Author Topic: New Mustache and Debt Consolidation  (Read 3785 times)

Carl

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New Mustache and Debt Consolidation
« on: January 24, 2013, 04:52:36 PM »
Let me start off by saying that I know that debt consolidation, particularly through companies that offer it, is generally a bit of a scam, but I have a slightly different set of circumstances that make me believe it may be a good options.

I just started working on my Money Mustache and need a little guidance.  I am stating here and now that I will have no more debt come 2014.

Right now I have:
$5318 on a Visa at 12.9%.
$6645 on a Student Loan at 4.960%
$8178 on a second Student Loan at 6.550%

So $20,141 in total debt at various interest rates.

Through work I have the Thrif Savings Plan (goverment run 401k) and with it comes the ability to take out loans against your balance.  The current interest rate on a general loan from this account is 1.5%. However interest paid on this loan goes back into my TSP account. 

Right now I am snowballing the Visa paying $630 plus over-time a month to it and the minimum ($170) on the student loans.  Should I continue on my current path, putting out one flaming debt disaster at a time, or push the fires together and pay myself in the process.

I want my mustache to grow so bad, but think I need a little kick in the teeth to get it started.

Any input is appreciated,
Carl

burly

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Re: New Mustache and Debt Consolidation
« Reply #1 on: January 24, 2013, 05:21:22 PM »
I would pay off the VISA with the 1.5% and then make that my priority to pay down after. I never liked 401k loans personally, however, 12% and 1.5% is a huge spread. So in the mean time, you might as well take advantage of it.

Since you work for the gov't, i'm sure you have decent job security but even still, I'd want that paid off asap.

Pro's & Con's:
http://voices.yahoo.com/pros-cons-401k-loans-5569533.html

James

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Re: New Mustache and Debt Consolidation
« Reply #2 on: January 24, 2013, 05:33:04 PM »

I agree, your investments in your 401k should match or beat the interest rates on your student loans, so there isn't any savings to be had there.  Don't borrow from your 401k to pay off your student loans.


For the Visa I'd try to find some other source of lower interest cash.  Maybe a transfer to a different card with 0% or at least a lower rate for a year?  A car you can borrow against?  The money you take out of your 401k is missing out on any growth while it is gone, so the cost is a lot higher than 1.5%.  Plus the pressure can be reduced since it isn't "CC debt", and sometimes you need that PANTS ON FIRE attention CC debt should give you.  I just don't think I'd recommend it, though I can understand your thinking and it isn't necessarily wrong.

Carl

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Re: New Mustache and Debt Consolidation
« Reply #3 on: January 24, 2013, 05:49:22 PM »
Thanks!

Another Reader

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Re: New Mustache and Debt Consolidation
« Reply #4 on: January 24, 2013, 05:52:57 PM »
By the time you fill out the paperwork and get the check, you will probably have made one or two more payments to the Visa.  Even a 0 percent balance transfer will take a month and probably have a transfer fee of 3 percent.  There is just not enough interest savings here to make this worth the trouble and risk.  If you average $700 a month, you are going to be done with it in about 8 months.  Find some stuff to sell on Craigslist or pick up some more overtime and it's gone even faster. 

The kick in the teeth should come from looking at the statement every month and seeing how much it really cost you to buy whatever went on the card. 

tomsang

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Re: New Mustache and Debt Consolidation
« Reply #5 on: January 24, 2013, 06:14:22 PM »
I am not opposed to 401k loans when they are used to increase networth.  If you are going to pay off debt, feel good, then go spend money then I think it is best to keep the debt outstanding to put the fear into you.

401k loans typically take 15 minutes and are funded within 48 hours, so not to much paperwork if you have double the amount in investments.  People think that it is great that the rate is only 1.5%, when really it is terrible as this is the yield your 401k is earning.  The higher the better.  I was trying to get a higher rate when I got a loan, but they were statutory.  Again, higher rate is higher return on your 401k investment.  I also took the money out of my riskfree type of investments in my 401k so my 401k yield was not hurt too bad.  I was paying 4.25% on the loan, so I was about breakeven based on the security categories that I pulled it from.  I was using it for an investment that was paying 18%, so my networth was improving significantly.  All your debt is $20k with an average rate of 7.7%.  So if you are disciplined you can turbo charge your debt.  Also, make sure that you aren't hurting yourself with taxes by paying off your student loans. If they are qualified you are getting tax benefits for the interest paid.

Before taking a loan, you should also have a generally good feeling about your employment status as if you get fired or laid off the loan is due immediately.  If you don't pay it back then you are hit with a 10% penalty and taxes on the unpaid amount.  Not cool.

I also think it is important to continue making 401k contributions even when you are getting a loan from your 401k.  Keep getting the free money match, and reduce your taxes. 

Again this is all based on having control of your finances and a fairly secure job.  You can make additional payments to your 401k loan with the interest savings if you want to pay it off quickly as well.

Good luck!

Tom