Long-winded age old question... my personal debt versus investment situation

[thelamb]

Late 2012, I bought a house and immediately began a major (hopefully fruit-bearing) remodel.  I put down 20% and then financed the remodel, mostly with a HELOC and a Home Depot CC (2-year intro @ 0%).  This went well but fairly over budget and by the end of Q1 2013, I was looking down the barrel of ~$84k in debt.  This included a car loan, student loan, and a couple 0% CCs to pay for an ongoing lawsuit.  The rest was the remodel. 

Since, much thanks to MMM, I’ve slashed expenses, even ditched my car altogether and am @ ~$40k in debt, most of this achieved in last 4-6 months.  I aim to be debt free by 2015 (not including mortgage).  I max out my 401k, throw all extra cash at the debt, and rely on the HELOC in the event of a catastrophe.  All liquid assets are in various retirement accounts. 

Right now the debt looks like this:
CC 1 - $2k, 0% till September then something stupid
CC 2 - $4k, 0% till January then something stupid
Student loan - $3k, 3.5%
Home Depot CC - $20k, 0% till January then incredibly stupid
HELOC – $11k, 4.24% - this has a $28k limit

I’m questioning if/when to pull up on the debt pay down to begin saving and investing again.  I feel my current plan misses out on any market opportunities.  Conversely, the various 0% loans are ticking time bombs.  At a minimum, I have to be under $28k by 2015 at which point the HELOC could be maxed out to eliminate all the other debt, leaving a single balance at 4.24%.  Also, I sometimes rationalize that the remodel debt is balanced against home equity not against more liquid assets. 

The way I see it, there are three options:

Option 1 – Stay the course.  Psychological benefit of being debt free and able to maximize savings, but a year before I can progress down that path. 

Option 2 – Pay monthly “minimum”, an amount to get under the $28k by year-end.  Would increase savings now but could mean paying down debt for up to 2-3 years. 

Option 3 – Stay the course until under then switch to the minimum.  A hybrid.  I like the idea of getting into a “safe” zone and then reallocating. 

What say you?  Other options welcome.

[Catbert]

As a minimum I would figure how much needs to be paid each month on the 3 0% cc's so that each is paid off when the % rate goes to "something stupid".

I would not plan to max out your HELOC so you can invest.  What if you have an emergency?

[ZiziPB]

I would suggest paying off the CCs by the end of the year (or by September for the one going up then), and then continuing the student loan and HELOC on a slower schedule since the interest rates are not bad.  I agree with the prior response about not maxing out HELOC.

[thelamb]

To be clear, the two small CCs and the student loan are on a scheduled paydown to be gone by end of year or by the date in which the rate explodes, thus just leaving the HD CC and HELOC to fret over.  I pay the min on HD CC but then pay every last penny into the HELOC since it has the highest rate and can be used at any time to absorb the others.  If I stick to my plan, the HELOC will reach 0 by middle of year, leaving the full $28k for emergency, and focus will shift to the HD CC.

If I went to the "minimum" approach, yes I would, at year end, when I absorb the remaining debt, lose the $28k for emergency, but I would by then have saved around $15-20k in a vanguard fund, which becomes the new emergency. 

I also have reasonable amounts in retirement and can always sell the house, if true catastrophe strikes. 

All that being said, the concern over not having emergency funds is noted and appreciated. 

[Cheddar Stacker]

If I understand correctly, you can wipe out all debt other than Home Depot credit card by the middle of 2014? (you said "the year" below, so I was a bit confused)

If that's the case, stick to your plan and get it done. 6 months of opportunity cost is not worth the stress of carrying the debt. Yes, you could "beat" the 4.24% if you invested correctly, but you could also see the market take a hefty dip and lose 10%. Even if the market runs up 15% over the new six months, it's only six months and you can get in afterwards.

With that said, I don't have any major problem with #3 - the hybrid option. Get down to the safe zone, plus maybe another 10% safety margin, then slow down the HELOC pay down. I would avoid option #2 unless you have a very low risk, high return scenario like rental real estate.

Either way, congrats on finding MMM. I'm relatively new to the site also, but it's re-ignited my frugality muscles and opened up a whole new world of optimization.

