Author Topic: Pay off debt or keep building e-fund?  (Read 3580 times)

KittyFooFoo

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Pay off debt or keep building e-fund?
« on: October 02, 2013, 09:31:20 AM »
Hello party people.  I am having trouble deciding whether to pay off my wife's car, or keep building our cash savings.  Here is our situation:

Equity
Cash: ~$12,000
401K: ~$38,000

Debt
Auto loan: $7,600 remaining on my wife's car

Income
$7,600 net per month between our two salaries

Expenses
Rent$1,550
Utilities$150
Car payment$250(200 to principal, 50 to interest currently)
Groceries$600(wife groceries run a bit high.  Still working on this)
Pet food$50
Two CrossFit memberships$250
Wife's one-on-one CrossFit sessions$140
Car insurance$140In one more month, wife's accidents will be >5 years old and this will go down to 90, woohoo.
Gas$150
Internet$170
Wife nails/hair$100

Total: $3,450
Net income after expenses: $4,150

I realize there is still some fluff above, but we have made a LOT of progress since I discovered MMM in April.  Our average savings rate (cash + debt payoff) since that time has been about $3k/month.

Looming Expenditures of Doom
  • Baby scheduled to arrive in late February.  This will represent a loss of income in some way--one of us moving to part or zero employment, or childcare costs if we both continue full time work.
  • Currently, we do not have much furniture in the house, and my wife wants some living room stuff and something to support extra clothes storage, as our sets of parents will each be spending some time with us to help out after the baby is born.  I am not sure how much this will run, but she wants some nice pieces that will last.

So we currently have 3.5 months of expenses saved up in cash, or 4 if we really tightened expenses to a minimum.  My goal is $20k cash and to own the car free and clear by the time this baby pops out (with about 5 months and $4k/month to work with, we're about there saving $8k more in cash, $7,600 toward this debt and $4,500 toward furniture).  Here is my question.

I am tempted to pay off the car completely, which would still leave ~$4,500 in cash.  On the other hand, we could be more conservative and pile cash until we reach our e-fund goal of $20k, and only THEN pay down the car with spare income.  Which would you do, and why?  Any frugal tips on buying decent furniture are much appreciated as well.

willn

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Re: Pay off debt or keep building e-fund?
« Reply #1 on: October 02, 2013, 11:06:38 AM »
I recommend the Dave Ramsey approach on this when people are expecting:  Pile up the cash, pay your minimums, once baby and mom are home safe and sound, pay off everything with the pile. This gives you some extra flexibility if there are complications.  Babies and mom's health is basically the number one priority.  The only ground you lose is a small amount of interest.

I won't go too far down this road but the fitness/hair/nails items are costing you 100K in 10 years if you could earn an easy 7%.

dragoncar

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Re: Pay off debt or keep building e-fund?
« Reply #2 on: October 02, 2013, 12:13:50 PM »
Well what's the rate on your debt?

If it was me I'd probably pay off a high interest rate.  You have a LOT of net income so it would be quick.

Edit:  remember one benefit of a paid off car is that you can up deductibles or drop collision/comprehensive (if it makes sense given your emergency fund and car value)

Also, frankly I'd rather pay off debts and tell the wife "sorry no cash for expensive furniture yet... Let's save a bit more."  After living with current furniture and baby, you might find that you are happy with what you have or what you can get very cheaply/free.
« Last Edit: October 02, 2013, 12:17:57 PM by dragoncar »

KittyFooFoo

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Re: Pay off debt or keep building e-fund?
« Reply #3 on: October 02, 2013, 03:14:26 PM »
Car loan is 7%.  Also should add that I have great insurance through my current employer.  They pay 100% of all medical costs--including deductibles through an HRA.  So we don't anticipate any big medical bills from the birth.

steveo

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Re: Pay off debt or keep building e-fund?
« Reply #4 on: October 02, 2013, 03:50:43 PM »

Pet food$50
Two CrossFit memberships$250
Wife's one-on-one CrossFit sessions$140
Wife nails/hair$100


All I can see is these costs. I don't mean to be a dick but how on earth did you end up with these costs. I mean cross-fit sounds fine to me if it was free. Otherwise why not buy a skipping rope and some weights and you are set.

