? Should we start investing right now (other than my required 9.8% contribution toward a 403b?) Household income after tax is about $60,000.

Thank you guys.
« Last Edit: May 01, 2018, 09:05:51 AM by EmergingStache »

FINate

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Re: What would you do?
« Reply #1 on: May 01, 2018, 10:13:28 AM »
Question about the IRA: Is/was this a Custodial Roth IRA set up when your wife was a minor, and now that she's an adult it has converted to a regular Roth IRA in her name? If so, that's very cool of her dad, but I would also make sure that she's the only one on the account with access. If nothing else just so that dad is not trying to meddle.

I would not touch the IRA funds, leave them in the IRA. Make sure it's invested in a low cost total market index fund, or an appropriate target date fund, and then forget about it. In 30 years you'll be glad you did ($31,000 * 1.10^30 = $540,931).

Save aggressively and pay off the three student loans with the highest interest rates (over 6%) ASAP. After that you can reassess your options. Whether you choose to pay down your remaining student loans ahead of schedule vs. invest in after tax accounts largely comes down to your individual risk tolerance.

EDIT: I'll also point out that it doesn't make sense to pull investment money from an IRA to pay down debts so that you can put more into investments. This is "robbing Peter to pay Paul" but you're losing the tax advantages of the (Roth) IRA along the way.
« Last Edit: May 01, 2018, 10:15:49 AM by FINate »

EmergingStache

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Re: What would you do?
« Reply #2 on: May 01, 2018, 10:21:02 AM »
Question about the IRA: Is/was this a Custodial Roth IRA set up when your wife was a minor, and now that she's an adult it has converted to a regular Roth IRA in her name? If so, that's very cool of her dad, but I would also make sure that she's the only one on the account with access. If nothing else just so that dad is not trying to meddle.

I would not touch the IRA funds, leave them in the IRA. Make sure it's invested in a low cost total market index fund, or an appropriate target date fund, and then forget about it. In 30 years you'll be glad you did ($31,000 * 1.10^30 = $540,931).

Save aggressively and pay off the three student loans with the highest interest rates (over 6%) ASAP. After that you can reassess your options. Whether you choose to pay down your remaining student loans ahead of schedule vs. invest in after tax accounts largely comes down to your individual risk tolerance.

EDIT: I'll also point out that it doesn't make sense to pull investment money from an IRA to pay down debts so that you can put more into investments. This is "robbing Peter to pay Paul" but you're losing the tax advantages of the (Roth) IRA along the way.

I believe he set it up after she was considered an adult (she's 26 now.) The thing about the IRA is that it is with Edward Jones and has about 7 total mutual funds in the portfolio with high expense ratios. I want to liquidate and then transfer funds into a Vanguard account, but that's a whole other question in itself.

PNW Lady

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Re: What would you do?
« Reply #3 on: May 01, 2018, 10:43:12 AM »
I would not touch the IRA funds, leave them in the IRA. Make sure it's invested in a low cost total market index fund, or an appropriate target date fund, and then forget about it. In 30 years you'll be glad you did ($31,000 * 1.10^30 = $540,931).

I agree with FINate on leaving the IRA funds alone in a low cost total market index fund. Personally, my next step would be to increase the "emergency" fund to somewhere around $5K + 2 months living expenses (combo emergency/job transition fund), especially since you have a house as indicated by the mortgage. Once the ER fund was at a comfortable level I would start paying off some student loans starting with the highest interest rate. I would effectively shut my spending life down and become laser focused on increasing the ER fund and wiping out the 6% student loans. From there I would focus on designing a very intentional lifestyle that will accommodate your long term financial goals while also taking any possible steps to optimize income.

FINate

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Re: What would you do?
« Reply #4 on: May 01, 2018, 10:43:17 AM »
Question about the IRA: Is/was this a Custodial Roth IRA set up when your wife was a minor, and now that she's an adult it has converted to a regular Roth IRA in her name? If so, that's very cool of her dad, but I would also make sure that she's the only one on the account with access. If nothing else just so that dad is not trying to meddle.

I would not touch the IRA funds, leave them in the IRA. Make sure it's invested in a low cost total market index fund, or an appropriate target date fund, and then forget about it. In 30 years you'll be glad you did ($31,000 * 1.10^30 = $540,931).

Save aggressively and pay off the three student loans with the highest interest rates (over 6%) ASAP. After that you can reassess your options. Whether you choose to pay down your remaining student loans ahead of schedule vs. invest in after tax accounts largely comes down to your individual risk tolerance.

EDIT: I'll also point out that it doesn't make sense to pull investment money from an IRA to pay down debts so that you can put more into investments. This is "robbing Peter to pay Paul" but you're losing the tax advantages of the (Roth) IRA along the way.

