Which to Pay Down/Off or Should it be done?

[t-dog]

Looking for your advice on how to proceed.

I am 42, single parent of an 8-year old. I have a stable job with good salary, 98k.

I have $17k in cash in the bank. Add another $1,000 to this EF monthly.
Work 401(k) balances is 36,600 (3% match and I contribute $500 per month)
Combined Roth and trad. IRA balance $83,000

Debts:

Chase credit card $3800, 13.24%
USAA credit card $860, 11.9%
Private student loan $2600, 3.5%, payoff per terms Jan. 2018
Federal student loan $67k, 3.625%, payoff per terms Jan. 2034

New homeowner as of August looking to purchase an in-ground pool install this winter - west coast dweller so it will be much used in those 100+ degree days.

Should I stop contributing to the EF and use that $1,000 monthly to eliminate the debt? The student loans are at such low interest rates is it more prudent to just ride out their repayment terms?

[Savoir Faire-Demogague in NJ]

Your student loans are at dirt cheap rates. I'd pay those one month at a time.

With your two CC's I would put effort into getting rid of the USAA first, because it has the lowest balance and you should be able to pay it off fairly quickly, and thus achieve a milestone.
At that point, use the money otherwise going to USAA toward the Chase account.
Many here will disagree and go with the highest interest rate method of getting rid of debt. I get that argument but personal finance has an emotional side. By paying off the lowest balance first you quickly reach a goal.

How do you plan to pay for your in-ground pool?

[reader79]

I would stop contributing, and payoff the debts, including the $2,600 smaller loan. You can always use your Roth as a backup EF. But they are going to ask for your monthly budget, what cell phone you bought your 8-year-old, why do you need a pool when you can just hose him down, yada, yada, yada.....

[qofcc]

Should I stop contributing to the EF and use that $1,000 monthly to eliminate the debt?

I would actually take the cash from the EF, then go back to replenishing it. These are major credit cards and you could charge the money back if you needed to.

The student loans are at such low interest rates is it more prudent to just ride out their repayment terms?

For now, yes.

How are you going to pay for the pool?

[jd2005]

Your emergency fund, in my opinion, is already big enough. I keep $5k in mine. I would up your 401(k) contribution another $500 a month for a total of $1000 per month. That leaves you with $500 a month to: a) add to your emergency fund; b) start a home repair/pool fund (separate from your emergency fund - as a pool is not an emergency); or c) continue adding to 401(k) to max it out. I would opt for option c. Even opting for this option you are till left over with "extra" cash of $125 a month ($1500 (current month cash to EF and 401(k) contribution) - $1375 (max out 401(k)).

With the cash in your current emergency fund I would take $4660 from your $17k to pay off credit cards. That leaves you with a balance of $12,340.

If your private student loans are not at a fixed rate (as mine are not, and we have the same current interest rate), I would also knock of the $2,600 using emergency fund money.

I assume your federal loans are consolidated and have a fixed rate for life. If they do not, consolidate and fix interest rate.

That leaves you with $9,740 in your emergency fund. I like round numbers, so I would use the "extra" $125 (if you opted for c above) or $500 you have monthly to reach $10,000, then stop contributing to the EF. I would then start a "pool" fund with the extra cash you have coming in.

[SVT]

Instead of waiting 5 months for the CCs to be paid off, I would use the $1000 you're thinking of putting in the EF and take $4k you already have in the EF and just pay them off. Then you can concentrate on building up your EF, if you want. I say if you want because I'm not one to have big EFs, and yours is already at a decent amount. It depends how stable you feel your job is, how new the house is, etc.

[mtntigger]

I would wait at least one year before you plan on putting in a pool. As a new homeowner, you are going to run into a lot of unexpected costs. In the meantime, up what you are contributing to your 401k and pay off your debts.

[Urban Chicago]

In addition to everything the others say, I'd like to mention that you have 10 years to save for college if your kid is 8. Not everyone will agree with me, but I think a college savings account (like a 529 plan) is more important than a pool.

[phil5185]

purchase an in-ground pool

Here in AZ pools seem to be a passing trend as neighborhoods grow. One house gets a pool, then about every third house gets one. After about 5 years, the owners grow weary of them - so they sell their house and move to a new house to escape the pool. Some fill in the pool, plant grass, and stay in the house.
But the "you will grow to hate it" stories are never heeded (it won't happen to us, we love the water). So the pool companies continue to do a thriving business.

