Author Topic: Help me spend my bonus check?  (Read 9841 times)

kythuen

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Help me spend my bonus check?
« on: November 26, 2012, 01:52:44 PM »
I picked up a $2000 bonus payout at work this morning, and I'm not sure what to do with it.  I'm at negative net worth (and how) so it's really just a question of who to send the money to.  I'm in a lot of debt, but only from three sources, so my options are:

1) Big principal payment on my car loan (very high interest due to bad credit) - I have $11,700 still outstanding.  This loan is what I plan to pay off first, but I can pay it off in 7 months without this extra chunk.  I just got this car in February - it's a new Toyota Yaris.  When I first started reading MMM I thought about selling it and buying something far cheaper with no loan, but decided instead to just keep this one until the wheels fall off.  I DID stop driving it to work, which eliminated the need to spend a lot on gas or anything at all on parking. 

2) Pay off most of my old 401(k) loans (one partial, one in full).  I have two, that I got when I was still young and stupid (last year) - one for $3000 remaining, one for $1000 remaining.  These are low interest, but they come out of my paycheck in fairly large chunks per month.  Plus, the loan money is not currently earning me anything.

3) Pay a chunk of one of my two student loans.  These are also fairly low interest, 4.19% I think.  One is for $6000, the other is for $60,000.  Both are currently in deferment until October 2013.  I'm paying interest only while paying off my car loan.

My plan to get my financial house in order is basically to throw half of my take-home pay at the debt every month while contributing 3% of my income to my 401(k) to get the full employer match.  Minus that and $2500 in my FSA (I'm expecting ankle surgery this year), that's about $1600 of debt reduction per month. 

My biggest question, I guess, is what's the best order to do this in?  I'm fairly sure the student loans should come last, but should the car go first because it's higher interest, or the 401(k) loans so the money can be working for me again?  I don't have any credit card/consumer debt, thank goodness, and don't plan to get any; I have a couple of credit cards that I am using to build credit (paying off monthly) just for groceries and gas, but that's it.

Any ideas welcome.  :)


Another Reader

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Re: Help me spend my bonus check?
« Reply #1 on: November 26, 2012, 02:01:52 PM »
You have a lot of debt, and my priority would be to get rid of the high-risk 401k loans first.  Lose your job and they immediately come due.  I would then focus on the car loan, throwing all the money from the 401k loan payments at that until it's done.

However, I might also consider the alternative of funding an IRA for 2012.  Yes, the debt needs to be paid off, but once the opportunity to fund the IRA passes, there is no going back.  I would look at what's coming up between now and April 15, 2013 to see if there was some way to squeeze out some extra money for that now that I have the bonus in hand.

Jason G.

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Re: Help me spend my bonus check?
« Reply #2 on: November 26, 2012, 02:16:13 PM »
Putting it toward the car loan is your best bet. It has the highest interest rate, so that gets you the best payoff in terms of future interest you don't have to pay. You're basically borrowing money from future paychecks at your lower 401k loan rate and using that pay down your higher-interest car loan now.

One possible concern is that 401k loans usually require that you pay back the loan in its entirety either immediately or very quickly if you lose your job. If you're not worried about that happening, or you have savings of some kind that could cover it, I'd wait to pay off the 401k loan until after the car loan is paid off. It sounds like even if you lost your job tomorrow you could at least sell your car and pay off the 401k loan.


twinge

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Re: Help me spend my bonus check?
« Reply #3 on: November 26, 2012, 02:32:26 PM »
Given that you're operating on a 50% savings rate, I think you have some options.
If you can pay off 11,700 for  the car in 7 months you've got a decent cashflow surplus now and likely could also pay off the 4K 401k loans on the off-chance you lost your job in the interim.   Thus given that the car interest rate is the highest I would suggest throwing the money at the car paying off even earlier and then redirecting that money at anything that's left on your 401k loans.   

