debt advice needed

[firecracker]

Hi. I've seen you give good advice and now it's my turn to ask. I appreciate the variety of responses and opinions I can get on this board...that's better than asking just one financial advisor who his or her own pet ideas.

So, here's our situation:

house debt: $68,000
2004 minivan (a repo, financed at 2.9%): $16,000
school loan (at 3.85%): $8000
401(k)(no current contributions): $30,000
our house is older and needs some remodeling work

We have an emergency fund of about $4000, and we recently received $5400 from an investment.

Here's the question: should we 1) use the $5400 and other $ we scrape together to pay off the school loan, then knock out the van, or 2) use the $5400 to pay cash for house repairs, or 3) waste it on an expensive vacation!!!

Thanks for any advice!

 

[plummer925]

If I were in your shoes today and had that money, I would take a bit of it and fix anything in the house that needed REPAIR first - not just a remodel, but a real repair (hole in wall or roof, etc). If it's not essential to do the work, then I would throw it all on the student loans.

The $30,000 401K - is that a loan off from a 401K or is that what is IN a 401K? I hope it's what is there (don't withdraw it to pay debt if it is in one - the penalties and taxes are horrible - we closed a tiny $1000 401K and ended up with only about $100 after!)

One thing I've done to pay off debt (I have one $400 credit card left, and student loans) is sell everything I can get my hands on. I like ebay because it's quick - I have also listed some larger items in a local swap-meet type booklet. I've never used it, but have heard Craigslist.com is good too.

Good luck with everything!

 

[disneysteve]

house debt: $68,000
2004 minivan (a repo, financed at 2.9%): $16,000
school loan (at 3.85%): $8000
401(k)(no current contributions): $30,000

I'd be in no hurry to prepay loans at 2.9 and 3.85%. I would keep those and just make the scheduled payments. No reason to pay them off early. They are nominal amounts with great interest rates.

You have a 4K emergency fund. Is that enough? Does that represent at least 3 months of living expenses (not income)? If not, I would use some of that $5,400 to boost the emergency fund.

I'm also assuming the 30K is what is in the 401k. Why no current contributions? I would resume those as soon as possible at whatever level you can currently afford, and then increase it as your situation permits. At least put it whatever you need to get any company match.

As for the home, first you say "remodeling work" and then you say "repairs." Which is it? Remodeling is a want. Repairs may be a need. If there is work that needs to be done for function or safety reasons, by all means do it. If you are just talking about cosmetic stuff or desired improvements, I would wait until you can afford to pay cash for them. Unless you are talking about major improvements and then a home equity loan or line comes into the conversation.

 

[dvcgirl]

Hi. I've seen you give good advice and now it's my turn to ask. I appreciate the variety of responses and opinions I can get on this board...that's better than asking just one financial advisor who his or her own pet ideas.

So, here's our situation:

house debt: $68,000
2004 minivan (a repo, financed at 2.9%): $16,000
school loan (at 3.85%): $8000
401(k)(no current contributions): $30,000
our house is older and needs some remodeling work

We have an emergency fund of about $4000, and we recently received $5400 from an investment.

Here's the question: should we 1) use the $5400 and other $ we scrape together to pay off the school loan, then knock out the van, or 2) use the $5400 to pay cash for house repairs, or 3) waste it on an expensive vacation!!!

Thanks for any advice!

What's the 30K next to 401K? Is that a loan against the 401K or is that what you have in your 401K. And you are making no current contributions? If so, why is that....is your budget especially tight?

Those facts would make a difference in how folks will answer your question. The car note and school loan interest is quite low, but if you're not making any contributions towards your 401k and have major repairs to do on the house, I sure as heck wouldn't blow that money on an expensive vacation.

 

[EthansMom]

I would probably split the money -- put some towards debt, some towards necessary home repairs, and some towards additional emergency savings. Maybe even put some in savings toward a vacation in the future.

As an aside, if you can scrape up extra $ as you mentioned above, then you should consider making contributions toward a 401k or IRA.

 

[firecracker]

to clarify, the 30k is money saved in retirement (untouched) funds. we currently aren't contributing because we have our kids in private Christian school (a priority and non-negotiable for us) and have stopped contributing in order to pay extra on debt.

in regards to our house, the roof's new, the furnace is new, windows are new, ($21,000 total over the last 5 years, all of those done w/0% credit card "loans" and they're all paid off) we've got wood floors in a room that need refinished, the electrical could use updating but it's not critical, same for plumbing. most of it is just cosmetic wants. what i WANT is an extreme home makeover!!

i was COMPLETELY joking about taking a vacation with that money! when we go on vacation, it's cheap (thanks to the disboards) and cash.

also, please note that we have NO c/c debt...our card gets paid off each month and we've begun to switch to all-cash, figuring that 1% in disney rewards is a small reward, especially when we found ourselves buying more than necessary, without thinking just to earn rewards.

i hope that you can see that we try to be good managers of what we've got...we try not to be foolish. that's why i'm trying to figure out the **best** use of this windfall would be.

thanks again, and my apologies to those who are annoyed by people typing in all small case.

