Author Topic: starting over question  (Read 6586 times)

payitoff

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starting over question
« on: March 04, 2014, 11:43:01 AM »
i have 2 options and i would like to find out what a Mustachian will do:

option 1 - max out 401k and pay down debts
option 2 - use all extra to pay down debt


i currently contribute a measly 3% on my 401k, and have been aggressively paying down debt. if i continue on with this aggressive plan, we will be debt free by Feb 2016. then we will have about 43% of our income to put into retirement. i am just wondering if it would be a better idea to at least have 401k in place while paying off debt even though this will add about 1-2 years of being debt free?

MsSindy

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Re: starting over question
« Reply #1 on: March 04, 2014, 11:58:30 AM »
It would depend on things like:
 - What rate is your current debt at?
 - What has been your 401k ROI?
 - What rate does your employer match (if any)?
 - What tax bracket are you in?
 - What best sits with your psyche for motivation?

payitoff

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Re: starting over question
« Reply #2 on: March 04, 2014, 12:12:23 PM »
It would depend on things like:
 - What rate is your current debt at?
 - What has been your 401k ROI?
 - What rate does your employer match (if any)?
 - What tax bracket are you in?
 - What best sits with your psyche for motivation?


- What rate is your current debt at? student loans at 6.5% totaling 60k, IRS at $18k not sure what's the interest

 - What has been your 401k ROI? this has motivated me coz i see it at 8.24% lately

 - What rate does your employer match (if any)? none

 - What tax bracket are you in? another motivation, since as of 2013 we doubled income, so tax bracket is now higher, grossing at around $112K

 - What best sits with your psyche for motivation? good question. i like to be debt free as fast as possible, but at the same time, i like the feeling of comfort of some cushion will be giving me,. the fact that i am giving away all our money and not keep to us is quite a risk, in case something happens, im afraid we end up going into deeper debt coz of it. we dont own a house so we dont have a line of credit for EF

Numbers Man

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Re: starting over question
« Reply #3 on: March 04, 2014, 12:32:36 PM »
The IRS rate would be approximately 6%. Get current with the IRS since that's a hair on fire emergency type of debt. After the IRS is paid then fully fund your 401(k). Just pay the Student loan as agreed unless you have extra cash to put against the principle.

Frankies Girl

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Re: starting over question
« Reply #4 on: March 04, 2014, 12:36:59 PM »
Based off your answers I'd say neither choice. You need an emergency fund of at least a month or two worth of expenses. If you don't have that, and I think if I am reading it right, you are suggesting using up all of your money on debt repayment and current living expenses, then that is crazy and you need to make sure you have a cushion since one crisis can throw you even deeper in debt.

so if I was in this same situation:

1. Emergency fund ASAP. Pay the minimums on the loans/debts and continue to fund the 401K at the current level (might see pushing it up to 5% for the psychological factor to feel like "I'm saving more!"

2. Once you have at least 2 months worth of expenses saved (that's going to cover short term job loss, car blow up or emergency sickness/injury or other surprise expenses), start hitting the debts with all of the surplus money.


With your current salary, it should take you under 2 years if you keep your monthly expenses low. THEN max out your 401K.

payitoff

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Re: starting over question
« Reply #5 on: March 04, 2014, 12:37:27 PM »
now the 401k got me thinking just now, do you also suggest to instead put some money in a regular savings or ROTH IRA rather? since in case of any emergency, i couldnt really touch my 401k without penalties. 

We have started a ROTH account but now we put it on hold for debt repayment

so let me revise my question:

Would a mustachian rather have stache built sooner than debt repayment

or

Would a mustachian like to be debt free first and then build some stache?


Frankies Girl

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Re: starting over question
« Reply #6 on: March 04, 2014, 12:41:42 PM »
now the 401k got me thinking just now, do you also suggest to instead put some money in a regular savings or ROTH IRA rather? since in case of any emergency, i couldnt really touch my 401k without penalties. 

