Author Topic: Is any of my debt an emergency?  (Read 6661 times)

MustardTiger

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Is any of my debt an emergency?
« on: January 11, 2015, 06:58:36 PM »
Trying to decide if I should be prioritizing any of this debt over investing in tax advantaged accounts.

Debts:

Car Loan (2013 Hyundai Elantra):  $9433 at 2.9%
Student Loan 1: $6125 at 6.55%
Student Loan 2: $6557 at 3.5%
Loan from parents: $8000 at 0%
Mortgage: $71000 at 3.875

Right now I am putting extra money into investment accounts and paying the minimum on all these loans (317,90,90,200 respectively).  I am a teacher and will be eligible for loan forgiveness in 3 more years so I am pretty happy paying the minimum there.  My mom is totally fine with me paying 200/month on that loan but maybe personally I would like to pay that off as quickly as possible.  We are pretty spendy, but thats another question entirely.  Right now we are investing %15 percent if you count my pension.  Take home is ~5k so we are spending another ~15% on debt for the minimum.  After everything this year we will probably have an extra 3-500 a month but we only have around 1k saved for emergencies.  Thoughts?

Bob W

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Re: Is any of my debt an emergency?
« Reply #1 on: January 11, 2015, 07:02:16 PM »
Your debts are fine.  As you say,  you are uber spendy by MMM standards.  Get a serious handle on that.

James

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Re: Is any of my debt an emergency?
« Reply #2 on: January 11, 2015, 07:30:13 PM »
Trying to decide if I should be prioritizing any of this debt over investing in tax advantaged accounts.

Debts:

Car Loan (2013 Hyundai Elantra):  $9433 at 2.9%
Student Loan 1: $6125 at 6.55%
Student Loan 2: $6557 at 3.5%
Loan from parents: $8000 at 0%
Mortgage: $71000 at 3.875

Right now I am putting extra money into investment accounts and paying the minimum on all these loans (317,90,90,200 respectively).  I am a teacher and will be eligible for loan forgiveness in 3 more years so I am pretty happy paying the minimum there.  My mom is totally fine with me paying 200/month on that loan but maybe personally I would like to pay that off as quickly as possible.  We are pretty spendy, but thats another question entirely.  Right now we are investing %15 percent if you count my pension.  Take home is ~5k so we are spending another ~15% on debt for the minimum.  After everything this year we will probably have an extra 3-500 a month but we only have around 1k saved for emergencies.  Thoughts?

First, find out everything about the "eligible for loan forgiveness", and make sure it is a "done deal", not a presumption based on something you have heard or read. Find out the exact details and make sure you qualify and it will happen. That rate on Student Loan 1 is pretty high, so best to pay it off if it isn't going to be forgiven.

Then it becomes pretty personal. Frankly, for anyone that is "spendy" in their behavior, I suggest making any non collateral loan an emergency. The loan from parents isn't costing you anything, but it's costing them something. Best to pay it off unless they recommend you invest money instead. I know paying my parents off wasn't any big deal to them, but I really felt better having done so. Every loan you pay off is a weight off your chest, and making a goal to save every penny and pay off a loan is often easier than saving every penny to set aside in savings. Remember that some portion of this is psychological, it isn't just about the numbers.

The car loan is a fine rate, but having $9,433 tied up in a car probably worth over $12,000 is a poor use of funds. I suggest selling the car to pay off the loan and getting a cheap car to drive. Not something you have to do, we all make our own choices, but I bet in 10 years your future self will wish you had if you don't. That $317 per month would look great building up in your saving rather than dumped out on your driveway and burned...

