Author Topic: What should I do with my bonus/raise?  (Read 3029 times)

evergreen

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What should I do with my bonus/raise?
« on: February 24, 2014, 12:00:03 PM »
Hi folks. I have a bonus (amount as yet undetermined, but should be at least a few thousand dollars after taxes) coming up and an expected raise that will happen in 2 months or so, expect that to be around $200/mo after taxes. I'm looking for some opinions/advice on where to direct it. Without boring everyone with tons of detail, here's my situation in a nutshell:

Debt
I have around $100K in student loans (all federal) at a weighted interest rate of around 7%. One loan is higher ($20K @ 8.25%). I pay about $500/mo distributed across the loans, plus another $500/mo towards the high interest one. I am charged about $625/mo in interest. This is, of course, obscene.

I have a leased car (2013 Honda Fit). I leased when I sold my last car to free up cash to pay off my high interest credit cards. My plan is to buy this out at the end of the lease (March 2016), but I'll likely do it in a loan since the interest rate should still be far lower than what I pay on my student loans.

I owe about $160K on my house, market value around $220K. We'll probably stay in the house another 5 years, maybe a little longer. House needs about $2K in repairs short term, in next couple years will need upgraded heating system and possibly new roof shingles. Additionally, the house needs/wants some upgrades to make it more useable and increase resale. Mostly, the kitchen is horrible. We'd need to do new cabinets (funky sizes make buying used difficult/near impossible), but can do that at ikea for probably $2500-3K. We will upgrade appliances over time at dent/scratch sales. A few other things need to be done, but none are super expensive or things we can't do ourselves. 

No credit card debt other than some recent medical bills on a 0% card, am maxing out my HSA this year and will cover expenses currently sitting there. No threat of interest here.

Savings

I have ~$5K in a 401k, my employer and I contribute about $500/mo to it. I had been contributing more but pulled back to focus on student loans. My partner does not have retirement savings, and her employer does not offer any matching. I am the primary breadwinner (I make 80% of our income).

We have about $7K in combined emergency fund/YNAB buffer. We put about $200/mo towards unexpected housing repairs and/or vet bills (we have one dog).

Income

I make $65K a year plus bonus, which varies (last year I net $4500 after tax, this is a better year)

My partner makes ~$12K a year working part time, plus ~$4K/yr as a part time yoga instructor.

Other info

We are getting married this fall, what isn't covered by family will be paid for in cash. We have this saved already. We would like to have kid(s) in the next couple of years, my partner would probably cut back her hours further to stay home and save on day care. We live very frugally, are a one car family. My partner usually walks or busses to work, I drive as my office is 20 miles away. We've considered moving closer to my work, but I hated my job until very recently. If I keep liking it, we'll reconsider. Also, it pays much more than one closer to where we are (40-50% more). We are both 30 and in good health. We have family near by and in a real emergency such as job loss, could rent our house at enough to cover expenses and move in with family (we have discussed this and are on the same page about this).

SO the question is - what would you do, in my situation, if you had an extra $3-5K and a $200/mo raise coming up? I am overwhelmed. My initial thought is STUDENT LOANS OMG, but I don't want to put myself into a situation where my heating system fails and I think "if only I hadn't been so aggressive with my student loans". Or not be able to retire because I failed to save early enough.

Ticopowell

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Re: What should I do with my bonus/raise?
« Reply #1 on: February 27, 2014, 12:55:43 PM »
I would say put as much as you can towards student loans. Then open a home equity line of credit and use that for house-breaking emergencies, then pay it off as soon as you can after the emergency. With the LOC you can also get rid of your emergency savings and put that money towards the debt. If you can get a low enough interest rate on the LOC you might think about using that to pay off part of the student loans as well.

The Bearded Bank Builder

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Re: What should I do with my bonus/raise?
« Reply #2 on: February 27, 2014, 01:56:52 PM »
Would you consider buying an older/cheaper car? You mentioned you plan on buying the car in 2016. I realize the interest rate on the car will be lower than the student loan interest, but you would save a much larger amount of money if you were paying that low interest rate on a $3-5k car. Your car payments would be minimal and you could redirect the extra cash towards the highest interest student loans.

RoseRelish

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Re: What should I do with my bonus/raise?
« Reply #3 on: February 27, 2014, 02:12:08 PM »
Kill the loans. I think the rate is high enough that investing to try to make better returns may not be worth the risk.

evergreen

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Re: What should I do with my bonus/raise?
« Reply #4 on: February 27, 2014, 02:27:44 PM »
Would you consider buying an older/cheaper car? You mentioned you plan on buying the car in 2016. I realize the interest rate on the car will be lower than the student loan interest, but you would save a much larger amount of money if you were paying that low interest rate on a $3-5k car. Your car payments would be minimal and you could redirect the extra cash towards the highest interest student loans.

Unfortunately this wouldn't work for a few reasons. The car is a lease (which I went with because at the time I got it, I had just paid all my cash towards my high interest credit cards and needed the most reliable, cheapest vehicle I could get with no money down) - it's very difficult to break leases, even if I wanted to. Also, it is our only car and I put around 16,000 miles a year on it, being conservative. A cheaper car would only be cheap for a little while, as we'd need to repair or replace it quickly. In fact one of the reasons I sold my old car and got this was because semi-frequent repairs were cutting into my ability to get to work (again, only car), and given that I make 80%+ of our income, that is critical.

huadpe

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Re: What should I do with my bonus/raise?
« Reply #5 on: February 27, 2014, 02:54:24 PM »
Would you consider buying an older/cheaper car? You mentioned you plan on buying the car in 2016. I realize the interest rate on the car will be lower than the student loan interest, but you would save a much larger amount of money if you were paying that low interest rate on a $3-5k car. Your car payments would be minimal and you could redirect the extra cash towards the highest interest student loans.

Unfortunately this wouldn't work for a few reasons. The car is a lease (which I went with because at the time I got it, I had just paid all my cash towards my high interest credit cards and needed the most reliable, cheapest vehicle I could get with no money down) - it's very difficult to break leases, even if I wanted to. Also, it is our only car and I put around 16,000 miles a year on it, being conservative. A cheaper car would only be cheap for a little while, as we'd need to repair or replace it quickly. In fact one of the reasons I sold my old car and got this was because semi-frequent repairs were cutting into my ability to get to work (again, only car), and given that I make 80%+ of our income, that is critical.

If you're putting 16k miles a year on it, you're probably going to be forced to buy it, since the mileage overage will be ruinous otherwise.  Find out what the overage is to be sure though.  In future though, a reliable car can be had for much less than the total lease payments+buyout.  I got a hyundai a couple years back with 25k miles for $8200.  The 3-5k price point will have reliability questions, but around the 8-10k price point you can get some really excellent and reliable vehicles.  And that'll still be about $7k less than buying new, and even bigger savings than financing new.

As to what to do with the money: student loans, no brainer.  8.25% guaranteed return on a non-bankruptable debt.  $7k is enough emergency fund to get by on, especially since you have surplus income that can be diverted to an emergency if one arises.

As to the house repairs: get creative there.  You don't need brand new ikea cabinetry.  Look around for deals on craigslist for stuff from other people's renos.  Check out the do it yourself forum here.  Not sure if the partner is very handy, but if (s)he's working part time, (s)he might have time to do some repairs/renovations.