Author Topic: Best way to proceed with paying off debt and investing - [case study]  (Read 3134 times)

MaxP0wer

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A little background stats:  I'm 35, my wife is 26, and we have a 1 yr daughter with another expected early next year.  We just built a house this year and while I did plenty of spreadsheets on the costs and budgets, I'm starting to feel overwhelmed and second guess myself.  I used to be ok carrying debt and managing it but as our daughter grows up I find myself wanting to be more financially free.  So I have a plan but want to to see what some other opinions are.

We live in the midwest in a LCOL area, combined gross salary 113,000.

Savings
401k - 10,000
457 - 26,000
IRA - 10,000
Roth IRA - 6,500
Liquid Savings - 4,000
Also have a pension that i've been paying into for 5 years.  I don't know if I'll stay till I retire but if I leave I have the option to get all that I've put in plus interest. Estimated value 25,000

Debts
House (1500/month @ 4.25%) - 282,400
Rental (780/month @ 4.25%) - 140,800
SUV (392/month @ 3.2%) - 24,300
Variable Student Loan (180/month @ 5.1%) - 17,600
Federal Student Loan (165/month @ 4.5%) - 21,000
Credit Cards (0%) - 14,000
401k Loan - (200/month) 5,300
457 Loan - (160/month) 13,900

The loans are paid to myself with interest so they don't bother me as much.  We have two other paid off vehicles, I am selling one that is worth about 4K.  The other is reliable but worth much less as it is almost 20 years old.  I know it makes more sense to sell the SUV but the wife loves it and the car I'm selling is a previosuly salvaged car and she doesn't like our daughter riding in it.  We both need a car and we both pick up and drop off for daycare.

I'm currently renting the other house to my brother who will likely purchase it and take advantage of current low interest rates.  Without a realtor I will net about 14k from the sale.  So I will have a lump sum of about 18k after the sales.

Not counting the minimum payments, we have about 1400/month extra to put toward debt.  Thats while stashing 500/month in savings but only the minimum in retirement accounts to get the match.  Paying back the 401k/457 loans first would give us the most cash flow.  I'm playing the 0% game with the credit cards, won't be adding to that at all. 

We already want to downsize, but to not lose our ass in the new house we need to stay for a few years.  Luckily there are no lots left in this area and it is desireable.  Pretty much why we jumped in before we were ready.  On paper it works, just tight.




« Last Edit: August 16, 2016, 02:24:17 PM by MaxP0wer »

ShoulderThingThatGoesUp

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Re: Best way to proceed with paying off debt and investing - [case study]
« Reply #1 on: August 16, 2016, 02:01:59 PM »
When does that 0% credit card debt turn into a pumpkin?

frugaliknowit

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Re: Best way to proceed with paying off debt and investing - [case study]
« Reply #2 on: August 16, 2016, 02:06:48 PM »
What caused these:

Credit Cards (0%) - 14,000
401k Loan - (200/month) 5,300
457 Loan - (160/month) 13,900

Was it an unforseen catastrophe, or less than optimal budgeting?

MaxP0wer

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Re: Best way to proceed with paying off debt and investing - [case study]
« Reply #3 on: August 16, 2016, 02:09:48 PM »
When does that 0% credit card debt turn into a pumpkin?
This is spread between 4 cards.  All various dates next year.  Soonest being in January, latest being in November.

MaxP0wer

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Re: Best way to proceed with paying off debt and investing - [case study]
« Reply #4 on: August 16, 2016, 02:14:00 PM »
What caused these:

Credit Cards (0%) - 14,000
401k Loan - (200/month) 5,300
457 Loan - (160/month) 13,900

Was it an unforseen catastrophe, or less than optimal budgeting?

Building a house before we were ready, got caught up in knowing there were only a few available lots and no new developments in the works for the forerseable future in this area.  Great school disctrict and close to family.  The loan money went toward down payment.  The cards are some expenses for this house and some previous items. 

boarder42

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Re: Best way to proceed with paying off debt and investing - [case study]
« Reply #5 on: August 16, 2016, 02:18:16 PM »
you should be refinancing both your house and your rental.  rates are sitting in the lower to mid 3's right now on 30 year mortgages.  that alone is probably worth around 70-100 a month based on your current rates and expected sizes.

i just got a no cost REFI to 3.25%

boarder42

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Re: Best way to proceed with paying off debt and investing - [case study]
« Reply #6 on: August 16, 2016, 02:19:35 PM »
you also need to get your wife on the same page that SUV is a huge suck on your money

ShoulderThingThatGoesUp

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Re: Best way to proceed with paying off debt and investing - [case study]
« Reply #7 on: August 16, 2016, 02:21:47 PM »
When does that 0% credit card debt turn into a pumpkin?
This is spread between 4 cards.  All various dates next year.  Soonest being in January, latest being in November.

Holy shit man the SUV is not something can be held on to.

MaxP0wer

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Re: Best way to proceed with paying off debt and investing - [case study]
« Reply #8 on: August 16, 2016, 02:23:00 PM »
you should be refinancing both your house and your rental.  rates are sitting in the lower to mid 3's right now on 30 year mortgages.  that alone is probably worth around 70-100 a month based on your current rates and expected sizes.

i just got a no cost REFI to 3.25%

I looked into that but closing costs seem to kill the deal.  I also looked into Penfed's 2.625% 5/5 arm, but that only works if we sell within 10 years.  And we probably will but things could change.

