New Financial Direction

[mohawkstrip]

Me: Early 30s, spent like crazy during my 20s but trying to get my act together. The facts:

Income: 55k a year with potential for moderate increase within next few years
Debt: Credit card - 1,500 @ 19%, Student Loan - 19,000 at 6%
Major changes since last year: Sold car (which I had taken out a 16k loan for and have paid off) and am living car free in major urban area. This cuts about $500 in monthly expenses.
Retirement savings: 13k
Investments (vangaurd - combination of stock/bond funds) 10k
EF: 5k

Future Plans: Not planning to buy a house - like the freedom and low maintenance renting affords, plus I'd like to live abroad for a few years and do more traveling.

Car: Not planning to buy a car unless I move to a smaller town. In that case, it will be a beat up Jeep Wrangler for like 3k cash.

My budget shows $800 extra a month after rent/bills are paid. during the past year, that has mostly gone into paying down CC debt and making extra payments on student loan.

Now that the debt is more manageable in size, how do you recommend I allocate this money? Should I take a chunk of the EF and pay more debt, increase my EF, or put more into investments?

[disneysteve]

I would immediately pay off the credit card. Carrying a balance when you are sitting on the cash to pay it off makes no sense.

As for the student loans, that's a little bit fuzzier. Is the interest tax-deductible? Is that one loan or several loans?

Most likely, your best bet will be to pay it off and take the guaranteed 6% return. What is your retirement situation? Do you have a plan with a company match? If so, I'd invest at least enough to get the full match and then probably knock out the student loans to get those off your back. Once you are debt-free, you can start socking away money for the future.

[jpg7n16]

I would immediately pay off the credit card. Carrying a balance when you are sitting on the cash to pay it off makes no sense.

Totally agreed.

As for the student loans, that's a little bit fuzzier. Is the interest tax-deductible?

Not sure what you mean DS. Student loan interest is always deductible as long as you meet the income restrictions. And $55k is not high enough to not deduct.

Student loan interest is an above the line deduction - like IRA contributions - not a below the line deduction - like mortgage interest.

Most likely, your best bet will be to pay it off and take the guaranteed 6% return. What is your retirement situation? Do you have a plan with a company match? If so, I'd invest at least enough to get the full match and then probably knock out the student loans to get those off your back. Once you are debt-free, you can start socking away money for the future.

I like DS's plan here too. You'll need some combination of debt reduction and retirement savings. The interest rate on the loans (minus their tax benefits) is not high enough to postpone retirement, nor is it low enough to put off debt repayment. So you should be doing both.

So for that $800/month - I'd first pay off the CC today, then use the $800/month to rebuild my EF to 3 months expenses. Then I'd split the $800 into $400 extra on student loans, and $400 extra into a Roth IRA.

[disneysteve]

Not sure what you mean DS. Student loan interest is always deductible as long as you meet the income restrictions.

I'm not familiar with the guidelines on this. Unfortunately, they didn't make student loan interest deductible until after I had repaid mine so I never had that perk.

[bjl584]

I'm not familiar with the guidelines on this. Unfortunately, they didn't make student loan interest deductible until after I had repaid mine so I never had that perk.

I deduct the interest on mine, but there is a limit. I think that the first 1250 of interest is deductable. That was last year. It may have changed this year. And even then, if you don't itemize, it doesn't really matter anyway. You would just get the standard deduction.

[jpg7n16]

I'm not familiar with the guidelines on this. Unfortunately, they didn't make student loan interest deductible until after I had repaid mine so I never had that perk.

OIC - well, you may have made too much income anyways or at least that's what you can tell yourself to console you on those nights when you cry yourself to sleep over this hahah

For more information about the student loan interest deduction than you could ever want to know, check out: Publication 970 (2009), Tax Benefits for Education


The basics: if you make less than $60k Single, or $120k filing joint - you get a to deduct up to $2500 of student loan interest. Whether you itemize or not, since it's not part of the itemized deductions.

If you make between 60-75k S (120-150k MFJ) you get to deduct a portion of the interest.

If you make over 75k S (150k MFJ) you don't get to deduct any.

[jpg7n16]

I deduct the interest on mine, but there is a limit. I think that the first 1250 of interest is deductable. That was last year. It may have changed this year. And even then, if you don't itemize, it doesn't really matter anyway. You would just get the standard deduction.

