Author Topic: Debt Priortization  (Read 4804 times)

scorpy

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Debt Priortization
« on: October 14, 2014, 10:54:44 AM »
Hi All,

First time poster here, but need some Mustachian insight. My wife and I (30 and 31 respectively) just sold our home to a fairly nice profit. I am not sure when we'll settle down again to be homeowners, and I would like to put that money to work for me.
We have the following debts:

Car 1: $7,000 Interest Rate 0.9%
Car 2: $15,000 Interest Rate 0.9%
Student Loans: $30,000 Interest Rate 2.9%

That is about it for debt. The profit would come close paying off all of those debts, but would lessen savings by 40% or so. It would also limit down payment to a standard 20% down depending on where we move. Should i pay down the debt? If so, in what order? Should i take it and invest it? Thanks all.

Cheddar Stacker

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Re: Debt Priortization
« Reply #1 on: October 14, 2014, 11:39:30 AM »
Congrats on the profitable sale, and welcome to the forum. Hard to say what you should do without more info. Are you going to rent now? How long until you plan to buy again, if at all. Are you currently maxing out 401k's? How much is the monthly debt burden for all three payments, and is that manageable?

If you were to repay these debts quickly, I would go student loans first due to the interest rate. But I likely wouldn't repay any of them with the proceeds, I would invest it since the rates are so low.

frugaliknowit

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Re: Debt Priortization
« Reply #2 on: October 14, 2014, 11:51:24 AM »
What do you mean by "The profit would come close paying off all of those debts, but would lessen savings by 40% or so"?  Do you have savings other than the home sale proceeds?  Are you saying the proceeds are around $52,000?  What is your family income, job situations, goals, emergency cash needs and risk tolerance?

Cheddar Stacker

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Re: Debt Priortization
« Reply #3 on: October 14, 2014, 11:57:08 AM »
I took that to mean something like "the profit is $40K, and we have $52K debt, so I would need $12K savings to pay it all off, and savings is $30K, so I would need to use 40% of savings to clear all debts."

That's a big assumption I made, but I think that's what scorpy was saying??

arebelspy

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Re: Debt Priortization
« Reply #4 on: October 14, 2014, 09:15:48 PM »
I took it to mean the profits were around the amount of the debts (around 50k on 52k debt), but their savings (whatever that includes, 401ks or whatever, but definitely including the home sale profits) are around 125k, so using the 50k home profits would reduce that savings amount by 40%.

In any case, that aside, I personally would pay the minimum amounts on all of those loans (as long as the rates are fixed for the life of the loans) all the way until they eventually pay off years from now, and invest the house profits.

Of course, it depends on how much the debt bugs you, but the mathematically correct answer* is to invest it.  The emotional choice could go either way, depending on your feelings. Some can't stand debt.  I can't stand leaving money on the table. 


*Defined as you would have ended up with more money most of the time historically had you made that choice - it's more likely with you to end up with more money, though not guaranteed.
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wwweb

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Re: Debt Priortization
« Reply #5 on: October 14, 2014, 09:35:42 PM »
It would also limit down payment to a standard 20% down depending on where we move.

I interpret this line to mean that you intend to buy a new house with a mortgage.  If that is the case, there will soon be a fourth debt with an interest rate around 4% (the new mortgage).  Given that the interest rates on the other loans are so much lower than the going rate for mortgages, I would recommend putting all of the "profit" from the sale into the down payment on the new house.  This will mean less 4% debt going forward.

Note this answer assumes that you really want to pay down debt.  Investing is another option.

Cheddar Stacker

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Re: Debt Priortization
« Reply #6 on: October 14, 2014, 10:37:57 PM »
The forum may never know. I hope scorpy returns, but I often wonder how many people never reach more than one post.

scorpy

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Re: Debt Priortization
« Reply #7 on: October 15, 2014, 08:34:49 AM »
Thanks all, and sorry for the delay. The profit from the home sale was approximately $40,000. Total savings just under 150,000. We will be buying a house at some point, but it depends on if we decide to stay in our current location or move. I would like to have at least 30% down on a house, and would like more. Obviously that figure is largely dependent on home and location. I hate the feeling of having any debt, but am risk averse, and like to stay liquid. Nor sure why, just preference.

The idea of maximizing a down payment is intriguing, but wonder if I would be missing out on the interest deduction.

Thanks again for the feedback.

Cheddar Stacker

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Re: Debt Priortization
« Reply #8 on: October 15, 2014, 08:52:40 AM »
No worries scorpy. If you're still reading check out the thread below. A lot of good discussion about the effects of paying off your mortgage. It's a personal choice and if you're as risk averse as you state it would make sense to reduce debts. On the other side of the coin though, there are many advantages to keeping a large mortgage.

I hope at the very least you're earning some interest on that liquid savings through CD's or TIPS. It's not ideal with rates so low right now, but if you're holding cash without earning interest you're losing money to inflation.

http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

scorpy

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Re: Debt Priortization
« Reply #9 on: October 16, 2014, 07:51:13 AM »
Thanks Cheddar Stacker. Some great stuff in that thread.

Bob W

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Re: Debt Priortization
« Reply #10 on: October 16, 2014, 09:03:24 AM »
Put me in the invest the money and let the debts ride camp.

Your rates are super low.

All that aside you may be driving pretty pricy cars.   I would drive them until they die 25 years from now.

If you do consider buying another home and since you have some amount of cash,  I would suggest buying a home of no greater value than your total savings.  At current rates, I would keep your money invested though and mortgage the home.

Save like hell,  invest like you're on a mission from God.

Conversely, you could pay off all the debts in on swoop as a psychological boost.   It feels different being debt free to most people.   

IMHO

MrFrugalChicago

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Re: Debt Priortization
« Reply #11 on: October 16, 2014, 09:13:50 AM »
I really hope all your savings is not in cash or savings account. Being "risk adverse" to the market is really just saying "I want inflation to slowly destroy to my nest egg" which is no way to go through life.

thd7t

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Re: Debt Priortization
« Reply #12 on: October 16, 2014, 09:57:06 AM »
Thanks all, and sorry for the delay. The profit from the home sale was approximately $40,000. Total savings just under 150,000. We will be buying a house at some point, but it depends on if we decide to stay in our current location or move. I would like to have at least 30% down on a house, and would like more. Obviously that figure is largely dependent on home and location. I hate the feeling of having any debt, but am risk averse, and like to stay liquid. Nor sure why, just preference.

The idea of maximizing a down payment is intriguing, but wonder if I would be missing out on the interest deduction.

Thanks again for the feedback.
With current rates on 15 year mortgages, the interest deduction, while nice, isn't what it could be.  Lowering your mortgage with a high downpayment and increasing your tax advantaged savings (if possible) would probably lead to lower expenses and lower taxes.