[Sum Dum Gai]

Use the money sitting in the bank to pay off the cards. You can build the EF back up afterwards if you'd like. Your retirement balance seems low for your age. If you have a pension, maybe that's deliberate. If not, I'd like to see you at least split the $1,000 a month you have budgeted towards the EF between the EF and retirement.

I'm not touching the pool thing. It's a personal decision. Don't forget to budget for the increased insurance premium, because it will go up a bit once you get the pool installed.

[Deleted]

"Here in AZ pools seem to be a passing trend as neighborhoods grow. One house gets a pool, then about every third house gets one. After about 5 years, the owners grow weary of them - so they sell their house and move to a new house to escape the pool. Some fill in the pool, plant grass, and stay in the house.
But the "you will grow to hate it" stories are never heeded (it won't happen to us, we love the water). So the pool companies continue to do a thriving business."

Sooooo true! I thought for sure we would put a pool in our AZ house (mind you the owners before us filled one in!). We waited a year and it turns out I spent a fair time in CA in the summer anyway. I loved our spa and none of my friends used their pools much after the first year.

[t-dog]

To answer some of the questions -

I have a 529 started for my son and he receives $742 in monthly survivors benefits which are directed for his college. He will accrue that benefit until he graduates from high school or 18 1/4 (as he is a March 17 baby - so yes, he turned 8 today!)

He also has 2 other college plans started by both grandfathers and is the sole heir to one grandfathers estate currently sitting at 700k.

My plan for the pool is to have it dug winter 2011 which will mark the 1.5 year point in homeownership. I grew up with a pool and never tired of it. What I am tired of is driving daily from Memorial to Labor Day to the community pool - I love the pool (my chores growing up were to scrub the tile, skim and test the water) and so does the boy. I am saving cash for the pool and will not embark on the venture if I don't have the cash ready to pay for it.

Federal student loan is consolidated and locked at that interest rate, but it bugs me to have such a large debt.

I am tempted to just wipe out both credit cards in April and the next month the private student loan (that rate is also locked) since I hate being in debt. Looking to the collective wisdom to see if that was a good plan.

As to the retirement question, I pulled a bunch of Roth contributions for downpayment money and am now replenishing as the mortgage at $1131/month 4.625% is much cheaper than teh $1,450 I was paying to rent. I have both a 401(k) and a defined benefit plan at work.

Medical/dental for me and the boy are paid 100% by my employer, so I have the odd $15 co-pay but have not in the last 3 years spent more than $300/year on any dental or medical (including Rx and otc medications).

I will cop to Santa bringing the child an iTouch for Christmas, but he already knows he is not getting a cell phone until he can contribute to paying for it monthly. Must be doing something right because he is a saver and at 8 has $500 in the bank (birthday/Christmas/Hanukah money - none of his survivors benefits go to that account and he doesn't even know he gets money monthly as I just put it away for him).

[Tiny]

Part of me prefers less "bills" so I'd definitely pay those CC's ASAP - have you solved the financial issues that got you into CC debt? You don't want to pay them off only to keep charging and not paying in full each month.
As for the Student Loans... I'd probably just pay off the little one before the end of 2011 (or ASAP) and then take whatever it's payment was (I'm guesstimating $50) and add it to your other SL payment and slowly prepay that one over time. It's got an attractive low rate which would let you really start building wealth with your disposable income. It's got a low interest rate but if you let it go to 2034 you'll be paying on it till you are 65... even if you cut 5 years off the payoff date that's still something.

[t-dog]

There was no particular "problem" that lead to the credit card issue - I had to finance a funeral for my husband - hence the survivors benefits for son. The only recent purchase was a new bed (it was badly needed and since its purchase he now sleeps far better) for son which represents the entire balance on the USAA card.

Thanks all for the advice. I hate being in debt and was debating the pay most of it off and rebuild v. slow and steady approach.

[phil5185]

I am tempted to just wipe out both credit cards in April and the next month the private student loan (that rate is also locked) since I hate being in debt.

I would clear the 2 credit cards, no need to pay double-digit interest on revolving credit, after all you earn $98k, you have $120,000 in investments and $17k in cash, you have substantial financial depth.

But I would keep the $220,000 mortgage and the two student loans for their full terms, you don't prepay 3.5% to 4.625% long term capital, you utilize it. And you make financial decisions with math, "hate" has nothing to do it.