It's up to $2500 (since 2009); and it's in addition to the standard deduction.

Student interest isn't part of your itemized deductions. It's above the line, like your IRA contribution deductions.

So even if you take the standard deduction (like me), you get to take student loan interest too

[littleroc02us]

Personally I would take out $1500 from your EF and pay off your cc like today, and then use $2500 and put it towards your school loan leaving a balance of 16.5k. That will leave $1000 in your EF for the time being. If you put 800 towards your school loan it will take you 20 months to pay off. Then your debt free. That's when you can build back up your EF fund...

[jpg7n16]

Personally I would take out $1500 from your EF and pay off your cc like today, and then use $2500 and put it towards your school loan leaving a balance of 16.5k. That will leave $1000 in your EF for the time being. If you put 800 towards your school loan it will take you 20 months to pay off. Then your debt free. That's when you can build back up your EF fund...

Do you feel that $1000 in the EF for the next 2 years is enough? Or are you leaving the other $10k investments alone and counting them as the EF too?

[disneysteve]

Do you feel that $1000 in the EF for the next 2 years is enough? Or are you leaving the other $10k investments alone and counting them as the EF too?

Actually, I believe the Dave Ramsey answer to the question would be to take $4,000 out of the EF, leaving $1,000, and liquidate the $10,000 in taxable investments and put all of that toward debt. That would leave just $5,000 in debt. With $800/month going towards it, OP is debt-free in just over 6 months and can start rebuilding the EF and savings at that point.

[littleroc02us]

Do you feel that $1000 in the EF for the next 2 years is enough? Or are you leaving the other $10k investments alone and counting them as the EF too?

If your referring to what my thinking is, is that just what I said above. The poster has 5k in an EF, they would simple take out 4k of that for bills and leave 1k in the EF until all debt is paid off. It worked just fine for me. If the car breaks down you have 1k to fix it our buy a used car.. Replenish the EF and continue with the debt payoff plan until it's gone. Don't touch investments...

[mohawkstrip]

Thanks for the comments. I wouldn't be comfortable having less than $4k in the EF. I've had chronic CC debt for the past 5 years and it's something I don't want to fall back into.

The student loan interest is deductable - this is why, psychologically, it bothers me a lot less than CC debt. Plus if need be, I can defer payments if something happens to my income.

So here is my plan.
-Pay off CC within next few weeks from EF
-Use tax refund (prob about $900) to make chunk payment to student loan
-Allocate monthly budget surplus to student loan (about $500 a month), investments and retirement (no company match, though).

[littleroc02us]

Actually, I believe the Dave Ramsey answer to the question would be to take $4,000 out of the EF, leaving $1,000, and liquidate the $10,000 in taxable investments and put all of that toward debt. That would leave just $5,000 in debt. With $800/month going towards it, OP is debt-free in just over 6 months and can start rebuilding the EF and savings at that point.

That is true about what DR would say, but I disagree with him about taking out the investments especially when you can be debt free in 20 months.

[littleroc02us]

Thanks for the comments. I wouldn't be comfortable having less than $4k in the EF. I've had chronic CC debt for the past 5 years and it's something I don't want to fall back into.

The student loan interest is deductable - this is why, psychologically, it bothers me a lot less than CC debt. Plus if need be, I can defer payments if something happens to my income.

So here is my plan.
-Pay off CC within next few weeks from EF
-Use tax refund (prob about $900) to make chunk payment to student loan
-Allocate monthly budget surplus to student loan (about $500 a month), investments and retirement (no company match, though).

Have fun with that idea, but what you are going to find out is how much longer it takes you to get control of things....

[jpg7n16]

That is true about what DR would say, but I disagree with him about taking out the investments especially when you can be debt free in 20 months.

But you're okay dropping the cash to $1k, when you could be debt free in 23 months?

I kinda disagree with both of you

I'd pay off the credit cards for sure. And then keep at least 1 month's expenses in cash. 3 would be better.

And then I'm also against selling the investments to pay off a 6% tax deductible loan.


If the balances were flipped, and the Credit card was at $19,000 @ 19.4%, I'd sell the investments in a heartbeat. And I'd drop to a $1k EF to get out of the credit cards as fast as possible. But I wouldn't advise it for the school loan.