Figure out what will most get you fired up to stop your spendy ways, savings or paying off loans. That is probably more important than interest rates. :)

aj_yooper

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Re: Is any of my debt an emergency?
« Reply #3 on: January 11, 2015, 07:56:38 PM »
!.   Have you explored getting a lower interest rate on your SL, especially the 6.5%?  The loan forgiveness is a definite argument to keep them on a minimum payment.  Both loans are eligible?  Without loan forgiveness, your 6.5% loan borders on an emergency.
2.  You have a loan on a car, a declining asset.  Not an emergency, just  a dumb way to  get transportation.  Some people save up the money by budgeting for a new car and get the interest on their money rather than pay on a loan.  You could, in some circumstances with a loan, end upside down on the transaction.  You stipulate that you are spendy.  So, how about cleaning this mess up and learn a new way of paying for transportation-save before you need a new one and skip the loan.  Pay it off and quit buying bobbles, flying around to places, and going out or whatever you are doing.
3.  Loan from parents at 0%.  Really, fix this, it's not ok.  I'm a dad.
4.  Your mortgage rate is good.  Congratulations.
5.  You have a start of an emergency fund!  Build this up.  Are your jobs that stable?  Take a look at the Bogleheads personal finance startup kit at:  http://www.bogleheads.org/wiki/Bogleheads®_personal_finance_planning_start-up_kit
So, should you be putting more into your retirement funds?  Well, yeah.  But, like Bob says, fix your budget first and join the party.

Welcome to the forum!



Gin1984

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Re: Is any of my debt an emergency?
« Reply #4 on: January 11, 2015, 08:31:31 PM »
!.   Have you explored getting a lower interest rate on your SL, especially the 6.5%?  The loan forgiveness is a definite argument to keep them on a minimum payment.  Both loans are eligible?  Without loan forgiveness, your 6.5% loan borders on an emergency.
2.  You have a loan on a car, a declining asset.  Not an emergency, just  a dumb way to  get transportation.  Some people save up the money by budgeting for a new car and get the interest on their money rather than pay on a loan.  You could, in some circumstances with a loan, end upside down on the transaction.  You stipulate that you are spendy.  So, how about cleaning this mess up and learn a new way of paying for transportation-save before you need a new one and skip the loan.  Pay it off and quit buying bobbles, flying around to places, and going out or whatever you are doing.
3.  Loan from parents at 0%.  Really, fix this, it's not ok.  I'm a dad.
4.  Your mortgage rate is good.  Congratulations.
5.  You have a start of an emergency fund!  Build this up.  Are your jobs that stable?  Take a look at the Bogleheads personal finance startup kit at:  http://www.bogleheads.org/wiki/Bogleheads®_personal_finance_planning_start-up_kit
So, should you be putting more into your retirement funds?  Well, yeah.  But, like Bob says, fix your budget first and join the party.

Welcome to the forum!
That really depends on her parents and her.  Not all families operate the same way.

aj_yooper

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Re: Is any of my debt an emergency?
« Reply #5 on: January 11, 2015, 08:53:37 PM »

[/quote]
That really depends on her parents and her.  Not all families operate the same way.
[/quote]

I think they all operate pretty much in a similar way.  A 'spendy' budget and a family loan does not make for good family and personal relationships generally.  If it is a gift, fine.  Otherwise...


kathrynd

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Re: Is any of my debt an emergency?
« Reply #6 on: January 12, 2015, 06:49:57 AM »

That really depends on her parents and her.  Not all families operate the same way.
[/quote]

I think they all operate pretty much in a similar way.  A 'spendy' budget and a family loan does not make for good family and personal relationships generally.  If it is a gift, fine.  Otherwise...
[/quote]

I agree with you.
No one likes to see someone spending money on wants, when they haven't been paid back.

Pay it back asap, that way if you need to borrow money in the future, it wouldn't be a concern.

viper155

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Re: Is any of my debt an emergency?
« Reply #7 on: January 12, 2015, 07:26:09 AM »
You should call Dave Ramsey....I would love to be listening when he rips you to shreds

I'm a red panda

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Re: Is any of my debt an emergency?
« Reply #8 on: January 12, 2015, 08:14:58 AM »
I would make paying back your parents a priority.  Yes, it is no interest- but if you are doing ANYTHING that is non-frugal, it builds resentment.  Since you call yourself spendy, this could become an issue with your parents, even if they don't say anything.

Plus paying it back makes it more likely they will help you in the future.

Then start focusing on highest interest rate. (The "snowball" of lowest debt makes no sense to me... though in your case it looks like either  theory would align)

Bob W

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Re: Is any of my debt an emergency?
« Reply #9 on: January 12, 2015, 08:24:45 AM »

That really depends on her parents and her.  Not all families operate the same way.

