Mr Money Soul Patch

[NJAbroad]

Hello all,

I am a new convert to the Mr. Money Mustache lifestyle.  I have just gotten serious about trying to save for retirement this year (I say I because my wife is not quite on board yet).  My wife and I are not young (37 & 39) and have been big spenders over the years.  Luckily we sold a house a couple years ago and was able to pay off all debts (except for motorcycle @ 2.89%).  I began to notice that the debts have started creeping up again and I am looking to put a stop to it.  I have made some moves thus far but would like your input on my plans moving forward.  Below are some details:

Assets
Savings $19574
ShareBuilder IRA $5065
Investments $3035
Betterment  IRA $225 (just started)
2012 Volkswagen Passat (Paid Off)
2001 Fiat Punto (Paid Off)

Debts
Andrews Federal Credit Union $9105 @ 2.89%
BofA CC $5248 @ 0%
Chase Sapphire CC $3964 @ 18.99%
Citi Simplicity CC $3759 @ 0%

Actions: Today I paid off the BoA and Chase Sapphire CCs from Savings leaving about $10K in savings
Future Plans: After paying those 2 cards I have an extra $800 that can be allocated to debt.  My plan is to put the money into savings until it reaches a point I can pay the debt down without dipping below $10K.  With this plan I believe we'll be debt free by March 2016.

Is this plan good or should I just wipe out our saving leaving no emergency funds?  I am in the military and stationed in Germany so the US Air Force pays all my housing expenses and my job is pretty secure, at least for the next 4 years.


Part 2
I have been stressing about retirement as of late pretty hard.  I believe it is because I am in the military and am approaching my 20 year mark (better late than never I guess).  My plan is to retire between 50-55 years of age.  I have gone over several scenarios and have landed on this plan of action.

So after I pay off all debts, I believe we can save between $2-$2.5K a month.  My plan is to contribute to my IRA and open an IRA for my wife (she doesn't work but I heard a spouse can have an IRA) then put the rest of the funds in a taxable Betterment account.  Running the numbers through Betterment and moneychimp.com, We should have about $400K in the taxable account by 55 and about $600K in IRA at 60. 

The ultimate plan is to use the $400K (while still contributing the max to both IRA's) until 60 or 62 then switch to IRA funds.  I believe if I split the $400K over 5-7 years combined with my military pension (est $2100/month) we should do ok.

Are my projections on point or am I missing something huge?

[dandarc]

Why pool in savings first?  Suppose that's an OK plan with the 0% balance, but 2.89% > 1% (guessing that's what you get on your savings), so if paying off all debt is a priority, immediately put any extra into that AFCU loan.  You've already gotten rid of the big problem - the Chase Sapphire balance.

[NJAbroad]

Why pool in savings first?  Suppose that's an OK plan with the 0% balance, but 2.89% > 1% (guessing that's what you get on your savings), so if paying off all debt is a priority, immediately put any extra into that AFCU loan.  You've already gotten rid of the big problem - the Chase Sapphire balance.

Thanks for responding.  I decided to use savings because I figured every month I am making payments is every month I am missing on compounding interest.  Also I downloaded YNAB (thanks to this forum) and I noticed that my Net Worth is the same whether I hold debt and save or pay debt and lose savings.  You make a good point with the Chase Sapphire.  We initially got it for the travel rewards but ended up running into oblivion.  The Sapphire is the reason we have the BofA and Citi card.  We transferred most debt off the Chase to those 0% cards.

[dandarc]

Why pool in savings first?  Suppose that's an OK plan with the 0% balance, but 2.89% > 1% (guessing that's what you get on your savings), so if paying off all debt is a priority, immediately put any extra into that AFCU loan.  You've already gotten rid of the big problem - the Chase Sapphire balance.

Thanks for responding.  I decided to use savings because I figured every month I am making payments is every month I am missing on compounding interest.  Also I downloaded YNAB (thanks to this forum) and I noticed that my Net Worth is the same whether I hold debt and save or pay debt and lose savings.  You make a good point with the Chase Sapphire.  We initially got it for the travel rewards but ended up running into oblivion.  The Sapphire is the reason we have the BofA and Citi card.  We transferred most debt off the Chase to those 0% cards.

Yeah, but you're compounding interest on the debt faster than you're compounding interest on your savings.  If you take that $800 and put it on this 2.89% debt, you save $1.92 in the first month.  Put it into a 1% savings account, and you make $0.67 in that same month on the $800.  So you save like a $1.25 by paying debt rather than sitting on the money.  And that's just one month.  Now, if your savings pays 4% or something, then yeah, you come out ahead by saving.  If you have a 4%+ savings account, let us all know where we can get one too!

When people choose "saving" over paying off low-interest debt, they are actually investing it in their stock / bonds portfolio, and usually it is long-ish term debt too, like a mortgage.  If you are using a savings account, the yield is generally not high enough to make this work in your favor.

[NJAbroad]

Apologies Dan.  I misunderstood what you were referring to when you said pool savings.  You are absolutely right.    There is no reason to wait.  I'll divert the funds to pay down the debt in monthly increments.  Thanks for the advice.

