10K to "spend"

[collegeguy]

I've got 10K unexpectedly coming to me and I'm thinking about doing something other than blowing it on things that I don't need.

My options are the following:

Option A: I've got a HELOC that's about 7.5% right now and I hate it. I have a balance of 26K on it, and I make $300/month payments to reduce the principal, so that's about a $500 payment per month. Hurts my cashflow. So, I was thinking of taking the 10K and throwing it all at the HELOC to get it down to 16K, and then will have it paid off in another 3 yrs.

Option B: Paying off my current car loan (balance of 10K). Int. Rate
is 5.5%.

Option C: Taking the $ and diversifying my investment portfolio by buying some stocks (value trusted companies like GE, BOA, Coke, etc...). I have several mutual funds in my 401K and IRA, so was thinking of branching out more into stocks.

Option D: Put it all towards a 529 college savings plan. I've got a bit of $ in there now and routinely contribute a small amount each month, but a 10k infusion should be able to turn into 100K or so in the next 17 yrs if the market does well.

Conventional wisdom says pay down the HELOC, cuz it's a cash drainer and in another 2-3 yrs from now I'll have kid #2 on the way (that's what we're planning).

Any angle anyone thinks I'm missing or opinions are welcome. Thanks.

[anonymous_saver]

Yes, I agree my first instinct was to say pay towards the HELOC.

However, now I'm thinking that you should pay off the car loan with one big check (if your loan allows for you to do pre-payments!). This way, you can take this monthly payment and add it to the $300 extra each month that you are paying on the HELOC.

It really just depends if the psychological or the purely financial benefits make you feel better. I don't think either is a horrible choice.

Do you have an emergency fund? Do you have any other debt? This could change my opinion.

[jIM_Ohio]

Originally Posted by collegeguy

I've got 10K unexpectedly coming to me and I'm thinking about doing something other than blowing it on things that I don't need.

My options are the following:
.

One issue at a time.

Originally Posted by collegeguy

Option A: I've got a HELOC that's about 7.5% right now and I hate it. I have a balance of 26K on it, and I make $300/month payments to reduce the principal, so that's about a $500 payment per month. Hurts my cashflow. So, I was thinking of taking the 10K and throwing it all at the HELOC to get it down to 16K, and then will have it paid off in another 3 yrs.

Not a bad plan for cash flow.

Originally Posted by collegeguy

Option B: Paying off my current car loan (balance of 10K). Int. Rate
is 5.5%.

This was my winner, I THINK. Because this is not tax deductable, you get whatever car payment is into the budget next month. If car payment was $400, what would extra $400 do to a?

Originally Posted by collegeguy

Option C: Taking the $ and diversifying my investment portfolio by buying some stocks (value trusted companies like GE, BOA, Coke, etc...). I have several mutual funds in my 401K and IRA, so was thinking of branching out more into stocks.

If b was not on the table, this is option #2, IMO.

Originally Posted by collegeguy

Option D: Put it all towards a 529 college savings plan. I've got a bit of $ in there now and routinely contribute a small amount each month, but a 10k infusion should be able to turn into 100K or so in the next 17 yrs if the market does well.

I would take this option off the table. The debt and retirement planning are a higher priority with information given thus far.

Originally Posted by collegeguy

Conventional wisdom says pay down the HELOC, cuz it's a cash drainer and in another 2-3 yrs from now I'll have kid #2 on the way (that's what we're planning).

Any angle anyone thinks I'm missing or opinions are welcome. Thanks.

cash drain vs financial independance should be weighed. Some of these help net worth more than others... car payment is where I would concentrate- largest immediate impact and debt is not tax deductable.

[collegeguy]

That's a good point of paying off the car. Thing is my car payment isn't too bad. It's $250 a month, so if I paid off the car then I could take that $200 + another $50 towards the HELOC to get me to my current $300 towards principal on the HELOC each month. And I'd have an extra $300 a month. Now that I think about it, if I paid off the car loan then I could theoretically pay $600 towards principal a month toward the HELOC and get rid of it faster. The clincher is this.....in 2-3 yrs from now my cashflow situation will be more difficult, b/c when baby #2 is here my wife will cease working for at least 4-5 years. So, that extra to put towards the heloc each month won't be doable. Hence the desire to get rid of it as quickly as possible. Tough call. The car loan is 4 years away from being paid off. And yes, I can prepay on it. Either car or HELOC.......hmmmm need to think more.

