Author Topic: Invest or pay down debt emergency?  (Read 2527 times)

Eloaire

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Invest or pay down debt emergency?
« on: December 02, 2013, 10:52:52 PM »
Hi Everyone! I am very new here and so glad I stumbled upon MMM!  I need some advice but let me just give you a brief history first...

My husband and I both had full time jobs (He still does) paying average salaries for about 5 years..all the while, not budgeting at all and continuing to keep about $500-$1,000 of debt on our credit cards (I totally thought this was normal and not worried at all...CRAZY!).  This all finally stopped when I found out I was pregnant.  I realized I would want to quit my job and I had to figure out if we could make it on one salary.  Finally, I started working on a budget.  This took me a really long time to figure out (no one ever teaches you about this stuff!)  Well, we did it and with the last few months of my paychecks we paid off our debt and had our baby!  A few months later we decided to move to another state and started accrueing debt on our cards again.  We are looking at about $15,000 in debt right now..  (ready for the face punches!)  I finally got my act together and perfected our budget so we are slowly paying our debt off right now by $300-$400 each month.  (I know we can put more toward the debt and we are canceling our cable and getting cheaper cell phone service to start.) 

So now here is my question..  I have about $40,000 saved up in a Mutual Fund.  This is money that I've had since I was 2 and remains untouched!  I've never quite known what I wanted to do with it up until now.  My husband has tried to get me to spend it on things like finishing the basement...or buy a new car.. (NO WAY!)  Well now after reading this blog...I so badly want to invest it Vanguard Index Fund...RIGHT NOW!  So what should I do? Sadly use my money for debt (I know it's my own fault) or get started on saving on retirement by investing it?

Your advice would be greatly appreciated! and please try not to be too mean...I'm a Mustachian at heart...I just need to get back on track.  Thanks.

iamlindoro

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Re: Invest or pay down debt emergency?
« Reply #1 on: December 02, 2013, 10:57:18 PM »
We probably should know more about the nature of the debt-- what amounts at what interest rates are probably the most relevant data.

Basically, pure mathematics says that if you can earn a higher return from your investment (8-11% averaged over long periods in a Total Stock Market index fund) than the interest rate on your debt, then you invest.  If your interest rates on the debt are higher (let's say it's mostly credit card debt at 15-30%) then you pay off the debt ASAP.

If it's a mix of each, then you can pay off some debt, and invest the rest.
« Last Edit: December 02, 2013, 11:00:09 PM by iamlindoro »

Argyle

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Re: Invest or pay down debt emergency?
« Reply #2 on: December 02, 2013, 11:43:48 PM »
If it's in a mutual fund then it's already invested. 

I'm not clear as to whether you're working for a salary right now or not.  If you are, then you could transfer part of that money ($5500) to a Roth IRA for this year, which would mean that it grows tax-free.  Then on the first of the year you could contribute another $5500 for 2014's Roth IRA, which would shelter $11,000 of it.  And so on.

I personally wouldn't withdraw that money and use it to pay down your $15,000 debt unless you were very sure you had the strength, frugality, and cashflow to contribute a substantial sum every month to build that $40,000 up again.  You say your overspending has ended, but can you be sure?  Presumably you thought that before, but then you built up $15,000 in debt.  I would be very cautious about assuming that you're going to live frugally, but then not, in which case you'd just be cashing in that $40,000 and having it slip through your fingers, only to end up in the same debt-ridden spot. 

Also -- as I understand it, you and your husband have both been running up the debt.  It doesn't sound as if he's been living frugally and packing his banana to lunch every day and trying to make homemade meals while you're insisting on the Starbucks lattes and the fancy meals out every night.  It sounds as if you're in this together.  Someone gave you some money when you were a toddler, to save for some future purpose.  I doubt they gave it to you to spend on luxuries and to bail your husband out of his habit of spending on luxuries.  I think what would be appropriate would be if he cut back and lived thriftily until he can pay his $7500 of the credit card debt, and you do your part in budgeting and cutting back until you've helped save $7500 toward your part of the credit card debt, and you leave the $40,000 out of it.  That's my vote.

Eloaire

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Re: Invest or pay down debt emergency?
« Reply #3 on: December 03, 2013, 08:49:45 AM »
Thank you both for your replies...you both have good points.

Iamlindoro...I will look into the interest rates on my credit cards.

Argyle...I agree with you about the possibility of running the debt up again..that thought has crossed my mind and was part of the reason of not wanting to use that money to pay down debt.  That money that I've had since I was 2 was money that I actually worked for...I was a baby model in Japan randomly and my parents invested the money I made which I am grateful for.  Obviously debt is that last thing I want to spend it on.  Currently we are not even using our credit cards...Just paying down the debt.  Part of the debt is from buying stuff we don't need but most of it is from medical bills (we finally changed insurance so it is affordable) and moving costs.  We also only budget $30-$50 for going out to eat once or twice a month...we mostly cook at home and I brew my own coffee at home!  Oh..also I am not currently working..I'm going back to school for a different degree. 

Anyway, thank you for your advice.  I will look into my options more.

Catbert

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Re: Invest or pay down debt emergency?
« Reply #4 on: December 03, 2013, 01:17:19 PM »
Before you sell that mutual fund and do anything with it make sure you understand how much tax you will pay.  If it's been in the same mutual fund for 20+ years the capital gains may be sizeable.  Depending on your current income you may want to spread any sale over 2 or more years.  If you are  currently in the 15% income tax bracket and have any room left you could "fill up" your 15% bracket and pay 0% on capital gains.  Once you taxable income and capital gains combined exceed the top of the 15% bracket then you pay the normal capital gains rate of 15%.  (If this all sounds like total gobbdygoop then you might want to have a CPA  figure it out for you.)