Author Topic: Paid Off Credit Cards - What's Next?!?  (Read 3442 times)

justinthyme77

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Paid Off Credit Cards - What's Next?!?
« on: July 06, 2014, 06:27:19 AM »
Income:
100K/year = $5500/month net after health insurance, retirement plan, and 5% to 457 plan

Monthly Expenses:
Fixed:

$1050 mortgage
$500 utilites, HOA, phone, etc
$500 food
$200 gas
$100 maintenance
$25 clothes
$50 dog
$550 auto loan
Total Fixed Expenses: $2475

Variable:
$500 Saving extra towards mortgage into a side account not towards actual loan.
$500 Saving extra towards auto loan into a side account not towards actual loan
$1000 Smoking cigarettes & hanging around with people I don't like in general
$1000 Hobbies - home remodeling, camping & outdoor gear, and working out to offset the effects of smoking
Total Variable Expenses: $3000


Assets:
$130,000 403(b) - Stocks, Defined contribution plan(10%employer / 7% employee contribution = $1500/month)
$92,000 457 - Invested in stocks, $400/month contribution. This was from an old 401(k) converted to a high fee IRA that I moved to current employers plan so I could more easily contribute to it
$7,000 - Savings
Total $229,000
(Both retirement accounts have very little investment options, like 6 categories, but fees are low & I can change investments easily. I work for government so not eligible for social security & have no pension)

Liabilities:
$182,000 - home loan @ 3.5% on $260,000 house = $78,000 equity. Lived there 11 years & most recently refinanced in 2011. This doesn't make sense to pay off so I invest any extra payment.
$7000 - auto loan @ 5.5% on 2008 Toyota Tacoma
Total: $189,000

I'm 36, work as an engineer, & just recently paid off my credit cards and saved enough to pay off my car loan.
I've been adjusting my budget and need some good advice so I don't do anything rash after scrimping & saving for so long.
My goals are to be debt free and retire as early as feasible.

I really want to pay of my car, because I don't like having debt in general, and I have enough saved to do it. The excitement of paying it off all at once would be great & would also leave me an extra $550/month to save. However, it seems more prudent to keep the money I have as an emergency fund & use it to grow more money while I gradually pay down the loan. Any thoughts, and what kind of account can I use to invest money that has fairly quick access in case of emergency?

I have also been thinking of converting the 457 account to a Roth type account, but not sure if this is a good idea at this point.  My thinking is in retirement it would be nice to have taxable and non-taxable withdrawals so I could adjust my yearly tax liability if needed. The bad thing is there's no Roth 457 through my employer, so I would have to convert to a Roth 401k or something equivalent & then I'd lose the penalty free withdrawal of the 457 in case of emergency. 

Anyone know of any calculators that can tell me how much I could convert a year to minimize the tax burden (I plan on paying the tax separately not using money from the account).

Thanks!
« Last Edit: July 06, 2014, 08:04:49 PM by justinthyme77 »

frugaliknowit

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Re: Paid Off Credit Cards - What's Next?!?
« Reply #1 on: July 06, 2014, 06:52:29 AM »
1.  Quit smoking NOW!!
2.  Whether to pay off the car loan now is a toss.  If you feel your job is secure over the next year, I would.
3.  As for where to stash cash:  If you are very disciplined and depending on where you live, consider "kasasa" accounts (these are rewards checking accounts that require you continuously "jump through hoops").  Check out kasasa.com.

Exflyboy

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Re: Paid Off Credit Cards - What's Next?!?
« Reply #2 on: July 06, 2014, 08:07:17 AM »
Quit smoking like yesterday.. Your insurance rates will go down and you'll probably live longer to enjoy the stash you'll build up.. Do it NOW dude your killing yourself otherwise.

You didn't mention 401k's.. Maximise the contribution tax free into low cost index funds.

pay off ALL loans.. do the Mortgage last (assuming its the lowest interest rate.

Thedudeabides

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Re: Paid Off Credit Cards - What's Next?!?
« Reply #3 on: July 06, 2014, 11:13:06 AM »
I would pay off the auto loan with you $7k.

Your mortgage is at 3.5%, so I wouldn't be in a hurry to pay that off personally. If it were me, I wouldn't pay anything additional to it. You could use a HELOC for your emergency fund in the meantime. You can apply and it's there if you need it.