My advice is to pay off your debt and then save. I have 3 kids and I wouldn't buy any furniture if I was you. I was tempted to buy a big TV a couple of years ago and didn't. My 2 year old often hits the TV. I prefer having cheaper stuff that I don't really car about. Maybe when the kids are older we will upgrade the TV when it breaks down.
« Last Edit: October 02, 2013, 05:14:58 PM by steveo »

travelbug

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Re: Pay off debt or keep building e-fund?
« Reply #5 on: October 02, 2013, 08:21:11 PM »

Pet food$50
Two CrossFit memberships$250
Wife's one-on-one CrossFit sessions$140
Wife nails/hair$100


All I can see is these costs. I don't mean to be a dick but how on earth did you end up with these costs. I mean cross-fit sounds fine to me if it was free. Otherwise why not buy a skipping rope and some weights and you are set.

My advice is to pay off your debt and then save. I have 3 kids and I wouldn't buy any furniture if I was you. I was tempted to buy a big TV a couple of years ago and didn't. My 2 year old often hits the TV. I prefer having cheaper stuff that I don't really car about. Maybe when the kids are older we will upgrade the TV when it breaks down.


I was thinking the same.

That's alot of $ going out on superfluous stuff when you have debt and no real assets to speak of.

Good on you for streamlining what you have so far but I would NOT buy $4500 worth of furniture: is it for the baby? Seriously, babies do not need anything and you can pick up some real bargains from other people's mistake of not realising this earlier.

Cut the fat, pay off the car loan and watch your savings rate grow. What will be your income when your wife stops working? I would try to live on your income now and throw 100% of your wife's at the debt. Take the cash and pay off the car. Add that payment plus the $50 interest you would be otherwise paying and build up your stash this way.

Good luck.

dragoncar

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Re: Pay off debt or keep building e-fund?
« Reply #6 on: October 02, 2013, 08:30:32 PM »
Car loan is 7%.  Also should add that I have great insurance through my current employer.  They pay 100% of all medical costs--including deductibles through an HRA.  So we don't anticipate any big medical bills from the birth.

OK, I'd personally pay it off.


Pet food$50
Two CrossFit memberships$250
Wife's one-on-one CrossFit sessions$140
Wife nails/hair$100


All I can see is these costs. I don't mean to be a dick but how on earth did you end up with these costs. I mean cross-fit sounds fine to me if it was free. Otherwise why not buy a skipping rope and some weights and you are set.

My advice is to pay off your debt and then save. I have 3 kids and I wouldn't buy any furniture if I was you. I was tempted to buy a big TV a couple of years ago and didn't. My 2 year old often hits the TV. I prefer having cheaper stuff that I don't really car about. Maybe when the kids are older we will upgrade the TV when it breaks down.

I avoided commenting on this, since it wasn't really the question.  But it sounds like the wife is not and does not plan to be mustachian.  I think there are entire separate threads on this.  But these expenses are not cray for someone with $7600 net income.  Depending on how much the wife makes, she may feel entitled to spend as she wishes.

captainawesome

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Re: Pay off debt or keep building e-fund?
« Reply #7 on: October 03, 2013, 07:22:58 AM »
In theory, you pay the car off and your insurance goes down next month as planned, that gives you an extra $300 a month which would bring your monthly savings up to around 4500, which would put you at 18k by Feb.  Still a pretty good chunk of change to have flexibility, and at 7% that's pretty high these days for a car loan. 

FWIW, I was in a similar situation and paid the car off and then threw everything I had into savings afterwards, more piece of mind that I didn't have a bill/payment due anymore.