Pay off debt or increase 401k contribution

**sweeps** · 06-06-2008, 08:29 AM

I think you're doing just fine... I would stay the course.

**tripods68** · 06-06-2008, 08:48 AM

Are you planning to purchase any big items like new car, upgrade to the house, plan for vacation etc..? Do you have an account to tap in case of an family emergency, like MMA or CD? If you don't an EF, i would put money towards this aside on monthly basis. You should set aside 5 to 6 months of your monthly expenses.

**cv1975** · 06-06-2008, 09:07 AM

Thanks for the responses!

We do have an emergency fund of about 6 months of our expenses.

We are not planning to buy a new car for at least 3-4 more years. If we need to do maintenance on the house we would temporarily stop paying the extra on the Line of Credit for a month or so. We already put aside $50 a week for vacations.

One thing I forgot to mention is that we are in the 25% tax bracket if that matters.

**poundwise** · 06-06-2008, 09:22 AM

Originally posted by cv1975

My question is, should we be paying less on the line of credit and putting that money towards the 401k or 403b?

Originally posted by sweeps

I think you're doing just fine... I would stay the course.

I wholeheartedly agree. I wouldn't stop the payoff plan; you are doing well all the way around.

**jIM_Ohio** · 06-06-2008, 10:48 AM

Originally posted by cv1975 View Post

Hi everybody. This forum is great! I have a question and I need help with it.

I am in my early 30s. We have about $78,000 saved for retirement in Roth IRAs, a 401k, and a 403b. We also have some debt. We owe $165,000 on our first mortgage and $25,000 on our Home Equity Line of Credit. The line of credit has an interest rate of 4.49% currently, but it is variable, so it could go up in the future. We don't have any other debt. We make $110,000 a year together. We currently put $5000 a year each into our Roth IRAs. We also are putting $10,500 a year into the 401k. We are putting a small amount into the 403b ($3500 a year). We are currently paying $500 extra every two weeks to the line of credit to pay it off. My question is, should we be paying less on the line of credit and putting that money towards the 401k or 403b? We would not get any additional matching from our employers.

Thanks for any advice!

I think your plan is fundamentally sound.

110k gross income
you are setting aside 5k+5k+10.5k+3.5k=24k
24/110=22% savings rate. That 22% is before matching, I assume. Excellent.

You are paying extra on the HELOC to pay it off- good move. Maybe you want to see the balance drop quicker? A thought would be to invest the extra payments (in a taxable account) earning more than the 4.x% ytou are paying, then when taxable account is big enough, pay off the HELOC with a lump sum. The advantage to this technique is you have more liquid assets, the downside is there is slightly more risk and you will be carrying slightly more debt short term.

**cv1975** · 06-06-2008, 11:15 AM

Thanks for the input everyone!

I get 3% matching on my 401k, so that adds another $2500 to our yearly total. My wife's employer matches but it is only a token amount ($400 a year). She also will get a small pension.

The idea was to pay off the HELOC before rates went back up too much. It is tied to prime so if the Fed raises rates we will be hit directly with a higher payment each month. However, I am open to Jim_ohio's idea, as long as there is not too much risk of losing money. What are some options for investing the extra money in a taxable account?

**jIM_Ohio** · 06-06-2008, 11:40 AM

Originally posted by cv1975 View Post

Thanks for the input everyone!

I get 3% matching on my 401k, so that adds another $2500 to our yearly total. My wife's employer matches but it is only a token amount ($400 a year). She also will get a small pension.

The idea was to pay off the HELOC before rates went back up too much. It is tied to prime so if the Fed raises rates we will be hit directly with a higher payment each month. However, I am open to Jim_ohio's idea, as long as there is not too much risk of losing money. What are some options for investing the extra money in a taxable account?

PRPFX
RPSIX
Vanguard Wellesley

all come to mind as mutual funds which can beat the 4.x% you are currently paying on HELOC. If the HELOC goes above 6%, cash out the investment, pay down the HELOC and continue paying down the HELOC.

PRPFX would subject you to market risk (it owns 25% stocks), interest rate risk, and currency risk, but it is diversified by owning swiss francs, gold, silver and US bonds. It is the most diversified fund of the 3. It has highest reward of any of the 3 funds I listed (8-12% returns possible). In one day it may swing 1%, but generally speaking, year over year, that chart does not get any better the last 10 years. I own this fund and invest in it as opposed to paying down my second mortgage.

RPSIX owns 15% stocks and 85% bonds and cash. It is usually positive year over year, and it's principal value will fluctuate the least (few days would see this fund move 1% either direction).

Vanguard wellesley is 40% stocks and 60% bonds. It is the middle fund of the 3 mentioned. More risk than RPSIX (because it holds more equities), but less risk than PRPFX in some people's eyes (I think PRPFX has less risk, but others might disagree).

The last two mentioned will affect tax returns each year (they each pay out ~4% in interest and dividends each year). PRPFX will hit you with a tax bill the year you sell it, and that tax will be lower (because PRPFX is long term capital gains not marginal rate).

**poundwise** · 06-06-2008, 01:51 PM

I understand the concept and I respect Jim's opinions, however, I disagree with the idea of investing, as described, for this purpose.

The balance on the HEL is $25,000 and they are able to throw $500 every two weeks, or $13,000 a year, at it. That means they'll be done with it in two years, or less if they want to press the issue.

I don't think it is a wise move then to invest money, in a taxable account, with a less than 24 month window, to try to beat out a rate that is guaranteed (the amount saved by making the extra payments.)

Could it be done? Sure. The rate on the HEL is low and the investments suggested are solid. But I'm not sure you gain enough to incur the risk and/or to even bother with the purchase, sale, taxes, etc. involved.

Also, what happens if the HEL rate goes up at a time when the fund(s) are down?

No, I wouldn't do it. I'd just make the extra payments against the HEL and systematically, and surely, put it away.

**jIM_Ohio** · 06-06-2008, 08:37 PM

Originally posted by poundwise View Post

I understand the concept and I respect Jim's opinions, however, I disagree with the idea of investing, as described, for this purpose.

The balance on the HEL is $25,000 and they are able to throw $500 every two weeks, or $13,000 a year, at it. That means they'll be done with it in two years, or less if they want to press the issue.

I don't think it is a wise move then to invest money, in a taxable account, with a less than 24 month window, to try to beat out a rate that is guaranteed (the amount saved by making the extra payments.)

Could it be done? Sure. The rate on the HEL is low and the investments suggested are solid. But I'm not sure you gain enough to incur the risk and/or to even bother with the purchase, sale, taxes, etc. involved.

Also, what happens if the HEL rate goes up at a time when the fund(s) are down?

No, I wouldn't do it. I'd just make the extra payments against the HEL and systematically, and surely, put it away.

I did not see the term on the HELOC (when it would be paid off). If two year payoff is correct, I concur with the advice to just pay it down $500/month.

Pay off debt or increase 401k contribution