Author Topic: What would you do with an extra $10k??  (Read 3168 times)

frugalfedmom

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What would you do with an extra $10k??
« on: December 23, 2014, 10:54:48 AM »
Our entire family was in a car accident a year and a half ago, where we were rear-ended so hard there were 3 separate impacts from the car behind us. Thankfully, none of us were hurt too badly, but we did go to the doctor and were treated for whiplash, neck/back pain, arm pain, etc. Well, we consulted a lawyer and it looks like we'll actually be getting a decent settlement. After the attorney's cut and medical bills, we'll most likely end up netting around $10k.

This is a small windfall for us, as we're crazily tring to put out our debt fires (car loan and private student loan). I'm estimating we'll have paid off the car by the time we get this settlement check sometime in the next few months. So my question is, do I 1) dump the entire settlement check into the student loan (~57k @5%) to make a decent dent in it, which would shave about 6 months off the loan (I had planned to have it paid off by Nov 2017, but this would make it more like May 2017) OR 2) keep it in the bank (or somewhere else?) so we have a bit of a head start once I do pay off the student loan and then start saving for a down payment on a house? I was considering taking out a 401k loan in case we don't have enough saved up by the time we're ready to buy (I don't want to keep wasting money on rent)...I'm almost inclined to go with #2 so i can avoid that 401k loan in exchange for sacrificing 6 more months of student loan-paying time, but I'm also afraid that with being relatively new to this mustachianism, and being surrounded by non-mustachian-leaning family members, I may end up just spending the money on other "emergencies".

Am I approaching this all wrong? Should I just not worry about the house until we save up enough even if it takes us 3 years after paying off all our debts?? Is the 401k loan a bad idea? (It'd be really cheap...~2% interest) I just don't want to waste an opportunity to spend this "windfall" as wisely as possible!

neo von retorch

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Re: What would you do with an extra $10k??
« Reply #1 on: December 23, 2014, 11:04:45 AM »
A big picture case study might help, as we could see where all your debts/ money goes each month and make recommendations, but given what you said, a few red flags popped up that we can address.

First - "wasting money on rent" is a common misconception. While it's true you pay to rent, and that money is gone forever, buying a home is not a magic bullet. When you buy a home, you pay closing costs. From there, you pay mortgage interest and property taxes, and you pay for hazard insurance. In your case, where it does not sound like you've saved up a 20% down payment, you'd also pay a pretty exorbitant PMI (private mortgage insurance) payment. Then you'll also pay for maintenance of the house (paint, roof, appliances, mowing, shovels, rakes, etc.) All of this is money that is "gone forever" just like your rent. In a lot of cases, it's more money than you were paying for rent, and you're actually worse off.

Second - what do you consider an "emergency?" Ideally, you'd actually take some of that money and create a bit of an emergency fund for yourself. But it should really only be used for emergencies. Not to buy things or pay back debt for things you bought. If you don't have a pretty stable handle on the money in your bank account, then perhaps the safest place for this money you're getting would, in fact, be that guaranteed 5% return on investment you'd get by paying off your student loan. (And no doubt that payment is a big drag on your overall budget right now.)

If you really do want to own a home, there are ways to calculate which is better in your area, but the important thing is to remember that you want to buy a home to save money. That means - buy a home comparable to what you're renting. The tendency is buy "a lot more" but you end up increasing your monthly costs over renting that way. This is a pretty nice calculator for that purpose: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

GoldenStache

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Re: What would you do with an extra $10k??
« Reply #2 on: December 23, 2014, 11:07:57 AM »
Sooo much more for you to think about. 

Do you have to have your student loans payed off before you buy a house?  Would buying a house now save you more on taxes / disposable income so you could pay off your loans faster?  Do you know of any place that will guarantee a 5% or greater return?


mxt0133

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Re: What would you do with an extra $10k??
« Reply #3 on: December 23, 2014, 11:11:32 AM »
@5% student loans I would just dump your windfall on that and not event think twice about it.  The sooner you pay of all your debts that faster you can save for that down payment. 

As for the 401k loan, basically the only reason I would use that money is if, we sold all our belongings, somehow didn't qualify for any welfare, and it was a life threatening expense (which really would be only a ransom scenario).  So yeah, don't do it.  One reason is if you leave your employer for any reason, even layoff, you have to pay it back within 60 day for most plans, or you go into default which would treat is as a withdrawal and be taxed on the remaining balance plus penalties.

Mr.Chipper77

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Re: What would you do with an extra $10k??
« Reply #4 on: December 23, 2014, 11:14:51 AM »
put toward the student loans

TerriM

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Re: What would you do with an extra $10k??
« Reply #5 on: December 23, 2014, 11:19:27 AM »
What is the rate on the car loan? And do you have any credit card debt? 

Are you putting enough into the 401K to get the full employer match?

Eric

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Re: What would you do with an extra $10k??
« Reply #6 on: December 23, 2014, 11:23:04 AM »
Pay off the student loan.

And then read this to assuage your feelings of throwing your money away on rent:
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

Calvawt

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Re: What would you do with an extra $10k??
« Reply #7 on: December 24, 2014, 11:51:13 AM »
I would put it all toward la the student loans.  It will save you a decent chunk of interest.


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TerriM

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Re: What would you do with an extra $10k??
« Reply #8 on: December 24, 2014, 01:05:03 PM »
Pay off the student loan.

And then read this to assuage your feelings of throwing your money away on rent:
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

Doesn't make me feel better one bit.  I pay more in rent per year than my parents paid total for the house they've lived in for 45 years.  If you're planning to stay for a while, it makes sense to buy.  If you're planning on moving, it doesn't.

Also, transaction fees are coming down. The 5% is negotiable, and if Redfin is in your area it's cheaper.