Comments on: Figuring Out A Debt Strategy After The Home Purchase

By: Frank Kelly

Frank Kelly — Fri, 29 Jun 2007 20:19:04 +0000

Hi Trent,

Similar situation here – after my wife and I bought a house we struggled with the following tug-of-war

DEBTS
1) Pay-down Credit Cards (we used them a bit to buy stuff for the house) @ 6.9%
2) Pay down HELOC @ 8.25% (tax deductible)
3) Pay down our Car Loan @ 7.99%

vs.

SAVING
1) Retirement Savings (401k / Roth)
2) Education Savings (we have two kids under two – but that’s IT! Well for now). Our local schools are pretty bad so we’ve got to save for private school in addition to college
3) Our emergency fund was depleted from 6+ months to just under 3 months

Here’s how we did it
1) We paid off the credit cards – done deal & no brainer

2) I set my 401k to 6% (the minimum to get the full match) – fortunately I saved like crazy and invested aggressively before I met my wife. So we’re still on track for $5M by age 65 (assuming history is any judge)

3) Set our Roths / Coverdells and 529s on minimum monthly investments ($50 a month). Any monetary gifts from family for the kids go towards their 529.

4) We paid an extra $100 on our HELOC each month – so it’s going down albeit slowly

5) We’re adding $100 a month to our Emergency fund – it will take years to get it back to where it was but we’ll get there.

6) Now the focus is on paying off the car loan – using things like tax refunds, bonuses etc.

Of course as soon as I did that there was an emergency in the family and I racked up $5000 in CC debt to buy plane tickets to Europe. So that hit the emergency fund. But you get knocked down and get back up.

Overall we might be spread a little thin for other’s tasts – but that’s the plan that makes me worry the least!

Car should be paid off in 12 months and then we’ll debt snowball into the HELOC.

We have two cars a 2003 sedan (from my bachelor days) and a 2002 wagon and we plan to drive them into the ground – at least until they are 12+ years old.

Perhaps once the HELOC is paid off we’ll roll that payment into the emergency fund and then perhaps to save for a Car. But that’s all far off!

By: Amy

Amy — Mon, 25 Jun 2007 13:23:05 +0000

Trent-
I came to your website via MSN Money and let me just say, I love it. I think that, in general, you have some very good advice – particularly for people like me. All platitudes aside, I’m probably not posting in the right spot, but I wanted to tell you about something. You’re putting your car savings into an HSBC account, probably on a monthly basis. While this is a good idea, here’s another one that might help you – or your readers. I work at a bank (it’s a small midwestern one, not one of the big guys) and one of the things we offer (we’re not unique – it’s just not popular) is a loan secured by a certificate of deposit – a CD secured loan. What this is is a loan – say 15K, where the principal amount that you sign for is deposited immediately into a certificate that is held as collateral. If you can get a rate that is at 5.50% (do some negotiating) then the loan is usually 2.00 to 2.50% above that. While this might seem backwards, if you do the math it works out. Because you are paying the loan back at a monthly installment (your three or five years, depending) you actually spend less in interest than you save. As well, due to the time value of money, you make more money on a lump sum in the certificate than you do with equal installments over the same length of time. This is how I’m saving for my car, and while this type of loan isn’t mainstream, they are available. As well, it helps your credit to have that on there. And, if you run into some unforseen financial difficulties, all you have to do is cash the certificate in – and pay back the loan with the proceeds – and your good to go. Just wanted to share that with you – it’s a lot for some people to wrap their brains around, because it seems backwards, but I thought you might like it.

Amy

By: Bill

Bill — Mon, 25 Jun 2007 04:45:29 +0000

1. Pay down the debt. Feel ok with debt that’s making you a better life – education.
2. Pay your mortgage normally. Did I read that right? You want to pay off the mortgage?
3. Way too much in HSBC – 3-6 months total for the both of you or some set amount that the return will make the account grow automagically.
4. Lose the 529 plans for your kids. It would be better to have an investment account at a brokerage with both your and your wife’s name on it called the education account. If your kids need it then use it for their education. If they don’t because of grants, scholarships, etc. then it’s your money or help them start a Roth IRA with it. You owe your kids equality of opportunity and not money for all of them to go to college. You never know what they’ll want to do when they get there. Plus you really need to look at what the 529s do to your financial life when your kids reach that age. There’s more than one way to pay for college, there’s only one way to pay for your retirement.