I agree with AR too about considering setting a goal of putting at least some money in a Roth (or traditional if that makes more sense for you depending on income level/tax strategies) IRA by April 15, 2013.  Maybe you could throw the bonus 2K at the car now to accelerate re-payment/reduce interest costs and then use whatever surplus that buys you in your original 7 month repayment plan to fund the IRA in April.  That's mainly to catch the deadline and it will feel positive to have a new tax-advantaged account growing for you and will also give you a smart and already set up account to put your money in as you pay off these old debts.

matt_g

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Re: Help me spend my bonus check?
« Reply #4 on: November 26, 2012, 03:25:24 PM »
I like the debt snowball approach.  Regardless of the mathematics, it will keep you focused.  Once the loans start coming close to paid off, it will increase your intensity to pay them off.

1. Pay off 401k Loans
2. Pay off Car.
3. Pay off $6k Student Loan
4. Pay off $60k Student Loan

Richard3

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Re: Help me spend my bonus check?
« Reply #5 on: November 26, 2012, 05:56:48 PM »
The car loan is clearly the worst debt and should be attacked first. I have no idea about American tax rules, so maybe something IRA might be a good idea but you can get a 7% guaranteed return on that money by paying that sucker back. That's pretty good.

c

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Re: Help me spend my bonus check?
« Reply #6 on: November 26, 2012, 07:23:02 PM »
I like the debt snowball approach.  Regardless of the mathematics, it will keep you focused.  Once the loans start coming close to paid off, it will increase your intensity to pay them off.

1. Pay off 401k Loans
2. Pay off Car.
3. Pay off $6k Student Loan
4. Pay off $60k Student Loan

This is what I'd do and for the same reasons.

Another Reader

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Re: Help me spend my bonus check?
« Reply #7 on: November 26, 2012, 07:30:16 PM »
Getting rid of the 401k loans reduces risk and reduces the required monthly payments.  The flexibility of more net cash every month has a lot of benefits.  Decisions are yours to make when required payments are not making them for you.  That's why I would go with the debt snowball approach, even though I would incur a little more interest expense.

kythuen

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Re: Help me spend my bonus check?
« Reply #8 on: November 26, 2012, 07:35:46 PM »
Lots of good advice here - thanks!  For future reference, it would be easier if next time you could all agree with each other.  =D

The info about paying back 401(k) loans upon being let go/moving on is a good reminder.  I have no concern about my job right now - I'm on a really good track at work, well-respected and expecting a promotion sometime in the next couple of months.  And my company is growing, not shrinking, so that's also a plus.  Still, the economy is what it is, so it's good to keep this in mind.  I do have other options, though, should those loans come due unexpectedly.

The thought of putting the extra money in a Roth is a great one, and very tempting.  I came really close to doing that just this morning.  But my debt burden is really eating at me, and I want to start getting rid of it right away.  I'll re-evaluate this in early spring (before April) and at that point I'll probably take a month off from extra car payments to fund the Roth instead.

What I'm leaning toward doing right now, after thread-advice, is paying off the $1000 401(k) loan because it has the higher weekly paycheck-withdrawal and because I'll get a lot of satisfaction out of seeing it go away.  I'll snowball that payment toward the car payments. Then I'll put the other $1000 directly toward the car, and leave the student loan payments till last.  By the time I get to the last one, I'll be making more money and hopefully better at living a Mustachian lifestyle, so I'm hoping I can chuck more than $1600 a month at them. 




PJ

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Re: Help me spend my bonus check?
« Reply #9 on: November 26, 2012, 09:14:47 PM »
Lots of good advice here - thanks!  For future reference, it would be easier if next time you could all agree with each other.  =D

What I'm leaning toward doing right now, after thread-advice, is paying off the $1000 401(k) loan because it has the higher weekly paycheck-withdrawal and because I'll get a lot of satisfaction out of seeing it go away.  I'll snowball that payment toward the car payments. Then I'll put the other $1000 directly toward the car, and leave the student loan payments till last.  By the time I get to the last one, I'll be making more money and hopefully better at living a Mustachian lifestyle, so I'm hoping I can chuck more than $1600 a month at them.
 