I believe he set it up after she was considered an adult (she's 26 now.) The thing about the IRA is that it is with Edward Jones and has about 7 total mutual funds in the portfolio with high expense ratios. I want to liquidate and then transfer funds into a Vanguard account, but that's a whole other question in itself.

Yeah, you need to get it out of EJ ASAP. That place is a complete rip off.

Don't liquidate and transfer. The terminology is very important here. You want a "IRA rollover." The money must never be sent to you personally. Have your wife set up an account and IRA on Vanguard, then follow their rollover instructions.
« Last Edit: May 01, 2018, 10:48:34 AM by FINate »

FINate

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Re: What would you do?
« Reply #5 on: May 01, 2018, 10:47:24 AM »
I would not touch the IRA funds, leave them in the IRA. Make sure it's invested in a low cost total market index fund, or an appropriate target date fund, and then forget about it. In 30 years you'll be glad you did ($31,000 * 1.10^30 = $540,931).

I agree with FINate on leaving the IRA funds alone in a low cost total market index fund. Personally, my next step would be to increase the "emergency" fund to somewhere around $5K + 2 months living expenses (combo emergency/job transition fund), especially since you have a house as indicated by the mortgage. Once the ER fund was at a comfortable level I would start paying off some student loans starting with the highest interest rate. I would effectively shut my spending life down and become laser focused on increasing the ER fund and wiping out the 6% student loans. From there I would focus on designing a very intentional lifestyle that will accommodate your long term financial goals while also taking any possible steps to optimize income.

Yes, I agree. I missed that. Get the emergency fund up to 3-6 months of living expenses before paying down SL debt or investing. You don't want to have to take on high interest debt if you have a job loss or large unexpected expense.

I'm a red panda

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Re: What would you do?
« Reply #6 on: May 01, 2018, 10:49:49 AM »
1. I'd make sure to have an emergency fund.
2. I'd get my investments out of Edward Jones.
3. I'd start paying off the student loan debt starting with the highest interest rate.  To me, above 5% is an emergency.
4. I would not pay off the house faster than needed, with a low interest rate, if I am able to take the mortgage interest deduction.

But that's me.

EmergingStache

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Re: What would you do?
« Reply #7 on: May 01, 2018, 11:06:48 AM »
Question about the IRA: Is/was this a Custodial Roth IRA set up when your wife was a minor, and now that she's an adult it has converted to a regular Roth IRA in her name? If so, that's very cool of her dad, but I would also make sure that she's the only one on the account with access. If nothing else just so that dad is not trying to meddle.

I would not touch the IRA funds, leave them in the IRA. Make sure it's invested in a low cost total market index fund, or an appropriate target date fund, and then forget about it. In 30 years you'll be glad you did ($31,000 * 1.10^30 = $540,931).

Save aggressively and pay off the three student loans with the highest interest rates (over 6%) ASAP. After that you can reassess your options. Whether you choose to pay down your remaining student loans ahead of schedule vs. invest in after tax accounts largely comes down to your individual risk tolerance.

EDIT: I'll also point out that it doesn't make sense to pull investment money from an IRA to pay down debts so that you can put more into investments. This is "robbing Peter to pay Paul" but you're losing the tax advantages of the (Roth) IRA along the way.

I believe he set it up after she was considered an adult (she's 26 now.) The thing about the IRA is that it is with Edward Jones and has about 7 total mutual funds in the portfolio with high expense ratios. I want to liquidate and then transfer funds into a Vanguard account, but that's a whole other question in itself.

Yeah, you need to get it out of EJ ASAP. That place is a complete rip off.

Don't liquidate and transfer. The terminology is very important here. You want a "IRA rollover." The money must never be sent to you personally. Have your wife set up an account and IRA on Vanguard, then follow their rollover instructions.

If I rolled it over would Vanguard accept those EJ mutual funds though? How could I get out of those mutual funds to put the money in an Index Fund?

MDM

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Re: What would you do?
« Reply #8 on: May 01, 2018, 01:51:48 PM »
If I rolled it over would Vanguard accept those EJ mutual funds though? How could I get out of those mutual funds to put the money in an Index Fund?
Give Vanguard (and/or Fidelity and/or Schwab) a call, tell them you are considering transferring funds to them, and what is the lowest cost way to change from what you have at EJ to what you want at Vanguard/Fidelity/Schwab.

MDM

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Re: What would you do?
« Reply #9 on: May 01, 2018, 01:54:58 PM »
Now, I've read all the investment order stuff, and the other steps I should take in order....
...
What is considered high interest debt?
Re-read the investment order post: the answer to your question is in there. ;)

Note that it's more a "guideline" than an "answer".