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Post by Deleted on Apr 6, 2011 22:32:08 GMT -5
2) SL at 9%? Ouch! What is the length? I'd seriously try to get that paid off ASAP maybe even ahead of the car loan.... Yep It it is my sallie mae loan and currently refinancing it to a lower percentage (6.125%)
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Post by Deleted on Apr 6, 2011 22:39:37 GMT -5
I don't know what you invest it - but 5 years is $10,825 (free money). If you use 10%/yr items in your retirement fund, that will be $188,888 of your fund in 30 yrs - I would be careful not to miss out on that. My 401k is in the Fidelity Freedom 2045 FFFGX My wife 401k is in Principal lifetime 2050 seperate account PTERX Both Roths are with in the Vanguard Target Retirement 2050 Fund VFIFX Ok I am home and all our loans are at 6.125% exept for my sallie mae but by next month when the refinancing goes thru it would be at 6.125 The majority of my wife student loans are Federal loans: 78K at 6.125% for 30 years. Same for my 15K in Federal loans. The rest are for 10-15 years. You think 6.125% is a good rate so no rush to pay them down? I always thought you said anything above 6% is not worth keeping.
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Post by Deleted on Apr 6, 2011 22:43:35 GMT -5
I know I am going to get beaten, flamed and stoned on my response. But as someone recently out of Chp 7 I was told repeatedly not to forgo contributions to my retirement or take out money from retirement funds to "help" my consumer debt situation. I am an example of someone who held on too long and should have done my BK a year ago. If your situation changes drastically (trust me I didn't see it coming) your consumer debt can be discharged. They can't take your retirement funds Not advocating BK. Just coming from someone on the other side now. Keep up the investing. I will be playing catch up for a long time.... Now hiding behind a lead curtain to deflect the Snark Masters on here That is a very valid point, Jingles. However, in Caiwau's case, his debt is primarily student loans which do not get discharged in bankruptcy. Yep, of the 160K only 22K will be discharge in bankruptcy: - 7K credit card loan - 15K car loan 86.25% of our total debt is student loans, so chapter 7 will not do us any good
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Post by Deleted on Apr 6, 2011 23:33:42 GMT -5
I'll bet you were listening to Dave Ramsey. DR advocates stopping all retirement contributions if you have debt. I think it was Dave Ramsey, I am not sure. I just was trying to figure out if a person were to follow that advice, how would it play out? So I am thinking about us since we have considerable debt (160K), would a scenario like that wuld really make sense for us. And I saw some good reasons here not to do it since you might never go back to saving for retirement. But I also can see how paying off your debt can really help psychologically.
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phil5185
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Post by phil5185 on Apr 6, 2011 23:41:36 GMT -5
The rest are for 10-15 years. You think 6.125% is a good rate so no rush to pay them down? I always thought you said anything above 6% is not worth keeping. Yes, 6% is about my threshold in today's market. Ie, I wouldn't purposely refi our houses at >6% to raise money to invest in stocks. But if I already had a 6.1%, 30 yr FR loan, I would retain the use of the money and invest it exactly as you have - 2045 & 2050 Target funds. That also leaves choices open for you. If mortgages go to 10% in 5 or 10 yrs (not a prediction), you will be glad that you kept your 6.1% capital. Conversely, if mortgages go down to 3% in 15 yrs, you can refi your 5 yr old house, take out your equity, and use it to pay off your 6.1% loans.
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achelois
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Post by achelois on Apr 7, 2011 3:40:56 GMT -5
Don't stop your retirement contributions. If you do, you will end up having to put in twice as much later on to make up for the money you wouldn't be putting in today.
Keep the student loans and pay each month. If it were me, I would have the wife do the actual writing of the check or paying the bill online each month. She might get tired of that and seeing the huge balances and actually cut back on spending or vacations or eating out.
It could happen.
You guys really do blow through a lot of money on wants. I hope I get to read one day that y'all are debt-free!