I think they all operate pretty much in a similar way.  A 'spendy' budget and a family loan does not make for good family and personal relationships generally.  If it is a gift, fine.  Otherwise...
[/quote]

I agree with you.
No one likes to see someone spending money on wants, when they haven't been paid back.

Pay it back asap, that way if you need to borrow money in the future, it wouldn't be a concern.
[/quote]

I'm a father of 5 adult children.  I cringe every time they buy a latte or take an expensive vacation.  We dumped tons of money into them (not loans --gifts).     Yeah, parents want to see their children be wise with money. 

Bottom line it is very hard to advise adult (stepchildren) children about money.  So I will advise you instead.

But in the case I agree that Dad would be happy and proud when you paid him back the 8K.

So my advice on this issue is that you do whatever it takes to get 8K together in the next 4 months.  Get and extra job,  cut everything!  Then pay the 8K in one check.  Easter dinner will taste a whole lot better when you hand them the 8K check on that day.  (Is that Dave Ramsey enough?)

You should also thank your lucky stars that you have family that loves you and has enough money to loan you 8K.  That is very rare. 

So, I'm back peddling on my original post and suggesting that your family loan of 8K is indeed a hair/house/car on fire emergency.   Get out the biggest hose you have and put that baby out asap!

Lmoot

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Re: Is any of my debt an emergency?
« Reply #10 on: January 12, 2015, 08:42:53 AM »
I personally would not be comfortable having that much debt, owing that much money to family for that long, or having those interest rates. No reasonable amount of investments would change that.

I agree with paying the minimum back on the loans if forgiveness is imminent, even the higher % one. Pay your parents back and throw at least a goodwill 1% cherry on top of it. Get.rid.of.the.car.loan. If you are spendy and borrowing thousands of dollars from people, don't buy new cars. Get a reliable used model for well under 10k and drive it into the dirt. If you didn't have the other stuff then I don't care what car you buy, but I would feel let down if someone I lent a large amount of money to bought a new car, when I myself have never owned one (nor have a desire to).

I don't know how old you are but I'm sure your parents are at or nearing retirement age and probably would like that 8k back to solidify some short-term plans they have...whether they say something or not. They could be waiting on that 8k before making certain financial commitments or decisions. If they could afford to gift it to you, I'm sure they would; the fact that it's a loan and not a gift tips me off that they need it.
« Last Edit: January 12, 2015, 08:45:00 AM by Lmoot »

MustardTiger

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Re: Is any of my debt an emergency?
« Reply #11 on: January 12, 2015, 09:24:19 AM »
Trying to decide if I should be prioritizing any of this debt over investing in tax advantaged accounts.

Debts:

Car Loan (2013 Hyundai Elantra):  $9433 at 2.9%
Student Loan 1: $6125 at 6.55%
Student Loan 2: $6557 at 3.5%
Loan from parents: $8000 at 0%
Mortgage: $71000 at 3.875

Right now I am putting extra money into investment accounts and paying the minimum on all these loans (317,90,90,200 respectively).  I am a teacher and will be eligible for loan forgiveness in 3 more years so I am pretty happy paying the minimum there.  My mom is totally fine with me paying 200/month on that loan but maybe personally I would like to pay that off as quickly as possible.  We are pretty spendy, but thats another question entirely.  Right now we are investing %15 percent if you count my pension.  Take home is ~5k so we are spending another ~15% on debt for the minimum.  After everything this year we will probably have an extra 3-500 a month but we only have around 1k saved for emergencies.  Thoughts?

First, find out everything about the "eligible for loan forgiveness", and make sure it is a "done deal", not a presumption based on something you have heard or read. Find out the exact details and make sure you qualify and it will happen. That rate on Student Loan 1 is pretty high, so best to pay it off if it isn't going to be forgiven.

