Author Topic: 2 Questions: Pay Debt Off Early? 401k with no Company Match?  (Read 4334 times)

Joba

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2 Questions: Pay Debt Off Early? 401k with no Company Match?
« on: February 03, 2013, 06:15:05 PM »
Hello,

Been reading MMM for about 4-5 months, and have been turning my situation around...this is my first post... Thank you for all the information on the site and forum so far!

I'll pose my questions first, then give my situation/info:

Question 1:
I believe I could pay remainder of my consumer debt except school loan and mortgage by April 1st if not earlier. Am I better off just paying monthly amount till paid off seeing as though the interest that would accumulate would be minimal and start my investment building (ideally would like to buy a multi-family property at some point, but open to other options as well)

The amount of debt is not psychologically paralyzing as it was before I started paying them down as I see the end very very near, but what is paralyzing to me now is my lack of savings/retirement/investments.

Question 2:
I'm an Internet Marketing Director and I make base of $90k plus guaranteed monthly bonus minimum of $4,500 (bonus taxed at ~40% since its bonus) - so my actual take home is right around $7-$8k. I actually love my job, and enjoy doing it everyday (love the people I work with too and come and go and telecommute as I please so it has a lot of freedom ) so I don't have any intent on leaving it voluntarily anytime soon. 10% pretax goes to my 401k (no company match). Earn too much for Roth IRA (however I do have money in Roth from previous years, but not a lot)

Does it make sense to put money in 401k when there is no company match? For me, it was just a way to guarantee that I save (pay myself first). If the answer is no, where should I think about placing it.

Monthly Consumer Debt Owed
---------------

1) Car - owe $3,700, down from $18k in October 2012 ($375 minimum monthly payment)
2) Exec Line of Credit - $600, down from $9k in December 2012 ($305 minimum monthly payment)
3) Engagement Ring - $4k remaining  ( 0% interest until Nov 2013) (divided up total owed by due date to pay off before 0% interest expires)
4) School Loan $9k ($105 monthly payment 5% rate)

5) Mortgage - $144k ($1179 monthly including taxes and insurance, plus $300 condo fees, 3.5% interest rate)

So my current outgoing is about $3500 per month, Once I get the car, line of credit, and ring paid off it will be down to about $2400 (probably even cut out more from that - working on that part now).

Both the line of credit and car, instead of paying lump sum, I divided up what i was sending in by 10 months  and sent in 10 payments with their monthly coupons - so technically I don't have to pay again until Nov 2013, although will pay off before, but both credited to account now so it acted like a lump sum payment)

I could pay off the car today from savings, but that's about all I have in liquid savings.

Thanks in advance for any advice or suggestions.

SwordGuy

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Re: 2 Questions: Pay Debt Off Early? 401k with no Company Match?
« Reply #1 on: February 03, 2013, 06:44:29 PM »
You've really been knocking down that debt!  Congrats!

If the dates on the car and LOC balances are correct (Oct/Dec 2012), you've paid down $14,300 on the car and $8,400 on the LOC in 4 months.  That's $22,700!

At that rate, you could have the everything you owe, including the mortgage, in about 2 1/2 years.  That would be awesome!   I would max the 401K and put the rest on debt; but then I've lived thru multiple rounds of layoffs, companies going out of business, etc. over the decades.   Owing nothing really allows you to whether the uncertain vagaries of fate.

I'm sure you'll get plenty of good advice to max out the 401K, knock out the higher interest debt, and start investing instead of accelerating the house payments.   In the long term, that's probably the best advice. 

In the mid term, following that advice, you could find yourself out of work through no fault of your own with a simultaneous huge drop in your investment value - and losing your home.

In the short term, following my advice, you could find yourself out of work and with all your money tied up in your house, unable to make payments - and losing your home.

You are in a better position to evaluate the relative short and mid-term risks than we are.

And, of course, if there is a high likelihood that you'll move and need to sell that house sometime soon, the less you have in it the better.

Best of luck!

PS, if you like custom, hand-made jewelry instead of the corporate-style factory-made goods you'll find in the mall, send me a private message.   Maybe we can work something out where you'll get something you like more for substantially less than that 4k engagement ring.  :)

TheDude

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Re: 2 Questions: Pay Debt Off Early? 401k with no Company Match?
« Reply #2 on: February 03, 2013, 06:45:39 PM »
I think you should get serious and pay down your debt (minus the ring and the mortgage) in a couple of months and then start saving in a 401k. You make a crazy amount.

sherr

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Re: 2 Questions: Pay Debt Off Early? 401k with no Company Match?
« Reply #3 on: February 04, 2013, 08:20:04 AM »
I also negotiated  a monthly bonus plan when I started with a minimum payout that raises each year (since you pay more taxes on bonuses, it costs the company less to pay it to me).

It's a common misconception, but you do not pay more taxes on bonuses and it does not cost the company less to pay it to you. The amount withheld for taxes may be more on a bonus check than on your regular paycheck, but you will end up getting more back / owing less at the end of the year when you do your taxes because of it. And bonuses are mildly better for companies because it's not money that they strictly owe you in the future, so their accountants feel better about the ongoing costs. It ends up costing them just as much either way though.

To answer your general question, it is always mathematically best to pay off / invest in the opportunity that has the highest interest rate. If you expect the stock market to return 7%, then investing it stocks is mathematically better than paying off debt at 5%, which is in turn better than investing in CDs (or whatever) at 4.99%. However, that's just the math, there may be differences in risk and additional benefits like the psychological ease that comes from being debt free that you have to take into account. In my case I put the maximum possible into my 401k and Traditional IRA and then use the rest of the money I have available to pay down the mortgage on my rental property (at 4.5%). I believe that the stock market would pay more in interest, but I have decided that the security that would come from having only one mortgage instead of two is more worthwhile at the moment.

Good luck, it sounds like you're on the right track to me. Saving your money in some form (including paying off debt) that aligns with your goals is more important than figuring out the mathematically optimal way to go. However, I would recommend maxing out your 401k and Traditional IRA contributions to maximize tax advantages, and then figuring out what to do with the rest.