Debt vs Savings? Need helpful advice please.

[DP2012]

Hello, looking for some advice. I am 25 years old. Weekly income of $1,500-2,300. Rental income of $1250 monthly. No debt besides home loan which is around $1750 per month bills included. Also around $2000 per month i spend on credit card. Here is my situation. My parents own a finance business where i can get 9% interest guaranteed annually. Should i dump most of my income into this account quarterly and let interest compound. Or should i put large payments toward my home loan principle monthly. My interest on 30yr mortgage is 3.75%. Note is roughly $1300 per month. Im not a fan of debt and hate to see all a large sum of my mortgage payments goin toward interest. Another option is to draw a line and split income into both accounts. Need advice please. What would you do? Thanks alot.

[disneysteve]

My parents own a finance business where i can get 9% interest guaranteed annually.

I think you need to get more details about this. I don't believe there is any investment anywhere that can give a guaranteed 9% annual return. If there was, we'd all be doing it.

So assuming that is fantasy, as I'm sure it is, what should you be doing?

1. Post your budget broken down, not just $2,000 on your credit card. Know where your money is going.
2. Have an emergency fund of 3-6 months of expenses.
3. Pay off all debt except the mortgage.
4. 15% of income to retirement accounts (401k, Roth IRA, 403b, whatever).
5. 5% of income to general savings
6. Once 1-5 are done, then you can consider extra mortgage payments though with a low interest rate, it still probably isn't the best investment option but it is reasonable at that point.

[DP2012]

thanks for the quick reply. I have no debt besides home mortgage. My breakdown of spendings are vehicle insurance $200 month. Gas $500 month. Groceries $400 month. I spend about another 1,000 month on misc items. So total spending is around 2000 monthly on credit card which i pay off monthly. I have no retirement set up yet but my work will offer a 403 at the end of year which i plan to invest maximum amount of match which is 6%. I have my emergenency fund setup also addiditional cash in bank. Finance companays accept money from "investors" and pay them interest on there money. The companys use the money to hand out to customers. The money is guranteed back to the investor at anytime. So im planning to invest 10k to start and as much as i can every 6 months ( im thinking around 6k) and let interest compound and put back into the account. I would like to do this for as long as 20yrs. Is this a good idea or should i focus on paying off the mortgage first by putting my additional income into the mortgage principle. Another option is to split income between mortgage payments and finance account where i will be getting 9% interest. Sorry if it sounds confusing just trying to see which is better paying off a mortgage where i pay 3.75% interest or either putting my money into an account where i get 9& interest. Thanks

[witchkizzle]

"Finance companays accept money from "investors" and pay them interest on there money. The companys use the money to hand out to customers. The money is guranteed back to the investor at anytime."

sounds like a ponzi scheme.

What is your mortgage balance at right now?

With your income at 9k per month (average of 1,900 a week and 1250 rental a month)and only spending 2k per month, you should be able to pay off your mortgage very quickly. You could pay it off very quickly and still have money for investing on the side...

[Petunia 100]

thanks for the quick reply. I have no debt besides home mortgage. My breakdown of spendings are vehicle insurance $200 month. Gas $500 month. Groceries $400 month. I spend about another 1,000 month on misc items. So total spending is around 2000 monthly on credit card which i pay off monthly. I have no retirement set up yet but my work will offer a 403 at the end of year which i plan to invest maximum amount of match which is 6%. I have my emergenency fund setup also addiditional cash in bank. Finance companays accept money from "investors" and pay them interest on there money. The companys use the money to hand out to customers. The money is guranteed back to the investor at anytime. So im planning to invest 10k to start and as much as i can every 6 months ( im thinking around 6k) and let interest compound and put back into the account. I would like to do this for as long as 20yrs. Is this a good idea or should i focus on paying off the mortgage first by putting my additional income into the mortgage principle. Another option is to split income between mortgage payments and finance account where i will be getting 9% interest. Sorry if it sounds confusing just trying to see which is better paying off a mortgage where i pay 3.75% interest or either putting my money into an account where i get 9& interest. Thanks

I think you should get started with retirement investing immediately. If the 403b is not available to you now, then open an IRA.

The finance company's guarantee is only as strong as the finance company. Do your parents own this finance company, or are your parent investing in the finance company? What sort of loans are made to customers? They must be high risk, or the interest wouldn't be so high. If the finance company is paying investors 9%, then it is charging something more than 9% to its customers.

I agree with Witchkizzle, what you have written screams "ponzi scheme" to me. Certainly I could be mistaken, though. In a ponzi scheme, investors aren't really paid from earnings, but from new deposits from other investors. Eventually, it becomes unsustainable and investors lose what they have invested. One tell tale sign of a ponzi is unreasonably high investment returns which are guaranteed. How can the finance company possibly guarantee that none of their customers will default? They can't, so what they are guaranteeing is to make investors whole in the event of default. Unless they have very deep pockets, that is a worthless guarantee. If they do have deep pockets, then why solicit outside money and pay 9% for it? That makes no sense. So whichever way you look at it, it just doesn't smell right.

[DP2012]

Most owners of finance companys dont tie up there own money with the business they use money from banks which they pay interest on usually 3-7% and money from investors whom they pay interest too. My family has about 20 investors who theyve been paying 9% too for years now. Most finance companys do this, they may not pay as much interest but they pay. The companys return from customers is around 20-35%. Anyway i will split the income and put half into mortgage and other half into finance act.

[Petunia 100]

Most owners of finance companys dont tie up there own money with the business they use money from banks which they pay interest on usually 3-7% and money from investors whom they pay interest too. My family has about 20 investors who theyve been paying 9% too for years now. Most finance companys do this, they may not pay as much interest but they pay. The companys return from customers is around 20-35%. Anyway i will split the income and put half into mortgage and other half into finance act.

If I own a finance company and can borrow from a bank at 3 - 7%, then that is what I will do. I will not solicit outside money and pay 9%. Why would I? I am bearing all the risk.

What sort of customer pays 20 - 35%? Unsecured debt for people with really bad credit? There is going to be a high default rate for this kind of lending.

[witchkizzle]

If I own a finance company and can borrow from a bank at 3 - 7%, then that is what I will do. I will not solicit outside money and pay 9%. Why would I? I am bearing all the risk.

What sort of customer pays 20 - 35%? Unsecured debt for people with really bad credit? There is going to be a high default rate for this kind of lending.

I completely agree with Petunia. This situation makes no sense.

With that high of a interest rate charged to the borrower, the default rate is going to be inherently large.

If the default rate is large, the 9% payout can not be sustained.

If the 9% payout can not be sustained, old investors start to get paid with new investors money.

When old investors begin to be paid with new investors money, the system begins to destroy itself if more and more new investors can not be found and "tricked" into investing.

this is basically the definition of a ponzi scheme.


If this was a guaranteed 9% like you are saying, why wouldn't you invest every single penny you had into it? Is there a catch you aren't tell us about? 9% is greater than the interest you pay on your mortgage, so it only would make sense to make 9% and pay 3.75% (or whatever it was) and have a net gain of 5.25% on your money.

[Auditum]

Pay only the monthly payments for your debt and invest the rest of the money, because the money that you will invest will bring you more that being without debt.

[Nika]

Finance companays accept money from "investors" and pay them interest on there money. The companys use the money to hand out to customers.

You mean they pay interest to customers using new investments? That is the definition of a ponzy scheme.

You have to understand how the money are being made for the company to pay this much interest and make a profit for themselves. And with so much capital being so widely available right now at a much, much lower cost, why on earth would a reputable company pay 9% "guaranteed"?

I would not touch this investment or that company with a ten foot pole.