 

[bdb7607]

sounds like you're doing great! I agree with Steve, no need to pay off those low interest loans.

I'd do anything I could to continue 401k, even just $20 per paycheck would help, plus it wouldn't be $20 you'd "lose" from your paycheck due to tax relief.

Good luck, pump up that savings a bit and fix up the house are my $0.02

 

[firecracker]

 

[dvcgirl]

Well, after reading your reply I guess I'd use a good portion of it to pay down some of your debt. Especially if you're talking about cosmetic wants and not necessary repairs. We're not really talking about a significant amount of money here, but in my opinion it's better spent paying down debt than on the house since you've spent a fair amount last year on that. I don't know how old you guys are, or whether you have pensions or not, but I would be looking for ways to contribute to that 401K. This is especially important if your employer matches.

 

[cruisnfamily]

.....we've got wood floors in a room that need refinished, the electrical could use updating but it's not critical, same for plumbing. most of it is just cosmetic wants. ....

Do you have any estimates for these things? Perhaps you could do one of these things and then save the rest.

I'm assuming that what you listed are your only savings. If that's the case, you need more savings. $30,000 in a 401K and $4,000 in an emergency fund are a great start but your money would really be best spent there. I think I'd take some of the money open a roth for either yourself, or DH, or both. I'd also restart the 401K contributions for whatever is the amount of available match money. Even if you think you can't afford it out of your budget, in reality, you can't afford not to do it. If there isn't any match money available, then just set it up for a minimal amount like 2%. Any contribution is better than none.

 

[cruisnfamily]

Oooh, just had an idea. Could you use some of the money to pay next years Christian school tuition thus freeing up some money in your monthly budget over the next year to either save for retirement, do home repairs or attack the debt?

Don't know what the tuition runs or even if this is a good idea but it's just one more thing to consider.

 

[firecracker]

...about pre-paying the tuition. I'm a teacher at a different Christian school, so I get a discount on my kids tuition, but I still pay about $550 a month/10 months. So, it's just the right amount to pay for next year's tuition AND it would free up $550 a month to be used elsewhere.

??

 

[dvcgirl]

...about pre-paying the tuition. I'm a teacher at a different Christian school, so I get a discount on my kids tuition, but I still pay about $550 a month/10 months. So, it's just the right amount to pay for next year's tuition AND it would free up $550 a month to be used elsewhere.

??

And so what's the point? If you have $5400 now, and tuition costs $5,500 next year, why pre-pay when you can just do whatever it is you plan to do with your money right now? If you planned on using the tuition money next year to invest it towards retirement....why not just invest the $5,400 now and let it work an additional year for you instead of saving it monthly next year.

 

[DVC Sadie]

And so what's the point? If you have $5400 now, and tuition costs $5,500 next year, why pre-pay when you can just do whatever it is you plan to do with your money right now? If you planned on using the tuition money next year to invest it towards retirement....why not just invest the $5,400 now and let it work an additional year for you instead of saving it monthly next year.

ITA, gotta love compounded interest. I would definately prepay myself for a year instead of next years tuition which is already earmarked out of the monthly bills. By putting the 5400.00 windfall into the IRA it is out of the way and less likely to be spent on impulse purchases.

 

[pearlieq]

Since your loans are low interest, there's really no reason to pre-pay. You'll actually get the same or better return on your money in a high-yield savings account!

Since none of the home repairs are pressing, and your emergency fund is only about 4k, I'd put the bulk of the money there. 4k isn't much of a cushion against life's ups and downs!

Maybe you could compromise--put another $4,000 into the emergency fund and spend the leftover $1,400 on one of your home projects--one that would add value to your home.

 

[jeankeri]

You have until April 17th; have you thought of starting a Roth IRA? You could split the $5400 between the two of you and not go over the yearly limit.

 

[disneysteve]

I think the suggestions to put the money in retirement savings is okay, but I just want to restate what pearlieq said. If the $4,000 emergency fund is the only savings outside of the 401K, the money needs to go there. That's an awfully slim reserve to be living with for a family of 4. A car or home repair bill, unexpected medical expense, job loss (or temporary disability) would use that up in a snap. We don't know how much the OP earns, but I strongly suspect that 3-6 months expenses is considerably more than 4K.

So I'm voting for savings with that money, or at least the bulk of it, unless there are other non-retirement savings we haven't been told about.

Also, I just reread the OP's comment re: the 401K - "have stopped contributing in order to pay extra on debt." I missed that. I thought you stopped contributing to pay for private school which I certainly wouldn't argue. But if you have stopped contributing to make extra payments on loans with less than 4% interest rates, that just doesn't make sense financially. Your 401K can earn way more than 2.9 or 3.85% interest, especially if there is an employee match! Forget the extra debt payments. Your debt is minimal - 24K. You need to focus on your savings.