[runewell]

I would not wait but pay off the credit cards immediately, then build the EF up again. The amount you had seemed sufficient as long as you were comfortable that your job was secure.

After that, do whatever seems right.

[Tiny]

Jenr, I'm sorry for your loss.
The only reason I brought up the cc debt was because often the feast(run up the cards)/famine(deprivation to pay off the cards) way of handling CCs is rut many people get stuck in. This obviously doesn't apply to how you handle your money.

[t-dog]

Thanks ATS.

[debtheaven]

I am so sorry for your loss.

I'd leave 15K in the EF, put 2K towards the cards, and then use that 1K per month to pay them off. You'd be done with them in two or three months.

While I wouldn't actively pay off the bigger student loan, I like ATSiaRu's idea of paying off the smaller student loan sooner rather than later, and rolling that monthly payment into the bigger student loan so you knock some time off the 2034 payoff date.

Then all you'll have left is your mortgage and one student loan.

I hope you and your son enjoy your new pool!

ETA: I am tempted to just wipe out both credit cards in April and the next month the private student loan (that rate is also locked) since I hate being in debt.

Reread and saw this. I think this is a good plan.

[thyme4change]

I agree with the people that say to take $5k out of the EF and pay off the credit cards all at once, and then go back to shoring up the savings account.

I'd leave both student loans hanging out until they mature on their own.

[schildi]

jenr, sorry to hear about your husband.

I would pay off the two credit cards first.

[azphx1972]

I'm sorry for your loss.

It's difficult to give relevant recommendations without a complete picture (expenses, medical conditions, transportation situation, etc.). If I were in your shoes, because you have a stable job, I would use the EF to pay off the credit cards, and then build it back up again before I thought about getting a pool (which I personally would not do if I could go back and do it over again). I would also increase the contribution to retirement to 15% of my income, more if I could afford it.

Good luck.

[midjd]

Jen, I'm sorry for your loss. I understand the feeling of huge student loans and wanting to pay them off as soon as possible, but with those interest rates, I'd stay with the minimums. (As someone carrying a balance about 2x that at 6.5%, I'm very jealous of your interest rates Tackle the CCs first and increase your retirement contribution. Looks like you're in pretty good shape otherwise.

[share88]

Sorry for your loss.

Think long and hard about a pool and don't forget to budget extra for electricity to run pool pump and a person to clean it (unless you care to do it yourself). Also make sure you are familiar and compliant with local laws regarding pool fences, child resistant doors leading from the house, etc. You may need a little extra $ to account for such things.

[t-dog]

Ok so it was mentioned that my retirement balances seem low - where do you all think they should be by this time?

[Deleted]

Mar 18, 2011 1:07:07 GMT -5 t-dog said:

Ok so it was mentioned that my retirement balances seem low - where do you all think they should be by this time?

Seriously don't go by Your Money standards because it will crush your self esteem

I say figure how much you will need in retirement and go from there.

One last thing, if I were you I would start by working towards maxing your 401K and Roth IRA accounts.

Edit:

Also sorry for your lost
If you received life insurance policy payout that also might change the amount you will need at retirement.

[azphx1972]

Mar 18, 2011 1:07:07 GMT -5 t-dog said:

Ok so it was mentioned that my retirement balances seem low - where do you all think they should be by this time?

According to the retirement magic number calculator, you should be contributing around 19% toward retirement.

More about the retirement magic number here.

Edit: I'm not sure why the board is putting a space in the word "retirement" above. Bug?

[share88]

Mar 18, 2011 1:07:07 GMT -5 t-dog said:

Ok so it was mentioned that my retirement balances seem low - where do you all think they should be by this time?

Well . . . it depends. Do you expect a pension as well as your 401k/Roth?

[t-dog]

yes, I will have a pension and 401k in retirement. I should note my employer contributes the 3% even if I don't contribute anything to the 401k.

[phil5185]

Ok so it was mentioned that my retirement balances seem low - where do you all think they should be by this time?

IMO your balances are pretty solid. If you build on your $120,000 by adding $20,000/yr (you + employer) that is $2,000,000 in 20 yrs if you use 10% investments. Or $1,300,000 if you use 7% investments. (As your salary increases over the years, you will probably increase the $20,000, that will help offset inflation).