Of course, like you say, it’s all personal. :)

Bill

By: Elden

Elden — Sun, 24 Jun 2007 20:42:48 +0000

I agree with the not paying that much for cars. You do not need a minivan until the number of people exceed the number of seat belts available.

By: Lauren

Lauren — Sun, 24 Jun 2007 20:35:07 +0000

I didn’t see anything in here about retirement – you can’t take out a loan for retirement but your kids can get scholarships and student loans for college. I am going to be balancing saving for retirement and paying off student loans and other expenses too. Was wondering what some other people’s strategies are?

By: Brian

Brian — Sun, 24 Jun 2007 10:39:38 +0000

One last thing, emergency funds/short term savings(for the cars) should never be invested in anything other than savings/money markets/cds type of accounts.

These are savings, NOT investments.

By: Brian

Brian — Sun, 24 Jun 2007 10:36:49 +0000

First of all, this is a great post for many reasons. It gives all of us different ideas about tackling similar debt/savings situations.

You do have to do what YOU(and your wife) are comfortable with no matter what all of us might say.

I also think snowballing the loans then applying all of the monthly payments towards ONE car account. If one car breaks down beyond repair, you can use what you have saved to buy a used inexpensive car and start saving for the next one. You would be surprised what you can get cheaply if you look and are willing to settle for something that is only sound transportation and not $20,000 car. If you current cars last, then you will still have saved enough money to pay for the cars you want.

As for the emergency fund, I do think 6-12 should be adequate, but I would also suggest you postpone the full time blogger move until the part time blogger job is making as much or more than you current job. This should also give you additional income while building your emergency fund and paying down debt/saving for vehicles.

And one last thing, good insurance is the foundation of any wealth building plan. So if you don’t have sufficient disability and life, I would suggest you get it asap.

By: Erika

Erika — Sun, 24 Jun 2007 06:03:03 +0000

I find it amusing that people always think it so terrible to have a large emergency fund because it earns a lower interest rate than investing. I say that if you are saving enough for retirement, if your account is at least matching inflation after taxes, and you can meet your financial goals, do what makes you most comfortable. If, for example, someone could meet all those goals by keeping all their money in high interest savings accounts, there is no need to invest; sure, do it if you think its fun or if it would cause you to broaden your goals (have more to give more perhaps), but do not feel bad if you choose not to.

By: Kathryn

Kathryn — Sun, 24 Jun 2007 00:49:00 +0000

I dont’ think this has been mentioned yet…

We faced a similar (well, related) situation… trying to decide whether to pay down debt or save for an upcoming expense. In the end, my decision was driven by the issue of cash flow. When you partially pay down a installment loan like your student loan, you may owe less but you are still obligated to make the same minimum payments on the debt…and thus you still don’t have any flexibility in allocating that money each month. When you _pay off_ an installment loan, it frees up some of your income/cash flow. I view this freedom from obligation as part of my emergency fund/plan. It means I can get by with less income each month if I need to.

So…my thought is:
– IF you can actually close out one (or both) of the student loans in a very short time, you should do that first and then put the extra toward the car savings (snowballing).
– IF you can only partially pay down the loan before you really need to save for the car, then just set the money aside in whatever savings/investment account is comfortable for you. This way at least the your payments (on the student loans) is known. Probably better than taking on an additional loan later.

(Or split the difference. Start saving for the 3-year car and pay off one or both loans, then snowball the payments into the 5-year car savings.)

By: Monica

Monica — Sat, 23 Jun 2007 14:33:34 +0000

I’m with the people wondering about the two cars. Could neither of you car-pool? Could neither of you bike? Could you purchase a scooter instead of a second car? (I know people who have done that & it saves them a lot of money.) Could neither of you change jobs to a more convenient location? (I personally would take a pay cut to work closer to home.)