 
LOL!  Does it help at all that after reading the first few responses, I was planning to suggest paying the $1000 loan off and putting the rest toward the car loan?  And then I realized that you'd already figured out that compromise for yourself!

cdngb

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Re: Help me spend my bonus check?
« Reply #10 on: November 26, 2012, 11:45:04 PM »
Keep ten percent for yourself and pay the balance against any debt that you wish. We all need rewards as it is really tough to grind for a long period of time.

Good luck

AlexK

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Re: Help me spend my bonus check?
« Reply #11 on: November 27, 2012, 12:15:26 AM »
I don't consider a 401k loan to be debt at all because you borrowed the money from yourself and you are paying yourself the interest on it. If you do lose your job and don't pay back the loans they are taxed as income. Big deal, that's not likely to happen and it plays out just the same as if you never contributed the funds into your 401k in the first place (except the income is added in one tax year).

Your 401k loans are so small it doesn't matter anyway but from the responses above it seems there are some misunderstandings about them.

Math says pay off the highest interest rate loan first.

thurston howell iv

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Re: Help me spend my bonus check?
« Reply #12 on: November 27, 2012, 06:53:16 AM »
I know it may not be popular but, if you've stopped driving this new car for the most part; why are you paying a car payment to have it sit in your driveway? This car is theoretically worth about $15k or so. Sell it for $13.5. Pay the loan off (improve your credit score) then, pocket the remainder which you can use to buy a "new to you" used beater.  Since you rarely drive it anyway, it makes more sense to me to have a paid off beater for when you need it rather than a fancy new car that sits and takes your money. 

If you did that, the car wouldn't even be a factor anymore and you could divert the $11.7k you were going to give to the car- over to paying down one of the higher interest debts.  Basically speaking, you could pay off the 401k and the student loan debt in less time than it would have taken to pay the car off AND you'd already be into paying down the big student loan....

Worst case scenario, you could always "upgrade" the beater after you've paid the bills and gotten out from under your debt emergency. 

Just my .02. Good luck.

grantmeaname

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Re: Help me spend my bonus check?
« Reply #13 on: November 27, 2012, 12:31:47 PM »
I'm with Thurston Howell. You can't afford a $15,000 car.

kythuen

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Re: Help me spend my bonus check?
« Reply #14 on: November 27, 2012, 04:08:09 PM »
PJ - HA!  Yes, it helps a lot.  :)

Thurston & grantmeaname - You're absolute right about the car, but there are some extenuating circumstances.  If I can find something completely reliable to replace it, I plan to do as you both suggest without blinking! But though I don't use this for work anymore, I do still need it to get back and forth to my elderly father's home several times a week, in a neighboring town, to run errands for him and help him get to doc appointments and whatnot.  I'm leery of switching to something less reliable just as winter's about to hit.  But if I can find something I trust, I'm totally willing.

grantmeaname

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Re: Help me spend my bonus check?
« Reply #15 on: November 27, 2012, 04:25:18 PM »
I drive a ten-year-old car from a notoriously unreliable manufacturer and it's never broken down on me in 40,000 miles of driving. Even a car that breaks down 'a lot' may have like two events a year. Take the $12,000 you're saving on a cheaper car, and if you can spend less than $3,000 on a tow and taxi each time you'll come out ahead. You could get AAA for $50 bucks and you'd have enough left over to buy another 239 years worth of it!

mlipps

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Re: Help me spend my bonus check?
« Reply #16 on: November 27, 2012, 06:59:06 PM »
Do you have any emergency fund? I'm a big fan of this method from Bogleheads of "holding" space in a Roth IRA with (non-invested) emergency funds, then investing it once you have money outside the Roth for emergencies. Details here:
http://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund

I think your plan is sound, but I agree you should ditch the expensive car. The only tricky thing is that when I tried to buy an inexpensive ($3-4k) car last year, I couldn't get anyone to finance it (at least not at a rate I wanted to pay). If you can overcome that hurdle, it definitely makes sense to replace the car.

sheepstache

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Re: Help me spend my bonus check?
« Reply #17 on: November 27, 2012, 07:51:00 PM »
Can I just say since nobody else has yet, how delightfully mustachian it is that by "help me spend my bonus" he doesn't mean "help me spend my bonus at the mall."

