Put $6,500 bonus check to pay off car or max out Roth for the year?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
JB2013
Posts: 135
Joined: Mon Sep 12, 2016 1:04 pm

Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by JB2013 » Tue Apr 11, 2017 6:52 pm

I get two bonuses throughout the year for earning more than what my company gives me, and by estimation they'll owe me around $6,500 which is paid out the middle of next month. I put my $3,800 tax return towards my wife's car and will get to pay that off this Friday (finally!). I have my car which has $5,756 left on the balance, with an interest rate of 3.45%.

I have some student loans as well which total around $27,000, but knocking the car loan out frees up another $220 per month. Some of my student loans have higher interest rates, but I've done the math of paying off the higher interest rates first vs lower debts first, and I only save $285 by doing the higher interest rates first. I think I'd sleep better at night by getting the higher payments done first.

So, I'm wondering if it would make more sense to take this money and pay this car loan off, or put it towards my Roth which is invested in FFNOX and have my max contribution done for the year? My FFNOX has a balance of around $14,500 right now so could get this to 20K with this contribution. Would love to hear people's thoughts. Thanks!

DTSC
Posts: 1185
Joined: Mon Oct 20, 2008 9:47 am
Location: Illinois

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by DTSC » Tue Apr 11, 2017 6:55 pm

I vote Roth. Your car interest rate is relatively low.

mortfree
Posts: 1977
Joined: Mon Sep 12, 2016 7:06 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by mortfree » Tue Apr 11, 2017 6:59 pm

Not enough info.

Do you have an emergency fund?

Age?

Does your wife have a Roth too?

I would use the bonus money to get out of debt.

Contribute something to a Roth(s) but don't ignore the debt either.

User avatar
ERMD
Posts: 291
Joined: Thu Dec 26, 2013 11:26 am

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by ERMD » Tue Apr 11, 2017 7:17 pm

I agree that more information would probably be helpful, but even with all the information in the world, there's no objectively correct answer. Purely by the numbers, the return on the Roth (depending on your AA) will probably be greater than 3.5% long term.
between scotch and nothing, i'll take scotch. -- faulkner

hightower
Posts: 627
Joined: Mon Dec 12, 2016 2:28 am

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by hightower » Tue Apr 11, 2017 7:21 pm

Well, I think it depends. Are the car payments stressing you out? If so, go ahead and get rid of them. Will you be able to earn enough money the rest of the year to still fully fund your Roth? If so, go ahead and pay off the debt. I know how it feels when you just want to get rid of debt. It can be worth it just for the peace of mind. Plus, you could start putting those car payments towards your Roth instead which would feel a lot better.
But, I agree that either way there's no right or wrong answer here. Both options will be good for you in the long run. At least you're not asking "should I buy a jet ski or fund my Roth?" Haha

Topic Author
JB2013
Posts: 135
Joined: Mon Sep 12, 2016 1:04 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by JB2013 » Tue Apr 11, 2017 7:23 pm

mortfree wrote:Not enough info.

Do you have an emergency fund?

Age?

Does your wife have a Roth too?

I would use the bonus money to get out of debt.

Contribute something to a Roth(s) but don't ignore the debt either.
I suppose I should have added more info...sorry about that...

Wife and I are both 32 yrs old.
Emergency fund of $5,000. My wife has a ROTH with a balance of $2,800. She stays home with the kids now so isn't working.
My salary is around $87,000. I contribute 4% to my 401K with a match of 50% up to 4%, with them also giving a lump payment every year of 4% of my total earnings for that year.

My only other debt are the student loans that I mentioned of around $27K. Would you suggest maybe splitting up the money, half into my ROTH and other half towards the car?

mortfree
Posts: 1977
Joined: Mon Sep 12, 2016 7:06 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by mortfree » Tue Apr 11, 2017 7:35 pm

One thought: I would put $4400 towards the car. Reason being that the car should then be paid off by Dec/Jan.

Right now you have close to 26 payments left. I'd rather free up that monthly payment sooner.

Put the remainder towards the Roth. Then your old car payment can go towards debt and/or Roth.

You should also be able to contribute to your wife's Roth. But take small steps first.

4% to 401k seems low but you have to stretch your dollars in a one income household.

USGrant
Posts: 54
Joined: Fri Feb 20, 2015 12:58 pm
Location: New Hampshire

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by USGrant » Tue Apr 11, 2017 7:38 pm

As stated, no wrong answer. Pertinent questions would still be: what is your monthly net cashflow (i.e., how much can you allot to EFfund/Car and student loan debt/retirement savings each month), and how much are your overall monthly expenses?