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Post by Deleted on Apr 7, 2011 7:22:30 GMT -5
The rest are for 10-15 years. You think 6.125% is a good rate so no rush to pay them down? I always thought you said anything above 6% is not worth keeping. Yes, 6% is about my threshold in today's market. Ie, I wouldn't purposely refi our houses at >6% to raise money to invest in stocks. But if I already had a 6.1%, 30 yr FR loan, I would retain the use of the money and invest it exactly as you have - 2045 & 2050 Target funds. That also leaves choices open for you. If mortgages go to 10% in 5 or 10 yrs (not a prediction), you will be glad that you kept your 6.1% capital. Conversely, if mortgages go down to 3% in 15 yrs, you can refi your 5 yr old house, take out your equity, and use it to pay off your 6.1% loans. Thanks Phil... I will pay the credit card and car loan and re-evaluate in 2 years what I will do with the extra $1,050/month
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Post by Deleted on Apr 7, 2011 11:02:05 GMT -5
The rest are for 10-15 years. You think 6.125% is a good rate so no rush to pay them down? I always thought you said anything above 6% is not worth keeping. Yes, 6% is about my threshold in today's market. Ie, I wouldn't purposely refi our houses at >6% to raise money to invest in stocks. But if I already had a 6.1%, 30 yr FR loan, I would retain the use of the money and invest it exactly as you have - 2045 & 2050 Target funds. That also leaves choices open for you. If mortgages go to 10% in 5 or 10 yrs (not a prediction), you will be glad that you kept your 6.1% capital. Conversely, if mortgages go down to 3% in 15 yrs, you can refi your 5 yr old house, take out your equity, and use it to pay off your 6.1% loans. Thanks Phil... I will pay the credit card and car loan and re-evaluate in 2 years what I will do with the extra $1,050/month Though your SLs are over 6%, which is the general cut off (as are mine), the tax deduction may move you below the 6% line. My fiance's SLs are 6.8% but once he starts paying he can get them on autopay and get a .25% deduction to the rate making them 6.55%. Then we should be in the 10-15% tax bracket, and the rate after taxes would be 5.57%-5.9%. Something to think about.
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jimb
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Post by jimb on Apr 8, 2011 12:48:22 GMT -5
Would you do it? would you come out ahead? On my way to work this morning I heard someone on the radio (don't remember who) suggest to a caller that it would be on their best interest to go as far as stopping contributions to their 401k, pay off their debt first and they will be better off in the long run. That would have to be Dave Ramsey. Nobody else would recommend stopping retirement contributions just to pay off a manageable debt a little faster, without regard to the long term costs. Dave’s "baby steps" are tailored for spendaholics and debtaholics like AA's steps to sobriety are tailored for alcoholics. IMO, his target customers –and I do mean customers--do not understand money, math, or debt at all and have absolutely no ability or patience to plan for the future. The most devoted Ramseyites think he's a savior for explaining stuff such as that you cannot go on forever borrowing money to buy stuff you cannot afford, with money you don’t have. An incredible number of his followers apparently cannot even balance a checkbook, and are amazed at his wisdom about budgeting cash for day to day expenditures in separate paper bags or envelopes, or perhaps in Dave's deluxe embossed vinyl envelope set which he was selling for $19.95. Dave's single-minded focus on eliminating debt as fast as possible is somewhat the financial equivalent of jumping out a 5th floor window just for the satisfaction of getting to the ground faster. It might be a very good idea--and worth the consequences--if you were trapped in a raging inferno. But if there is nothing but a little smoke from burning popcorn in the microwave, it would make a lot more sense to take a few seconds to walk down the stairs and arrive on the ground in a lot better shape. By far Dave’s worst advice IMO is to postpone retirement contributions (and even matching payments) in order to pay off those evil debts just a little faster. That can literally cost his follower who are not in dire straits anywhere from tens to hundreds of thousands to millions of dollars out of their future retirement income in exchange for saving only a tiny fraction as much interest by paying the after-tax money on debts that can be paid off reasonably well anyway. Another piece of his really bad advice that contradicts virtually all real financial planners, writers, and talk show hosts is to invest only in stocks after retirement. Dave still advises to count on earning a constant 12% in equities only, and to start out withdrawing 8% of your nest egg and allowing for 4% per year for inflation. This despite the fact that if someone had actually followed Dave's advice at retirement 10 to 11 years ago but only earned the real stock market averages, they'd be flat broke or very near it now. Here's an actual example of how the math works and how much Dave can cost someone who is NOT really in bad financial shape, but follows his advice to the letter anyway. This is for a relatively high rate debt, with 18 months of postponing retirement contributions to pay off the debt faster: If you were contributing the max of $15,500 per year, [the max at the time of this original post] $1291.67 per month, to a 401(k) and your combined marginal tax brackets for fed and state total 31% then you will have to pay an extra $400.42 per month in taxes if you stop contributions.