[jIM_Ohio]

might want to list loans for HELOC and car- list amount owed, monthly payment, interest rate (similar to OP, but more detail).

26k@ 600/mo is paid off in 43 months using simple math, probably sooner with compounding.

The car would NOT be paid off this early (you said it has 4 years (48 months) left. So this appears to be a no brainer to me.

16k@300/month is paid off in 26 months and frees up the amount of the 2nd mortgage payment (in 26 months). There is still $250/month tied up on the car for another 14-22 months after this.

26k@600/month is probably paid off in about 33 months (based on compounding). This frees up $600+ whatever interest payment is on HELOC in less than 3 years.

Add to this within 3 years I'd hope the postive cash flow on the rental units has built up a cash reserve. Then pocket around 200-500/mo from rental units and that is around 1100/mo freed up in 3 years.

[disneysteve]

I generally recommend paying highest interest loan first no matter what, but in this case, I think paying the car off makes sense. Applying that 10K to the HELOC does nothing for your cash flow, since you'll still owe 16K. Paying off the car, however, helps your cash flow immediately by eliminating that loan completely. You can then take the money that was going toward car payments and use it to make extra principal payments on the HELOC. The advantage of that is if something else comes up that you need extra money for, you can temporarily stop the extra payments and have money available for the other needs.

[cptacek]

I agree with Disneysteve. My philosophy is to get rid of a payment if you have a cash flow problem by paying off a debt, but pay towards the highest interest rate first if you don't. The OP said the payments to the HELOC is hurting, but really, the payments to all debt is hurting. Getting rid of the car debt (and then you can drop the expensive insurance on it and just get liability - which is cheaper) solves that problem every month and the extra money can go to the HELOC, but doesn't have to if that is too tight.

[disneysteve]

Originally Posted by cptacek

Getting rid of the car debt (and then you can drop the expensive insurance on it and just get liability - which is cheaper)

I don't necessarily agree with this. What kind of coverage you need has nothing to do with how much you owe on the vehicle. It has to do with what the vehicle is worth and how much you are willing to spend to repair it if it gets damaged. I wouldn't drop collision coverage just because the car is paid for. I think that is a very shortsighted way to save money. One relatively minor accident could eliminate any savings realized by dropping coverage.

[Ima saver]

I too, would pay off the car and use that money to pay extra on the heloc. Saving for your children's education should not be put above saving for your own retirement.

[creditcardfree]

I vote for paying off the car and applying all of the car payment money to the HELOC, too. One can always borrow for college, but not for retirement.

[collegeguy]

yeah, I agree that even if I pay off the car, I'm not going to change the type of insurance I have. The car is only 1.5 yrs old and I don't believe in taking collision off until the value has severly decreased (ie. <3K or similar).

as far as what you all say, I also agree that convention wisdom is to take a chunk out of the HELOC since that rate is higher than the car loan. but it is partly a cashflow issue and paying off the car loan will provide me greater flexibility if I need it. that, and what i"m thinking of doing is if I pay off the car loan, then I take that payment $ and throw it at the HELOC each month I'm able to do so, to try and get that thing gone in 4-5 years as well. and if there's a time when I can't throw that extra $ at it, then I won't, but at least I'll have that additional cashflow to be able to play around with.

[Scanner]

I'm going to a lone voice of dissent and opt for investing it as primary choice.

Secondary choice is the HELOC.

I don't care for lines of credit (even though I have one, LOL - maybe that's why I don't care for them) because the term is generally long when calculating the minimums.

Term loans like your car have a beginning, middle, and end - they don't "revolve."

Anyway, investing to me is attractive because you are admitting that soon your cash flow is going to be pinched. It's going to be difficult for you to add to your portfolio when Bouncing Baby 2 gets here and your wife isn't working and your expenses become higher.

So, why not get time and compounding on your side?