We have started a ROTH account but now we put it on hold for debt repayment

so let me revise my question:

Would a mustachian rather have stache built sooner than debt repayment

or

Would a mustachian like to be debt free first and then build some stache?


NOOOOOOOO.

Your 401K is not an emergency fund. Do not even think of it like that. A Roth is not an emergency fund. You NEED AN EMERGENCY FUND. A cash account that will be earning shit interest but is available to you instantly and with no penalities or short term trading fees that would occur if you treated your 401K like a piggy bank.

- What best sits with your psyche for motivation? good question. i like to be debt free as fast as possible, but at the same time, i like the feeling of comfort of some cushion will be giving me,. the fact that i am giving away all our money and not keep to us is quite a risk, in case something happens, im afraid we end up going into deeper debt coz of it. we dont own a house so we dont have a line of credit for EF

Something is ALWAYS going to happen. You'll have a fender bender and need to come with a deductible. Someone needs a tooth fixed. Something broke down and needs to be replaced. If you don't have ready money or a line of credit that can be paid back easily (and you don't have that sort of thing apparently with all this debt) then you need cold hard cash sitting in a crap savings account until you can work out of debt and build up assets.



payitoff

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Re: starting over question
« Reply #7 on: March 04, 2014, 12:47:24 PM »
Based off your answers I'd say neither choice. You need an emergency fund of at least a month or two worth of expenses. If you don't have that, and I think if I am reading it right, you are suggesting using up all of your money on debt repayment and current living expenses, then that is crazy and you need to make sure you have a cushion since one crisis can throw you even deeper in debt.

so if I was in this same situation:

1. Emergency fund ASAP. Pay the minimums on the loans/debts and continue to fund the 401K at the current level (might see pushing it up to 5% for the psychological factor to feel like "I'm saving more!"

2. Once you have at least 2 months worth of expenses saved (that's going to cover short term job loss, car blow up or emergency sickness/injury or other surprise expenses), start hitting the debts with all of the surplus money.


With your current salary, it should take you under 2 years if you keep your monthly expenses low. THEN max out your 401K.

You're right., we only have $1k cash right now, (as per D. Ramsey) but i think i feel much more comfortable to have at least a month or 2 worth of expenses sitting.  sometimes we jump into wanting to get results right away that we forget to do the basics first!

Mortgage Free Mike

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Re: starting over question
« Reply #8 on: March 04, 2014, 12:59:10 PM »
Like others said, beef up that EF if you can. With that said, if you have a family member who can help in a crisis-- that's an EF for people in serious debt.

I would contribute up to the company match if you can, then destroy the debt.

MustachianAccountant

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Re: starting over question
« Reply #9 on: March 04, 2014, 01:30:47 PM »
Grossing 112k, let's say you net 80k... that's ~6,500 month income
You say if you throw all your extra money at debt, you'll have your 78k in debt paid off in 24 months, that's 3,250/month....

Where is the other $3,250 a month going??

It's possible you could do option 1 AND option 2 with some budget work.

MsSindy

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Re: starting over question
« Reply #10 on: March 04, 2014, 01:36:19 PM »
I know the concept of whether one needs an EF or not is often debated here.  But, in your situation I think some sort of EF would be warranted.  How much?  It depends on how steady you think your jobs are, generally how is your health, how is the health of your vehicles, do you have pets/kids, etc.?   At a minimum you should have enough to cover lifeís emergencies (car repair, flights for death in the family, etc.).  If you think your job might be in jeopardy, then youíll want to have a very robust EF.


Also, once you decide on how much you need in your EF, you donít necessarily have to fund it overnight, it can be funded over the next 3-6 months (assuming your job is steady).  This way you can still feel good/motivated about moving closer to your debt reduction goals, but adding in a little protection along the way.  This is a matter of risk tolerance. 

And I agree with the general consensus of some sort of EF, pay IRS ASAP, then pay SL aggressively after that.  You need to get the monkeys off your back.



payitoff

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Re: starting over question
« Reply #11 on: March 04, 2014, 01:55:39 PM »
Grossing 112k, let's say you net 80k... that's ~6,500 month income
You say if you throw all your extra money at debt, you'll have your 78k in debt paid off in 24 months, that's 3,250/month....

