Author Topic: Expecting available cash flow in the new year. How to allocate?  (Read 1477 times)

Koreth

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Expecting available cash flow in the new year. How to allocate?
« on: December 09, 2015, 12:38:16 AM »
So, this current year, I've been making an extra $200 contribution with each bi-weekly paycheck so to get caught up on HSA contributions for 2015. With my current payroll deductions to my HSA. I'm on track to hit the IRS contribution limit for 2015 and 2016 both Which leaves me with a dilemma -- how best to allocate this now free $400/mo?

Some background. I presently have 3 debts on my books. 1 credit card with $2000 on it at 0% interest until Jan of 2017,  1 credit card with 3500 on it at 0% until June of 2017. and $44,000 in federal student loans at 6.75%. I am presently paying $250/mo on the credit cards in an effort to get them paid off quickly. I know I could easily lower payments and stretch those balances for all of 2016, but I want my debt *gone* and my cashflow back.

I also have two tax-advantaged accounts at present. A 401(k) through work with lackluster fund options and professional management from Stadion with expense ratios at least 1% if not higher (Vanguard has spoiled me). I presently contribute $3750 to this a year. There is no employee match. I also have a tIRA through Vanguard that I stuffed 401(k)s from former employers into. I presently contribute to that the $40/mo that was shaved from the budget when I cancelled the gym membership and bought a bike instead. Pathetically lackluster, I know, but it ain't nothin' at least.

Here are the scenarios I've considered.

Scenario 1a: Max 401(k) contribution to the IRS limit, then debt snowball
 I've run the numbers through a paycheck calcualtor, and this should lower my take-home pay by about $400. Little else changes from a day-to-day cashflow perspective. money remains tight due to those damn credit cards, but I at least max out the 401(k) for 2016. Credit card 1 gets paid off in August. Allocating that $250 to credit card 2 gets it paid off in November.

Scenario 1b: As above, but prioritize the tIRA.
When Credit Card 1 is paid off in August, allocate that $250 towards my tIRA, stuffing an extra $1000 before year end. CC2 is paid off Mar of 2017, before the 0% interest expires.

Scenario 2: Max tIRA, snowball the rest.
Set my tIRA contributions at the beginning of the year (a little over $200 bi-weekly) to max out the $5500 IRS limit. The remaining free $200 gets added to CC1's payment for a total of $450 a month. CC1 is paid off in  May. Fold that $450 into CC2's payment, bringing it to $700. CC2 is paid off in August.

Scenario 3: Maximum snowball. Die, debt! Die!
Allocate the $400 to CC1 to bring it's payment to $650. It is paid off in March. Allocate that $650 to CC2 to bring its payment to $900. CC2 is paid off in June. Don't think just because you're huge that means you're safe, Student Loans...

Obviously, Scenario 1, in both variants leaves me with the most net worth at the end of the year, but will leave me with the tightest cashflow, and those damn credit cards hanging over my head as a source of stress. Scenario 3 leaves me with the least net worth at the end of the year, gets rid of the credit cards the fastest and knocks out a good chunk of the student loans. This also leaves me with the most flexible cash flow should unexpected events occur. Scenario 2 strikes me as a good compromise between the two. Delaying the payoff of the credit cards by only 2 months gets me a full tIRA, and still plenty of flexibility in cashflow to meet unexpected events.

I'm feeling inclined to go with Scenario 2, but was wondering what you guys would recommend.

Playing with Fire UK

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Re: Expecting available cash flow in the new year. How to allocate?
« Reply #1 on: December 09, 2015, 02:13:36 AM »
I'm very comfortable with 0% credit cards, so YMMV:

I would work out what the balance will be on each credit card ( the balance less the minimum payments) on the month the 0% runs out. I'd then count back from January and June 2017 to work out when I need to start saving the $400's to pay of that (which I would do in 'high' interest savings or current account - if there are any available). If I was making anything more than the minimum payment now I'd reduce that and recalculate. If I was concerned about job security I'd save the $400's in a savings account until I had the full balances and then turn to 401k or tIRAs. If you are concerned about the discipline of spending again, this has the potential for disaster and is not recommended.

Before then, I'd send all of the $400 to the Student loan, unless I thought I was an investing genius or the tax benefits were too good to ignore (more than 6.75% after tax of benefit, I think this wins for the tIRA? ) or that the Student loans will be written off at some point (no idea about the US, but in the UK I minimised my SL payments due to the low interest and terms).

====================

As your concerns are with cash flow, would you feel better about letting the CC debt continue if you had an Efund/cash savings with the balance of the CC in it? You could then dump whatever you don't need into the tIRA the day before the deadline.

If you really want the CC's gone, I would vote for Scenario 2. It would be a shame to not max the tIRA and not save any interest. [I don't know enough about the US to have an opinion on 401k vs tIRA apart from that it sucks not to have an employer's match]

Catbert

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Re: Expecting available cash flow in the new year. How to allocate?
« Reply #2 on: December 09, 2015, 11:54:55 AM »
Is there a reason you aren't concerned about paying off your SLs?  Are you in one of those situations where they will disappear after a certain point? 

Personally in your situation I'd figure out how much I'd need pay monthly to have the CCs paid off a month before the 0% interest is up.  Then set it up so that those payments are made automatically.  Then I'd take the remaining money and split it between tIRA and SLs.  It sounds like you have multiple SLs all at the same interest rate.  Is so, pick the one with the smallest balance.

Also keep your eye out for additional 0% CC offers and transfer part of your SLs.

Koreth

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Re: Expecting available cash flow in the new year. How to allocate?
« Reply #3 on: December 09, 2015, 03:17:50 PM »
I actually am worried about paying down my student loans. I didn't mention the payment details on them because they are a permanent top-priority fixture in my financial plan, right up there with food and rent.

I like your idea of paying down the student loans faster with balance transfers to 0% promo interest credit cards. Unfortunately, that ship sailed years ago, as I consolidated my loans after I left college. Were they still in individual $2-3k chunks, it might be viable. However, I did the math on this earlier in the year, and unless one can transfer the whole balance at once, balance transfers don't result in the loan paying down any faster than simply making extra payments in the amount of the balance transfer. Not worth the extra work of acquiring and managing another account, or the risk of running out of the promo period before the loan amount is fully paid off. Never mind that getting $44k worth of 0% credit cards isn't very likely at this stage.

That said, I like the idea, and will keep it in my back pocket. In a couple years, when a chunk of my student loans has been paid down, I'll take another look at this. If I can get enough 0% credit cards and have enough cash flow to pay them down before the promo period ends, I might go for it.