By: Tyler

Tyler — Sat, 23 Jun 2007 14:14:03 +0000

Trent, I like your ideas. I see nothing wrong with the super high Efund. Why? Because having too much is nonsense. The more you have that your not using, the more you can let it work for you, say in a MM account or online savings. Either way, plenty of cash is NOT bad. As for the cars, I’d lower the prices on what you are going to buy. That’s way too much tied up in a car IMO. Not only will that car quickly depreciate, but you’re going to have to pick up one when those die. Get a cheap, reliable used car and make it run – you’ll then have quite a bit of extra money left over for paying down your loans or whatever you want. Either way, Trent, you are ahead of most of Americans with this plan – don’t let the comments derail your goals as your goals are your own and you choose the way you want to live. Keep it up buddy!

By: Trent

Trent — Sat, 23 Jun 2007 14:01:18 +0000

Jake: without a doubt, yes.

Lisa: the money at that point goes further down the list, likely into the emergency fund or possibly into paying off the first student loan.

By: Jake Smith

Jake Smith — Sat, 23 Jun 2007 13:32:01 +0000

Trent, I love the fact that you have chartered out such a detailed plan for yourself, that can only be good. BUT, here’s my question – should you even think of having a third child given your fiscal situation – you obviously have a ton of debt, and paying for 3 kids’ college education is going to take a LOT of savings. Would it be worth being continuously frugal for 20+ years so that you can have a third kid?

By: Lisa

Lisa — Sat, 23 Jun 2007 13:04:56 +0000

One more thing, in year 4 of saving for car 2 are you applying the $501 now available (since you are done saving for car 1) to car 2. Not by my calculations. What are the plans for this money? Why not refigure and see if you could pay off school loan 1&2 and save for car 1&2 using the snowball.

By: Lisa

Lisa — Sat, 23 Jun 2007 12:57:59 +0000

I don’t know your numbers for school loans 1&2 but if they are higher than your mortgage interest they must be at 6%+. What about this as an alternative? Pay off school loans 1+2 in a year as stated above and then save for a vehicle for 2&4 years. The debt is gone and you could then use the student loan payment money towards the vehicle fund. Another 2 monkeys off your back and still saving for vehicles in 3/5 years.

By: kim

kim — Sat, 23 Jun 2007 11:37:11 +0000

When I had my first children, twins, all I thought about was a minivan. I was convinced that I needed such a big vehicle to accomidate my family. We bought one and I hated it. No trunk space and lots of wasted space in the seat portion. When the third baby came along, it was a pain to have one child way in the back. We traded in the van for a much more reasonable used dodge intrepid. It fits 3 car seats comfortably accross the back. It has pleanty of leg room for my 6″5″ husband. Best of all it has a HUGE trunk. It was only one year old when we bought it for 12K. I think we are socially conditioned to think that we need a huge vehicle for a normal sized family. Remember when only families with 4 or 5 kids had vans? Do you need it or do you just believe you do because you’ve been conditioned to believe it?

By: Kevin

Kevin — Sat, 23 Jun 2007 10:35:43 +0000

Have you ever put two kids in a honda civic? I loved my 97 civic. It was a great car, great mileage, very reliable. Then I had a baby. Strollers don’t fit in the trunk well and theres really not enough room in the back seat for a good car seat for toddlers. Not to mention any other items you might have (groceries etc.)

By: Mike Pahl

Mike Pahl — Sat, 23 Jun 2007 06:33:46 +0000

Stick with your plan. First, you are one of the few out there that actually has one. Second, you need to do what makes sense for you. If you end up saving a ton of money for cars and find you don’t need it then you have extra cash. Saving money is never a bad thing. I am currently saving money for my next vehicle and am strongly considering living a lifestyle where I only use mass transit. If that’s the case I can apply that money to retirement, house fund, etc.

By: Murano

Murano — Sat, 23 Jun 2007 06:15:20 +0000

I agree about the cars its not a necessity we have saves a big chunk over the past few years by only sticking with the one car and choosing wisely.

By: bk

bk — Sat, 23 Jun 2007 03:57:21 +0000

Instead of saving $800+ for car(s), why not pay down your mortgage, thereby ‘earning’ more than what you would earn in a savings account? Then when the time comes to buy the car, you could take a Home Equity Loan with tax deductible interest to pay for it. Have you run numbers to see whether this strategy is preferable?