If your debt were $25,000 at 23.% you could pay it off in 52 months with a payment of $763.74. The total interest would be $14,714. Adding the after-tax $891 per month will pay off the loan in 18. months with $4,798 in interest. So you save $9,917 in interest and 34. months time on the debt.
If your employer matched $1.00 per dollar for your contributions on up to 3% of your salary, that would be another $175.00 per month income for you to invest. If you did not delay your contributions, the $1466.67 per month earning 12% that Dave promises that 'anybody can earn in any good mutual fund' it would grow to $9,432,074 by retirement time 35. years from now. If you delay it for 18. months while paying down the debt, it will grow to only $7,860,945 in the remaining 402. months. That's a loss of $1,571,129 at retirement in exchange for saving $9,917 in interest on the debt.
But that's only the tip of the iceberg. Because of compounding, you will usually earn more interest after retirement than you did during your years of contributions.
If you were to earn Dave's promised constant 12% after retirement, that $1,571,129 could have paid you an extra $15711.29 per month without even touching the principal. ( At 4% inflation for 35 years, that would be equivalent to an extra $3981/mo. in income today.)
So if you lived another 30 years, you would have lost the $1,571,129 that you won't have at retirement, plus the $5,656,064 of interest it won't earn after retirement, for a total loss of $7,227,193 in the long term in exchange for saving $9,917 in interest on the short-term debt. That's a cost of $729 out of your future retirement income for every dollar you saved on the debt, or $212,594 for every extra month you cut from the debt. Even at a more realistic earnings average such as perhaps 8% instead of the 12% that the Ramsey brothers (Dave and Phil here on the forums) preach, the long term loss can run into hundreds of thousands or a few million. Even if you had the sticktoitivity to reinvest the freed up payments, the contribution limits and the lost time for earning compound interest on the taxes you paid and the money you didn't contribute earlier would never let you catch up ... even if there were no matching payments. I've spent a lot of time in the past trying to keep people from making very expensive mistakes by following Dave’s advice when it does not apply to them, and I've had some success. There are a lot of people who do have some sense about money, but just never had it explained to them, and had slipped into borrowing too much money. So they can benefit from learning to live within their means, but don't have to lose millions just to get out of debt a little faster. However, it never ceases to amaze me how many people still believe that Dave's advice is best even when shown that by Dave's own numbers, it can literally cost them millions out of their future retirement income in exchange for saving only a few thousand in interest in eliminating a reasonably manageable debt. Even faced with losses of millions, their only real counter is "Dave sez it's not about the math, it's about the behavior". Can’t help but wonder at what point they would realize that losing millions out of your future retirement for the short-term gratification of eliminating a debt a little faster is bad behavior, and that Dave’s cure can often be a lot worse than the disease. jimb
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formerexpat
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Post by formerexpat on Apr 9, 2011 20:07:59 GMT -5
You still get the tax deduction until your AGI is over $120k [then it phases out], making it an effective 5.4% right now.
$90k x 6.1% = $5,490 in interest gross
$2.5k deduction, 25% tax deduction = $625
Net interest paid = $5,490 - $625 = $4865
$4865/$90k = 5.4%
This effective interest rate will continue to decrease since, as long as you stay under the AGI limit, you will be able to deduct $2.5k for a while [i.e. until your loan balances are under $41k].
I would keep these full term and invest the difference in 10% index funds.
The CC debt and other non deductible debt that is high interest, I'd pay off sooner. Car loans aren't necessarily bad - I just got one for the full price, but it's under 3%.
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azphx1972
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Post by azphx1972 on Apr 10, 2011 9:27:22 GMT -5
Like jimb mentioned, the problem with stopping 401k contributions is that you can never go back and make up for missed contributions. Unless my debt and interest levels are so high, and my income so low that I could never hope to pay it off in a timely manner, I would be hard pressed to forgo contributing to my 401k--particularly if there was a match involved.
I also agree that Dave Ramsey's advice is a bit simplified, and can be akin to using a hammer when a scalpel would suffice, but for some people it's the only way they'd ever get around to getting out of debt. I enjoy listening to him (as well as other financial personalities because I'm interested in the subject), but I obviously don't blindly follow what he or anyone else says.
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