You see. . .that kind of happened with us and I think it worked out. I aggressively invested when I was 28-31 y.o. I guess I could have done other things with the money - paid down debts but I didn't. Then the second one came and I'm going to admit to the forum, we didn't always contribute to our Roth's every year (that's called life). But I had time on my side and my portfolio grew. And my student loan debt got retired in there.

At least now, I'm 38 y.o and I don't look back and say, "Gee, I wish I had invested when I was younger."

In summary:

1. Invest. Pay yourself first - I may elect for something more diversified like an ETF or mutual fund though with a small amount like 10K.
2. HELOC
3. Car loan
4. 529

[Aleta]

I think paying off the car loan first is better for the cash flow and can use the car payment towards the HELOC which is tax deductible. There is a book called TWO INCOME TRAP BY Elizabeth Warren that may help you for when your wife decides to be a stay-at-home-Mom. Elizabeth Warren also writes one called All Your Worth. I highly reccommend these books. There is a lot of practical advice in them. You can request them from your library. You seem to be on the right track.

[jIM_Ohio]

Originally Posted by collegeguy

yeah, I agree that even if I pay off the car, I'm not going to change the type of insurance I have. The car is only 1.5 yrs old and I don't believe in taking collision off until the value has severly decreased (ie. <3K or similar).

as far as what you all say, I also agree that convention wisdom is to take a chunk out of the HELOC since that rate is higher than the car loan. but it is partly a cashflow issue and paying off the car loan will provide me greater flexibility if I need it. that, and what i"m thinking of doing is if I pay off the car loan, then I take that payment $ and throw it at the HELOC each month I'm able to do so, to try and get that thing gone in 4-5 years as well. and if there's a time when I can't throw that extra $ at it, then I won't, but at least I'll have that additional cashflow to be able to play around with.

you need to analyze the tax efficiency of the HELOC.

[1-(tax rate)]*[HELOC] rate= (1-.25)*7.5=5.625.
1-.28*7.5=5.4.

This rate is only .125% higher than the car if in 25% tax bracket. If the interest on HELOC is the "over/under" on being able to itemize, it may cost you more than you realize to pay off early. The higher the tax bracket, the more sense it makes to keep the HELOC (because it's effective rate is lower based on higher tax brackets).

This is outside the cash flow issue.

[oldbones929]

You can always pay off the car loan and put the $250/mo into an emergency fund account....or savings, etc. Then, when your wife quits working for a few years you'll have a bit extra to fall back on. After a year it would total $3000.

Jennifer

[Hot dog]

I just did this very thing. I have a 2nd mortgage at about 20,000 and I hate it, but I just chose to pay off my car and will put that money now towards the mortgage. I actually just got a 0% credit card and put the money to pay off the card in the MM so I will make 5% on it for about 15 months until I have to pay the balance in full. So, I did chose to pay the car off first and my rate was only 3.9%. Good luck with your decision.

[disneysteve]

Originally Posted by Hot dog

I have a 2nd mortgage at about 20,000 and I hate it

I'm in that same situation. We've got a HEL at about 17K. I've sent a few extra principal payments in but haven't made a real effort to pay it off early. I think once our Roths are fully funded for 2007 (another month or so), I'll direct more money toward the HEL. I'd like to get rid of it in a couple of years. I've got more than enough in savings to get rid of it anytime but I hate to sacrifice the higher earnings of the investments, but at the same time, I hate having the debt.

[cptacek]

you are right, disneysteve, about the car insurance thing. Sorry about that. The link in another forum explained it very well. thank you.

[disneysteve]

Originally Posted by cptacek

you are right, disneysteve, about the car insurance thing. Sorry about that. The link in another forum explained it very well. thank you.

No problem. When to drop collision coverage is a common question.

Here's the link again for anyone who didn't read the other thread:
Property & Casualty Insurance: auto insurance

[cschin4]

Do NOT pay off the car. I see no point to that at all. The interest saved will be minimal. And, once people pay off their cars, those new car models start looking darn good. Keeping the payment will propel you to keep the car you have longer.

So, I would vote on either paying the HELOC with a committment on your part not to ever take out another Heloc. Or, pay $5K on the Heloc and put $5 K into the college plan and work as hard as you can to get that Heloc paid off and done.