Author Topic: Case Study: What would you do with this $6,200  (Read 2270 times)

luminajd

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Case Study: What would you do with this $6,200
« on: September 22, 2016, 06:22:15 AM »
Income:
Me-age 34: $56,000/year
Husband-age 37: $34,000/year

Debt:
$33,000 on home, 5.25 interest rate, 17 years left
$13,000 on HELOC, 3.25%
$14,000 on my student loan, 3%, I cant remember end date but payment is only $130/month

Savings:
$10,000 in Husbands ROTH IRA, not currently contributing. He is at a new job that doesn't offer 401K until he has been there a year
$20,000 in my state funded pension, don't work there anymore, so not contributing
$20,000 in my 403B, funded at 6%

Life situation: Married, 3 kids, ages 10, 8, 5, low cost of living in Iowa

When we buckle down and do a good job not pissing away money, we have about $2,000 extra/month.
We sold our camper and have $6,200. We have nothing in savings. I have previously subscribed to the Dave Ramsey way of thinking so its tempting to keep only $1,000 for savings and throw the rest at debt.
I recently asked how to refi my mortgage and someone gave the idea of using the HELOc, which I like. So I'm considering throwing all extra money at the mortgage, getting that down to about 20K, going to the bank and having them increase my HELOC limit to 20K, pay off mortgage.
How would you spend this $6,200 and the extra $2,000/month left after expenses?

Bracken_Joy

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Re: Case Study: What would you do with this $6,200
« Reply #1 on: September 22, 2016, 06:28:27 AM »
Personally, I like keeping a good size "e-fund" around, so I would probably do that. But it sounds like you're the type of person that benefits from using springy debt and not having the temptation of spending around. In that case, I would use it to fully fund one of your IRAs for the year and part of the other spouse's.

No matter what, I would re-fi that mortgage. If you have good credit and you're in a SFH, there's no reason your rate should be so high right now. Re-fi before November if you can- it's impossible to know the effect the election will have on interest rates, but it's not unreasonable to think that there may be some sort of effect.

ShoulderThingThatGoesUp

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Re: Case Study: What would you do with this $6,200
« Reply #2 on: September 22, 2016, 07:09:40 AM »
I agree, make sure your tax-advantaged space is fully funded, because the rate on that is a lot better than 5.25%, then work on refinancing that mortgage.

frugaliknowit

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Re: Case Study: What would you do with this $6,200
« Reply #3 on: September 22, 2016, 09:28:59 AM »
If you can get a bank to re-fi the small mortgage plus the Heloc (some will not want to do it, or will give you a crappy rate on that small amount).   You might have to close the heloc (a new lender on the first mortgage would have to agree to a subordination agreement, I believe...).  BTW, I DON'T like the idea of "refi-ing" the mortgage with the heloc (heloc is not fixed rate).

After that, I would throw the $6200 into the roth, or use it as an efund.
« Last Edit: September 22, 2016, 09:31:25 AM by frugaliknowit »

Mother Fussbudget

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Re: Case Study: What would you do with this $6,200
« Reply #4 on: September 23, 2016, 11:48:32 AM »
[I think you're on the right track to be investigating a re-fi. Of your two debts, that's the only one I would do something about 'today']

As for the pay-off-debt vs. invest thinking - there are LOTS of posts on that topic here.  Do a quick search (google:  "forum.mrmoneymustache.com debt or invest").

In general, the prevailing wisdom is:  If the debt interest rate is below ~4% (and your HELOC is), then don't pre-pay debt, but invest until you have a nice nest egg going.  Put in a Roth (as frugaliknowit suggests).

I like MDM's "Generic investment order rules of thumb" - perhaps this will help...

Quote from: MDM
Generic investment order rules of thumb:

WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.    (see also:  http://www.madfientist.com/hsa/)
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   THIS if you want even more details on that topic).  See also
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   

boarder42

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Re: Case Study: What would you do with this $6,200
« Reply #5 on: September 23, 2016, 12:31:02 PM »
you need to REFI ASAP ... you missed the bottom... maybe another will come but to have a 5.25% loan in today's climate is bat shit crazy. i guees its only 33k but i'd do a low cost cash out REFI and invest that plus the 6200 bucks.

GetItRight

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Re: Case Study: What would you do with this $6,200
« Reply #6 on: September 23, 2016, 01:51:15 PM »
I would put it toward the student loan, keep some if you don't have at least a grand in cash. That student loan could balloon toa  ridiculous amount if you lost your jobs and were unemployable such as from an injury, it is the only debt you cannot shirk. You hardly have any left, just get it done. Look at refinancing the house, you should be able to drop 1% or more from it for the hassle of some paperwork. Put all the monthly extra in the student loan until it's gone then split it between building EF/savings and the mortgage. I'm risk averse though...

MDM

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Re: Case Study: What would you do with this $6,200
« Reply #7 on: September 23, 2016, 05:14:57 PM »
$20,000 in my 403B, funded at 6%
...
How would you spend this $6,200 and the extra $2,000/month left after expenses?
Put $11K into Roth IRAs, increase 403b contribution to $18K/yr, and plan $18K/yr into the 401k when that is available.

That assumes you have good (i.e., low fee index fund) investment options in the 403b, which is not necessarily true....

Also assumes that any pension will be very small.  If you will have significant pension income, using the Roth option for the 403b and/or 401k is worth considering.  See https://www.bogleheads.org/wiki/Traditional_versus_Roth.

Based on a quick read of your OP, you could do that much retirement saving, pay income taxes and the mortgage payment, and still have ~$30K/yr for other expenses.  See the case study spreadsheet if you would like to enter your own numbers.

CategoryMonthly
Comments
Annual
Salary/Wages for earner #1$4,667$56,000
Salary/Wages for earner #2$2,833$34,000
401(k) / 403(b) / TSP / etc.$3,000At maximum$36,000
Income subject to IRS tax$4,500$54,000
Federal Total Income$4,500$54,000
Federal tax-$1012016 rates, MFJ, stand. ded., 5 exempt.-$1,215
State/City tax$139Guess, using 5.00% * (AGI - Exempt'n)$1,668
Soc. Sec.$465Assumes 2 earners paying$5,580
Medicare$109$1,305
Total income taxes$611$7,338
Income before other expenses  $3,889$46,662
Monthly Average Expenses:
Mortgage$245$2,939
Loans:
Student Loan$135$1,622
HELOC$127$1,524
Other tax-advantaged investments:
Roth IRA$917At maximum$11,000
Total Expense$1,424$17,085
Total to invest$2,465$29,577


Filing Status21=S, 2=MFJ, 3=HOH
# Exemptions5
# Children <173
# Children for EIC3
Adult #1Adult #2
Age3437
# of earners2
Total Income$54,000
Std. Deduct.$12,600
Act. Deduct.$12,600
Exemption$20,250
SL int. (approx.)$399
AGI$53,601
MAGI$54,000
Taxable$20,751
1040 Tax$2,185
AMT adder$0
Saver's credit$400
Tax after n-r credit$1,785
NIIT$0
EIC$0
Child Tax Cred.$3,000
Net Tax-$1,215
Monthly-$101
Mtg. Int. (approx.)$1,715
State tax$1,6685.00%
Item. Deduct.$3,383
VersionV8.09

Loans:Orig. Prin.Orig. LengthCurr. Prin.Yrs leftRate
Mortgage$33,00017$33,000175.250%
Student Loan$14,00010$14,000103.000%
HELOC$13,00010$13,000103.250%