Then it becomes pretty personal. Frankly, for anyone that is "spendy" in their behavior, I suggest making any non collateral loan an emergency. The loan from parents isn't costing you anything, but it's costing them something. Best to pay it off unless they recommend you invest money instead. I know paying my parents off wasn't any big deal to them, but I really felt better having done so. Every loan you pay off is a weight off your chest, and making a goal to save every penny and pay off a loan is often easier than saving every penny to set aside in savings. Remember that some portion of this is psychological, it isn't just about the numbers.

The car loan is a fine rate, but having $9,433 tied up in a car probably worth over $12,000 is a poor use of funds. I suggest selling the car to pay off the loan and getting a cheap car to drive. Not something you have to do, we all make our own choices, but I bet in 10 years your future self will wish you had if you don't. That $317 per month would look great building up in your saving rather than dumped out on your driveway and burned...

Figure out what will most get you fired up to stop your spendy ways, savings or paying off loans. That is probably more important than interest rates. :)

I have been over the loan forgiveness stuff several times to make sure, and I will qualify after 3 more years.  My car is a 2002 Acura that has been paid off for 8 years and is in very good shape.  The Hyundai is my wife's car, and that is not a battle I would like to fight.  I am just happy I talked her into the 40mpg Elantra over an SUV.

Goldielocks

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Re: Is any of my debt an emergency?
« Reply #12 on: January 12, 2015, 09:52:20 AM »

That really depends on her parents and her.  Not all families operate the same way.
[/quote]

I think they all operate pretty much in a similar way.  A 'spendy' budget and a family loan does not make for good family and personal relationships generally.  If it is a gift, fine.  Otherwise...
[/quote]

+1000.

Pay your mom. Now.

Spendy+ parent loan = very poorly acheiving child

slugline

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Re: Is any of my debt an emergency?
« Reply #13 on: January 12, 2015, 11:01:24 AM »
MustardTiger, are any of your tax advantaged accounts an employer retirement account with employer matching? Getting that match would probably be the only thing I would consider before attacking the debts.

charis

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Re: Is any of my debt an emergency?
« Reply #14 on: January 12, 2015, 01:29:58 PM »
You don't get "enrolled" in the PSLF.  You have to make 120 eligible payments, which means payments under a qualified plan while you are an eligible employee (ie, in public service). 

I don't know what you meant by registering your employment records etc, but under the PSLF, you need to get an employment certification from each employer during the relevant period.  I have done this, you get the form online, fill it out, and have your employer sign it.  If you had one employer the entire period, it takes basically 5 minutes or less.


Señora Savings

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Re: Is any of my debt an emergency?
« Reply #15 on: January 12, 2015, 01:57:58 PM »
Right now we are investing %15 percent if you count my pension.  Take home is ~5k so we are spending another ~15% on debt for the minimum.

I wouldn't count the pension in your savings rate.  There's some uncertainty in whether or not you'll actually get it at it's full value; a lot can change in 30 years.  You also may not end up getting all of the benefits of it if you switch jobs by choice or necessity.  Make sure that you have a true 10 or 15% savings rate before adding in any luxuries.

I also wanted to add that plenty of people, even on the forums, spend more than 2.5k per person.  It's a positive that you recognize that you're spending a lot of money.  Sure, you'll be better off in the future if you can bring it down to 1k  each, but you're much better off than someone spending 5k and complaining that their budget is 100% life essentials.  The first step in the quest for frugality is recognizing that you're spending a ridiculous amount of money.

And pay your Mom back before you invest.  I know so many people that won't tell their kids to pay them back but complain to friends.  Maybe your family is different, but you don't have anything to loose by paying it back.

MustardTiger

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Re: Is any of my debt an emergency?
« Reply #16 on: January 12, 2015, 02:29:18 PM »
Ya I am really seeing the importance of getting that debt to my parents paid.  I don't think I want to stop my retirement contributions but will start to put everything extra to that each month.  Asked my mom for the balance and it is actually 7,125.  Going to set a goal to get it paid off in 2015.

Señora Savings

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Re: Is any of my debt an emergency?
« Reply #17 on: January 12, 2015, 03:18:31 PM »
Nice!  Good luck getting that paid off.  It will also get you in a habit of saving more if you can put the $600 you were sending her every month into an IRA next year.