MaxP0wer

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Re: Best way to proceed with paying off debt and investing - [case study]
« Reply #9 on: August 16, 2016, 02:40:42 PM »
Welcome to the forum meatbag!

I agree on the refinance - you should be able to do a no cost refinance if your credit is good, especially with your balance amount on the higher end.  You'll likely get a rate about a quarter point higher than if you paid the closing costs.

Looks like you've got to find a way to further cut expenses with the second kid on the way - is one of you going to stay home or are you going to have 2x daycare?

Luckily we have free daycare (grandma runs a daycare) which helped justify the house, lol.  I will look into no or lower cost refinancing on both properties. 

boarder42

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Re: Best way to proceed with paying off debt and investing - [case study]
« Reply #10 on: August 16, 2016, 02:45:50 PM »
you should be refinancing both your house and your rental.  rates are sitting in the lower to mid 3's right now on 30 year mortgages.  that alone is probably worth around 70-100 a month based on your current rates and expected sizes.

i just got a no cost REFI to 3.25%

I looked into that but closing costs seem to kill the deal.  I also looked into Penfed's 2.625% 5/5 arm, but that only works if we sell within 10 years.  And we probably will but things could change.

you havent looked hard enough then . its a giant cost that could easily save you 100 dollars a month indefinitely. how much do you get paid at work. probably not 100 bucks an hour if it took you 12 whole hours to figure it out.

MrsDinero

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Re: Best way to proceed with paying off debt and investing - [case study]
« Reply #11 on: August 16, 2016, 02:51:37 PM »
When does that 0% credit card debt turn into a pumpkin?
This is spread between 4 cards.  All various dates next year.  Soonest being in January, latest being in November.

YIKES!

Can you break out the credit cards with their balances, when the 0% is over, and what the new interest rates will be?

Honestly I agree with the others, sell the SUV that has a loan on it and use the one that is already paid for.  If your wife is adamant about not driving it because of the salvaged title, I would still get rid of both and buy a car with the cash earned from the sale of all cars.

Is your brother paying enough rent to cover the mortgage on the rental house?  What about maintenance on the rental?

Jrr85

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Re: Best way to proceed with paying off debt and investing - [case study]
« Reply #12 on: August 16, 2016, 02:55:18 PM »
We live in the midwest in a LCOL area, combined gross salary 113,000.

Savings
401k - 10,000
457 - 26,000
IRA - 10,000
Roth IRA - 6,500
Liquid Savings - 4,000
Also have a pension that i've been paying into for 5 years.  I don't know if I'll stay till I retire but if I leave I have the option to get all that I've put in plus interest. Estimated value 25,000

Debts
House (1500/month @ 4.25%) - 282,400
Rental (780/month @ 4.25%) - 140,800
SUV (392/month @ 3.2%) - 24,300
Variable Student Loan (180/month @ 5.1%) - 17,600
Federal Student Loan (165/month @ 4.5%) - 21,000
Credit Cards (0%) - 14,000
401k Loan - (200/month) 5,300
457 Loan - (160/month) 13,900

I'm currently renting the other house to my brother who will likely purchase it and take advantage of current low interest rates.  Without a realtor I will net about 14k from the sale.  So I will have a lump sum of about 18k after the sales.

Not counting the minimum payments, we have about 1400/month extra to put toward debt.  Thats while stashing 500/month in savings but only the minimum in retirement accounts to get the match.  Paying back the 401k/457 loans first would give us the most cash flow.  I'm playing the 0% game with the credit cards, won't be adding to that at all. 

A few thoughts:
(1) - how secure is your job?  The 401k loan carries a lot of extra risk because I believe it essentially has a balloon payment if you get laid off (or else you pay taxes and penalties on the amount withdrawn). 
(2) Are you getting a match in your 401k while you have an outstanding loan?  I was under the impression that if you had an outstanding 401k loan, you typically lose the match.
(3) The interest you're paying yourself is paid with after tax dollars.  And I think then included as a gain in your 401k, so you pay income taxes on it again when you withdraw it. 
(4) All that to say pay the 401k loan back first.
(5) How much have you contributed to your Roth?  I might use your liquid savings to pay off the 401k loan.  If you need emergency cash, you can withdraw your contributions to the Roth IRA tax and penalty free (although maybe the roth has to be open 5 years first?)
(6) As I'm sure pretty much everybody is going to tell you, sell the SUV. 
(7) I would take the proceeds from your house and pay off the credit card debt, ensuring you won't end up paying 28% interest on CC debt. 
(8) I'd focus on teh 457 loan after that if it has similar drawbacks to the 401k loan.
(9) I would then focus on the variable rate student loan debt. 

You really should be able to free up some significant cash flow without having to make any real sacrifices, and do even better if you can convince your wife to downgrade her car. 
« Last Edit: August 16, 2016, 02:57:40 PM by Jrr85 »

VladTheImpaler

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Re: Best way to proceed with paying off debt and investing - [case study]
« Reply #13 on: August 16, 2016, 02:56:34 PM »
You've got a pretty good situation my friend.
Well done on getting a wife almost a decade younger than you!
(I'm 35 and trying to do the same thing)

One other thing to consider is refinancing and consolidating your student loans.
You may be able to shave off a percentage point on the interest rate.

Taken from sofi.com:
Can I Consolidate Private and Federal Student Loans?

While it’s not possible to use the federal Direct loan consolidation program to combine your federal student loans with private loans, it is possible to combine private and federal student loans by refinancing them with a private lender.  Through this process, you actually apply for a new loan (which is used to pay off your original loans) and you’re given a new—ideally lower—interest rate.