What to do with upcoming bonus

**disneysteve** · 09-30-2010, 11:47 AM

Welcome. Do you have a fully funded emergency fund of 6 months worth of expenses? If so, I would pay off debt from highest to lowest interest rate. If the bonus will be sufficient to pay off all debt, CC, LOC and cars, that's great. Go for it. With what remains, give some to charity and save the rest. Then your next post can be to ask what to do with all the money that is no longer going to debt payments.

**greenskeeper** · 09-30-2010, 11:49 AM

by savings do you mean physical gold or silver?

**Temujin_12** · 09-30-2010, 12:05 PM

@disneysteve
I don't have 6 mo worth of expenses saved. So, would you recommend putting all of the bonus into savings (which would put us at the 6 month mark) instead of paying off CC, LOC or car loans? Thinking about it, I'd feel much more secure if I had a plan to pay off debt over time and a 6 mo savings rather than no CC/LOC/car debt but no savings. Which is better (or maybe a mix)?

I also got a small raise (promotion may come later in FY11), so I could put the little extra that comes from raise to pay down debt over time and keep the bonus in savings.

Thoughts?

@greenskeeper
By savings I mean in a savings account in the bank. If I have 6mo savings, no CC/LOC/car debt and money left over, I'll consider investing in other things (futures/bonds/roth IRA/401k/etc.)

**disneysteve** · 09-30-2010, 12:18 PM

Originally posted by Temujin_12 View Post

@disneysteve
I don't have 6 mo worth of expenses saved. So, would you recommend putting all of the bonus into savings (which would put us at the 6 month mark) instead of paying off CC, LOC or car loans? Thinking about it, I'd feel much more secure if I had a plan to pay off debt over time and a 6 mo savings rather than no CC/LOC/car debt but no savings. Which is better (or maybe a mix)?

I also got a small raise (promotion may come later in FY11), so I could put the little extra that comes from raise to pay down debt over time and keep the bonus in savings.

Thoughts?

Do you have any EF? If you've got at least 3 months saved, I'd say go ahead and get out of debt. Then you can build the rest of your EF quickly with the money that was formerly going to service all of those loans. Remember, your EF doesn't need to be as big when you are debt-free.

So I'd probably make sure I had a 3-month EF and put the rest toward debt.

**jIM_Ohio** · 09-30-2010, 12:42 PM

Without knowing more, I would look to do the following

1) know how much 1 month of expenses is (like $4000 or $6000)

2) If you pay down the cars, are they paid off?
for example, pay off one car, then bank the car payment to build up 3 months of expenses over next 3 years

3) if you paid off the cc debt, same example as cars- if you paid off the cc, then banked the cc payment for 3 years, would you have 3 months expenses saved?

In general pay down debt like this

1) unsecured debt
2) high interest rate debt (pay off debt highest interest rate to lowest interest rate)
3) depreciating assets
4) other debt (like a mortgage)

Unsecured debt is generally credit cars, or any debt which does not have something tangible. You cannot sell a dinner you charged, or groceries you charged, so this is unsecured (you cannot sell anything to pay this off).

Secured debt is a car or house or stereo which you could sell to recover all or a portion of the debt.

Depreciating assets are just about anything other than a house. Cars, stereo systems etc all are worth less when you get rid of them than when you purchased them.

So applying this to your situation, I would probably pay off the cc debt first (its unsecured) and its interest rate is probably higher than the car loans.

I would then pay off (or pay down) one of the car loans.

Then I would set a 3 year plan to build 3 months of expenses into savings with any money the debt pay down freed up.

**snshijuptr** · 09-30-2010, 12:52 PM

I would recommend you pay off any debt with an interest rate greater than 5%. That's my cutoff, you can determine what you think a "high" interest rate is. Then put the rest into an emergency fund until you have 3-6 months worth of expenses in savings. The number of months depends on if you own a home (more), have kids (more), have a secure job (less), and anything else that makes your financial life riskier (more) or safer (less). Use any remaining to pay down any other debt you have.

Remember that interest rates are always relative to the other place you are putting the money. 2% APR is high if you are going to put your money into a savings account with 1% APY. Think of your debt as money leveraged for other uses. Hopefully those other uses are earning you more money than the debt is costing you. The amount of principal really doesn't matter, only the interest rate.

**Temujin_12** · 09-30-2010, 01:14 PM

@disneysteve

Do you have any EF?

We do have some EF (only about 1-2 months). We had 2-3 months but recently had a confluence of unexpected expenses (expensive car repair, water damage to home, fridge and dishwasher going out).

If you've got at least 3 months saved, I'd say go ahead and get out of debt

I would like 6 mo. But perhaps 6 mo immediately isn't practical.

I like the idea of getting back to 3 mo of EF then putting the rest towards debt in order jiM_Ohio mentions then start putting those payments towards savings:

jiM_Ohio:
1) unsecured debt
2) high interest rate debt (pay off debt highest interest rate to lowest interest rate)
3) depreciating assets
4) other debt (like a mortgage)

Thanks. This puts things into perspective for me.

**jpg7n16** · 10-01-2010, 06:49 AM

Originally posted by Temujin_12 View Post

Pay off car loans. Here I have maybe several K's worth of principle left between two cars. I'm uncertain about this one since cars are depreciating assets. Does it make sense to pay them off early to avoid interest if they are just going to decrease in value anyways? One alternative I'm considering is consolidating the two loans into one loan and try to get a lower interest rate now that rates are much lower than when I bought them.

What's your opinion on how to best spend a generous bonus given my points above?

This is a common misconception. The car, and the loan you took out to buy the car - are two totally separate things.

The car is an asset, that typically goes down sharply in value over time (depreciates). = Depreciating Asset
The loan is a liability, with a fixed amount owed that charges interest until it is paid off.

One has no impact on the other. I mean, if your car goes down in value, will the bank give you a discount on the loan? No, you still owe the same amount. Or if you add improvements to your car (new tires, new stereo, etc) the value of the car may even go up, but your debt remains unchanged - because the car and the loan are not the same thing.

The time to be concerned with "depreciating assets" is when you are buying the car. Because at that point, you are about to borrow money to invest in a depreciating asset. But once you've made the decision to borrow, you should pay off the loan on its own merit.

Could you sell the cars? (this would remove depreciating assets off your balance sheet)

--------------------
I think that while you are paying down high interest rate debt, 1-2mo EF is perfectly fine. And I would personally pay off debt by:
1) High interest rate debt (7%+)
2) Low interest rate debt

Secured/unsecured doesn't make any difference to me.

**KTP** · 10-01-2010, 08:30 AM

Until you reduce the debts to zero, I think any extra money should go toward that instead of a charity (and maybe go to funding your EF). Think about it this way: Would you take out a cash advance on a credit card to make a donation? If you have credit card debt other than month to month charges that you pay off, then by not paying off the cc when you have the cash available is the same thing as taking a cc cash advance to make a charitable donation IMO.

What to do with upcoming bonus