[boarder42]

Apologies Dan.  I misunderstood what you were referring to when you said pool savings.  You are absolutely right.    There is no reason to wait.  I'll divert the funds to pay down the debt in monthly increments.  Thanks for the advice.

You're missing the chance to make more money on this money... like using vangaurd ETFs i wouldnt ever pay a sub 5% loan off fast much less a sub 3% thats under inflation.

[NJAbroad]

Boarder, that was my reasoning for keeping the debt around after our home sale in 2014.  It's been almost 2 years and I have not put more money away and, in fact, have run up even more debt.  I am trying a sort of reboot with our finances and I feel like we really need to have no debt.

Also, I read this blog post

http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

I want the wife and I to get to that mentality.

[KCM5]

One thing that helped us really up our savings was to simply increase the monthly withdrawals. So I just keep nudging up the monthly IRA amounts and the amounts that go into our workplace accounts, too. With an autowithdrawal I see it as sort of a bill, something that isn't negotiable. And obviously touching the money isn't negotiable either! So if you do choose to wipe out your debts, consider automating some of your savings.

[gReed Smith]

A credit card is a nice tool if it has rewards and you pay it off monthly. But, if you find that you are constantly carrying a balance, it may be time to cut the cards up and start using a debit card exclusively.  Getting completely out of debt may also be wise, because even a 0% rate can be a trap for the unwary.  If you miss a payment, interest may be retroactively added to the amount.  I think you're on the right track to just pay off all of the debt.  Also, cut up your credit cards.

[Squeedge]

If your wife is not on board, how did you convince her to let you use up half your savings on debt?  I am in a similar situation of wanting to use half our savings on a 6.25% loan and she simply insists that we need the savings so I'm not allowed to use it.  I stopped contributing to our savings so I can put money towards that instead, but I'm still looking at 4-5 years of payments (at my current payoff rate) instead of it being paid off tomorrow.

[NJAbroad]

KCM5, my plan is to treat savings like a CC or Auto payment. Whenever I clear one debt, the payment stays on the books allocated to either debt repayment or investments 

Greed Smith, I thought we could handle putting all bills on a CC and paying it monthly.  That actually did work.  It was the discretionary stuff that  did it.  Not to mention the 30 days of leave between duty stations.  We had to stay in hotels and use rental cars so we ran up almost $10K on the Chase Sapphire.  I'm going to take a break with the points thing and revisit it at the beginning of the year.

Squeedge, I got my wife on board by creating a powerpoint slide showing where we should be versus where we are today.  We should be ahead an extra $30K but instead we have debt.  The spread sheet broke down how much was going to debt a month and what that money could potentially earn in investments

I also showed her on the spreadsheet where we could be at the end of this 4 year tour.  Something about potentially reaching 6 figures can bring a person around. 

[dandarc]

Also, you want to keep an eye on that 0% CC.  When is it no longer 0%?  You'll want to have a plan to deal with that, because if it goes up to 20% or whatever, it doesn't take long for the interest to rack up.  And that's if they don't charge you the back-interest, which sometimes they do. 

At a store I used to work at, we had a 6 months same as cash deal on the store's credit card.  But if you had even $1 left when the 6 months was up, you got charged interest on the original purchase price for the whole 6 months at like 24%, so screwing that payoff up could cost a ton.

[NJAbroad]

Also, you want to keep an eye on that 0% CC.  When is it no longer 0%?  You'll want to have a plan to deal with that, because if it goes up to 20% or whatever, it doesn't take long for the interest to rack up.  And that's if they don't charge you the back-interest, which sometimes they do. 

At a store I used to work at, we had a 6 months same as cash deal on the store's credit card.  But if you had even $1 left when the 6 months was up, you got charged interest on the original purchase price for the whole 6 months at like 24%, so screwing that payoff up could cost a ton.

Dandarc, that was one of the things I checked when I ordered the Citi Simplicity card.  They offer 21 months 0% interest but if you go beyond that, they charge you the whole 21 months of interest.  My original plan was to transfer Chase Sapphire debt and pay it off in 18 to 20 months but now I just want to pay it off ASAP.

[dandarc]

Also, you want to keep an eye on that 0% CC.  When is it no longer 0%?  You'll want to have a plan to deal with that, because if it goes up to 20% or whatever, it doesn't take long for the interest to rack up.  And that's if they don't charge you the back-interest, which sometimes they do. 

At a store I used to work at, we had a 6 months same as cash deal on the store's credit card.  But if you had even $1 left when the 6 months was up, you got charged interest on the original purchase price for the whole 6 months at like 24%, so screwing that payoff up could cost a ton.

Dandarc, that was one of the things I checked when I ordered the Citi Simplicity card.  They offer 21 months 0% interest but if you go beyond that, they charge you the whole 21 months of interest.  My original plan was to transfer Chase Sapphire debt and pay it off in 18 to 20 months but now I just want to pay it off ASAP.

Well, if you know the month that's going to happen, no need to prioritize it to #1 necessarily, just be sure to have what you need to pay it off a month or 2 before the bad stuff happens.