This would leave you with $1000/month left to invest.

I would then start working on reducing variable expenses and fixed expenses.

You could be saving a lot more each month. Starting with quitting smoking, reducing expenses from hobbies, food and other expenses. You should be able to save/invest $3500 or so a month.



Suit

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Re: Paid Off Credit Cards - What's Next?!?
« Reply #4 on: July 06, 2014, 11:26:35 AM »
The max I can contribute to my 457b is $17500 a year (pre-tax, not a Roth although there is a Roth option available). Why not contribute more to the 457b? It defers taxes and saves you money since it'll lower your taxes on what you do take home and is available with no age limit on using it. I wound up with a few hundred additional dollars to invest once I started contributing because my taxes went down.

Thedudeabides

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Re: Paid Off Credit Cards - What's Next?!?
« Reply #5 on: July 06, 2014, 11:33:25 AM »

The max I can contribute to my 457b is $17500 a year (pre-tax, not a Roth although there is a Roth option available). Why not contribute more to the 457b? It defers taxes and saves you money since it'll lower your taxes on what you do take home and is available with no age limit on using it. I wound up with a few hundred additional dollars to invest once I started contributing because my taxes went down.

+1 to this. I would revise my above statement to say max out all tax deferred accounts first before investing in taxable.

justinthyme77

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Re: Paid Off Credit Cards - What's Next?!?
« Reply #6 on: July 06, 2014, 08:49:44 PM »
Thanks for the feedback!,

So obviously I need to quit smoking (I never though it would be that hard!).
The $1000 for this in variable expenses is really just money that I can't specifically account for, but figure between gas to see people, eating out when I don't have time to make food, and throwing cigarettes away when I'm fed up with it. It generally adds up to about $1000. This is an area that could definitely use improvement. I'll have to find more fulfilling stress management activities that are less expensive.

I'm not big on borrowing against equity, looks like I if I keep my 457 as a backup for emergencies, then I can pay off my truck & not feel like I'm out too much without any cash on hand.  Wish my employer offered a 457 Roth, but oh well, I'll just keep suggesting it to them.

I'll have to look into other places to invest money that doesn't involve capitol gains/loss tax, but doesn't lock the money into an account until I'm 59. Have to do some soul searching for that one.


Guizmo

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Re: Paid Off Credit Cards - What's Next?!?
« Reply #7 on: July 06, 2014, 09:55:35 PM »
That's the cool thing about the 457! It is deferred compensation. You can literally withdraw from it whenever you want with no penalties. You can also do the Roth IRA pipeline to access money in your 401k but the 457 is the simplest way.

I'm luck that my state offers both the 401k and 457 option. If I made 60 grand I would totally max out both.

WiseGuy

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Re: Paid Off Credit Cards - What's Next?!?
« Reply #8 on: July 06, 2014, 11:23:04 PM »
I would pay off the auto loan with you $7k.

Your mortgage is at 3.5%, so I wouldn't be in a hurry to pay that off personally. If it were me, I wouldn't pay anything additional to it. You could use a HELOC for your emergency fund in the meantime. You can apply and it's there if you need it.

This would leave you with $1000/month left to invest.

I would then start working on reducing variable expenses and fixed expenses.

You could be saving a lot more each month. Starting with quitting smoking, reducing expenses from hobbies, food and other expenses. You should be able to save/invest $3500 or so a month.

Excellent advice.  I second this.  By paying off your auto loan you'll have lower monthly expenses.  And then you'll need to focus on even lowering your monthly expenses even further.  The more you read on this forum, the more ideas you'll get on how to lower your expenses.  You don't need to go to an extreme, but the more you can get your savings rate up, it'll help.  Also, the more you can raise your income it helps as well.

Lowering your expenses is one important side of the coin.  The other side is raising your income, if possible.  I'd say though lowering your expenses is probably easier and would result in the quickest results.

Chrissy

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Re: Paid Off Credit Cards - What's Next?!?
« Reply #9 on: July 06, 2014, 11:23:54 PM »
You may access ROTH contributions, but not the growth, at any time without penalty, so not all of that money is locked away.

Pay off the car. 

Also, e-cigs?  Maybe roll your own?