[thelamb]

Wow, it's been two months.  Things are moving along and I'm curious what opinions will be now--if I slow down debt pay down a tad and increase savings by the same amount or stay on track.  Here's where I'm at now:

cc1 - paid off
cc2 - $3.6k, 0% till end of year then spikes
student loan - $1k, 3.5%, wiping out next month
HD CC - $19k, 0% till end of year then spikes
HELOC - paid off

So roughly $24k.  When I posted two months ago I was at $40k.  I have ~$3k a month leftover to either pay down or save/invest and access to a HELOC (@ 4.24% and a $28k limit) that is now fully paid off. 

Does everyone think I should just keep putting all $3k towards the remaining debt, getting me out in about 8 months or
come up with a more balanced approach featuring some investing?  Anything left over at end of year goes into the HELOC.  I'm still maxing 401k, my retirement portfolio balance is at roughly $150k, and then I have zero in terms of a savings account or taxable investments. 

Thanks

[aj_yooper]

Payoff the "hair on fire" cc debt!  Stick with your plan.  Think of the free cash flow when the job is done and you can start investing. 

However, you should have some cash type reserves so you don't have to do the 0% cc gamble again.  For me, it is a better and more mature way of managing assets and not increasing the riskiness of necessary expenses that will happen.

[Prairie Stash]

I have a HELOC, that's my emergency savings (somewhere north of $150K for me). With your ample cash flow, you don't need  real savings account, that's for chumps not saving several thousands/month. 

A 0% cc isn't a gamble either.  When comparing debt, your future interest rate is the HELOC rate on all debt (with 0% till then). I think of it as true rates not hypothetical cc rates.  I assume you're smart enough to transfer balances a week before the deadline.

The conservative approach is I would pay off the student loan.  Then switch to investments. At the very least the investments should be a high interest savings account (or term deposit), I like getting a few hundred dollars in free interest. In December you can flip the money onto the debt, pocket the interest and buy yourself a present (perhaps mustache wax?).

[thelamb]

@Prairie Practicality - that seems sensible and was what I was getting at.  I guess I'm questioning the pay off all debt at all costs approach, especially considering the bulk isn't only low interest, it's no interest.  Emotionally, getting it all off the books would be awesome, but the math makes sense the other way too. 

I broke down a scenario.  If I stay aggressive, wipe out all but the HD CC over the next month or so then switch to $1k/mo toward the 0% debt and $2k/mo into a basic index fund, I would end the year with $12k invested & $12k in my HELOC and then continue on same schedule.  The next year (2015) of paying down the HELOC would cost me $275 in interest (which, since it's a HELOC is tax deductible) while that $12k invested could earn somewhere between $600-$1k.  And hell, transferring to yet another 0% is an option.

[Cheddar Stacker]

$16K paid off in 2 months is damn impressive - nice work.

I like the new approach you just suggested. Get it down to 1 debt, keep hitting that debt but invest at the same time. It's down to a managable amount now, or will be in a month or two, so you should slow down once you feel comfortable.

[reachfield]

Make sure to pay off the HD card before the date the rate expires. Usually they'll charge all accumulated interest since the purchase date if you don't pay it off in time.

[Willbrewer]

Make sure to pay off the HD card before the date the rate expires. Usually they'll charge all accumulated interest since the purchase date if you don't pay it off in time.

I was just about to post the same thing. If it was one of those special "No Interest for 12 Months" deals, that's normally the terms. If it's not paid off by the end of the special rate cutoff, all the accumulated interest is added to the balance. Check the last statement. It should show the accumulated interest amount.

[thelamb]

Make sure to pay off the HD card before the date the rate expires. Usually they'll charge all accumulated interest since the purchase date if you don't pay it off in time.

Thanks for the warning.  Not too worried.  If need be, I'll use the HELOC to pay off weeks before the expiration.  I've been gaming 0% cards for years.  You do have to be careful though so that is good advice. Thanks. 

[Saverocity]

The Slate card from Chase might be a good option, 0% interest plus they also are one of the only that doesn't charge the initial load fee of 3-4%.  Don't let the extended deadline slow your payments down, but it offset that rate leap if you can swap it over.