Vahla

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Re: Help me spend my bonus check?
« Reply #18 on: November 28, 2012, 02:06:42 PM »
Can I just say since nobody else has yet, how delightfully mustachian it is that by "help me spend my bonus" he doesn't mean "help me spend my bonus at the mall."
Came into the thread expecting the mall based on Title but then remembered what forum I was on!  Lots of good advice.  If you aren't changing the car then I would say burn the 1k loan and then go for the car.

kkbmustang

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Re: Help me spend my bonus check?
« Reply #19 on: November 28, 2012, 07:20:01 PM »
Can I just say since nobody else has yet, how delightfully mustachian it is that by "help me spend my bonus" he doesn't mean "help me spend my bonus at the mall."

+1 for this. Love it.

kythuen

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Re: Help me spend my bonus check?
« Reply #20 on: January 22, 2013, 02:25:50 PM »
Resurrecting this long-lost thread for an update.  :)

Unfortunately, my bonus check got spent on an emergency visit to take care of some stuff down South for my aging father. I felt like a drain opened up at the bottom of my bank account.  Between the flight, the hotel, legal expenses, and cleaning expenses, I was down $1000 before I left. 

And I also adopted his 14-year-old cat (which I foisted upon him and my mom 14 years ago as a kitten) because he can't really care for it anymore.  I had to get him checked out by a vet to travel with him, and I paid for a senior blood panel while I was there because I wanted to be sure he didn't have really costly hidden health problems (diabetes, cancer, thyroid issues, etc).  It was a lot cheaper in Louisiana than it would have been in New England, and as it turned out, he was in glowing health.  Kind of amazing, given the randomness of the care he'd been receiving from my dad and brothers.  With all of that, plus a carrier the airline would accept, plus the cost of no-kill sheltering my dad's other cat (far too old and unhealthy to bring with me), that was another $500 gone. 

That was a pretty crazy December.  Still dealing with family issues - what I should take on, what I shouldn't, what my dad will *let* me do, etc.  But at least for now, I'm in a lull.

The big news is about my car!  So, I started in this thread completely unwilling to consider selling it.  But the pressure of logic (and reading all the many responses to advice requests that start with "First, sell yoour car) finally got to me.  I had my car appraised at Carmax weekend, and they offered me about $500 less than what I currently owe on it.  So - I sold it to my room mate, who offered what I owe plus two free months of rent, which will make me a very happy non-renter in Feb and March!  The total comes to around 13K.

I might have made more money on a private sale to a stranger, but my room mate wanted to keep this car "in the family," and I wanted to not spend a lot of time meeting strangers.  So I think it's all worked out pretty well, even if some of the benefits are in non-financial spheres.  And I'll still get to drive my ex-car now and then, so that's a plus. (Though I've also enrolled in Zip car to avoid straining the relationship by always "borrowing" what she's just bought from me.)

Anyway, I just wanted to let you guys know that your advice was heard and heeded - I'm now in $11.5k less debt than I was when I started this thread, and two rent-free months will allow me to make significant inroads in the remaining debt by spring.  Plus, without car payments, insurance payments, and gas costs, I'll be throwing around $1600 at my student loan debt every month. 

Unbury.me tells me I could be debt-free by 2017.  THAT is extremely exciting.  :)

marty998

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Re: Help me spend my bonus check?
« Reply #21 on: January 22, 2013, 02:33:20 PM »
awesome stuff about the car. well done and keep it up.

Hope you're father is doing better.


Another Reader

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Re: Help me spend my bonus check?
« Reply #22 on: January 22, 2013, 03:22:45 PM »
For once, the light at the end of the tunnel is not an on-coming train!  Congratulations on your progress and your plan to be debt free.

NWstubble

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Re: Help me spend my bonus check?
« Reply #23 on: January 22, 2013, 11:47:47 PM »
I'm now in $11.5k less debt than I was when I started this thread

The power of the supportive MMM community and one being open to alternative solutions is demonstrated once again.

Keep up the good work!