Where is the other $3,250 a month going??

It's possible you could do option 1 AND option 2 with some budget work.

yes, 24 months is the goal, that's why we were projecting to be done by Feb 2016.
the other $3250 a month? it pays our monthly expenses like rent, utilities, preschool, insurance, food & gas


Mazzinator

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Re: starting over question
« Reply #12 on: March 04, 2014, 03:26:22 PM »
I'm NOT an expert, but here's my two cents!

I might look at your taxes too. From your journal, i see you're getting some student loans settled of ~$12.5k...you will most likely owe taxes on that.

https://www.nolo.com/legal-encyclopedia/tax-consequences-settled-forgiven-debt-29792.html

That would bump up your income to ~$124k, which may put your income in "phase out" territory. (It seems that the settled amount is at "ordinary income" but i'm not sure)

You could contribute an amout that would lower your taxable income enough to take you down a tax bracket...just an idea!!!

payitoff

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Re: starting over question
« Reply #13 on: March 04, 2014, 05:10:06 PM »
I'm NOT an expert, but here's my two cents!

I might look at your taxes too. From your journal, i see you're getting some student loans settled of ~$12.5k...you will most likely owe taxes on that.

https://www.nolo.com/legal-encyclopedia/tax-consequences-settled-forgiven-debt-29792.html

That would bump up your income to ~$124k, which may put your income in "phase out" territory. (It seems that the settled amount is at "ordinary income" but i'm not sure)

You could contribute an amout that would lower your taxable income enough to take you down a tax bracket...just an idea!!!

Thanks so much! i havent thought of this

Ftao93

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Re: starting over question
« Reply #14 on: March 05, 2014, 12:57:18 PM »
the other $3250 a month? it pays our monthly expenses like rent, utilities, preschool, insurance, food & gas

There are obviously no absolutes, and things scale (I know if we made 112k a year combined, we'd have goofed on a bigger scale!).

However, using other methods highlighted here and linked blogs, could you maybe get that pared down to 2800?  that gives you an extra 400/mo to throw at the debt, freeing you much earlier.

I say this with the full knowledge that it's far easier to find fault with others than ourselves :P.


payitoff

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Re: starting over question
« Reply #15 on: March 05, 2014, 03:25:38 PM »
the other $3250 a month? it pays our monthly expenses like rent, utilities, preschool, insurance, food & gas

There are obviously no absolutes, and things scale (I know if we made 112k a year combined, we'd have goofed on a bigger scale!).

However, using other methods highlighted here and linked blogs, could you maybe get that pared down to 2800?  that gives you an extra 400/mo to throw at the debt, freeing you much earlier.

I say this with the full knowledge that it's far easier to find fault with others than ourselves :P.

yes, as much as we want to spend less, well be starving with $2800 lol
i posted my breakdown here before, but just with rent, school, insurance combined its already $2474/month plus utilities, food and gas (CA commute)

so far i think 50% for debt repayment, and hopefully move it into savings/ER plan will be our main goal, right now were at 43%, a little adjustment on monthly expenses to chip it down 7% less and well be right there.   


Ftao93

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Re: starting over question
« Reply #16 on: March 05, 2014, 04:04:08 PM »
Eekl!  that's a lot!  Your cost of living is also a ton higher in your location, and you have kids, so....it gives me perspective!

Here's a trick that I do once in a while.  It's not unhealthy, though your body will freak out at first:

Rice and beans, bean and cheese burritos, and salad for 90% of your meals. Eggs or yogurt in the morning.

When all I can trim is my own waistline from the budget, I'm not afraid to do rice/beans 5x a week for lunch and dinner.  Longest I held out was about 70 days, but it's cheap and not nutritionally unsound.  Quinoa is more expensive but a complete protein.

Warning:  I'm not a dietician, so YMMV.  Also, if you're not normally a fiber eater, you've been warned.

Might be a bit extreme for you, and not needed, but an example.