FFNOX looks like a very good fund / AA. I personally would put $5,500 into your Roth and then put $1k toward the car loan. Then I'd split 50/50 every dollar thereafter to car/wife's IRA (if eligible).

More conservative approach would be to beef up EFund first.

If cashflow is tight, I'd approach attacking each bucket in yearly terms: Planned major expenses first, Your Roth next, Spouse Roth/Debt, EFund last as long as expenses are low or your risk tolerance for little liquidity is high.

In a great year, you might be able to do all of the above. In a bad year, you might be able to do just the first or second buckets. My guess is you'll make progress and the loans will melt away soon enough, but you'll have grown your retirement wealth by many times in just a few years by prioritizing retirement - and have that compounding engine beginning to fire for your for the rest of your life.

Congrats on a nice bonus and killing that first car loan! Cheers.

EDIT: Keep up the 4% contribution to IRA (that would be my first priority bucket per the order above). Frankly, it may make sense to seek to contribute 11-15K to IRA for tax deductions and forget about IRAs for a year or so if it's an either/or. But I'm not sure about the tax math there.
Last edited by USGrant on Tue Apr 11, 2017 7:42 pm, edited 1 time in total.

billfromct
Posts: 1030
Joined: Tue Dec 03, 2013 9:05 am

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by billfromct » Tue Apr 11, 2017 7:41 pm

What's FFNOX?

I would fund the Roth IRA, for your wife, not you.

When my wife was a stay at home mom, back in the early '90s, before Roth IRAs, I opened a Vanguard Variable Annuity to save for her retirement. I had my 401k & wanted to show her that we were saving for her retirement as well. I put in $9,800 in 1990/1991(no additional contributions) & now it's worth $155k.

I wouldn't buy a variable annuity now, except for my 1 month old grandchild if my kids ever get married & have children.

bill

Blender
Posts: 155
Joined: Wed May 13, 2015 10:56 am

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by Blender » Tue Apr 11, 2017 8:43 pm

If it was me I'd pay off your car loan, then apply the payments you would have made each month for the two car payments towards the student loans. Snowball it.

Topic Author
JB2013
Posts: 135
Joined: Mon Sep 12, 2016 1:04 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by JB2013 » Tue Apr 11, 2017 8:59 pm

Thanks everyone for their input. I think I just get so frustrated with how behind I feel in the game, so feel the need to just dump everything in the Roth despite having some debt. I read some posts on here of those who are younger than me, having 100-200K in their retirement already, and I say, "What the hell?" Or of folks making 250K a year...ah how that would be lovely...sorry, quick rant...

Anyways, I'm thinking putting maybe half in the Roth would give me the most comfort of paying a lot down on the car, but still adding to my future. And, with my next payout I can do the same and have the car done by the end of the year. I'm hoping that seems like a good strategy...

Topic Author
JB2013
Posts: 135
Joined: Mon Sep 12, 2016 1:04 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by JB2013 » Tue Apr 11, 2017 9:07 pm

Blender wrote:If it was me I'd pay off your car loan, then apply the payments you would have made each month for the two car payments towards the student loans. Snowball it.
Would you be concerned though if missing out on Roth contributions? I always hear people talk about once you lose it it's gone.

hightower
Posts: 627
Joined: Mon Dec 12, 2016 2:28 am

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by hightower » Tue Apr 11, 2017 9:13 pm

JB2013 wrote:Thanks everyone for their input. I think I just get so frustrated with how behind I feel in the game, so feel the need to just dump everything in the Roth despite having some debt. I read some posts on here of those who are younger than me, having 100-200K in their retirement already, and I say, "What the hell?" Or of folks making 250K a year...ah how that would be lovely...sorry, quick rant...

Anyways, I'm thinking putting maybe half in the Roth would give me the most comfort of paying a lot down on the car, but still adding to my future. And, with my next payout I can do the same and have the car done by the end of the year. I'm hoping that seems like a good strategy...
I totally understand how you feel. I'm a physician and even though I have a high salary, I'm still quite behind in my savings because of all the student debt I had to deal with. My net worth was very negative for quite some time. However, I've learned not to spend time comparing myself to others. It really does you no good. Just be happy that you're wise enough now to see the value in saving for your future and that you're taking great steps towards achieving your goals. Remember that the end goal is not as important as the road getting there. You have to enjoy the present moment above all else;)

Finance-MD
Posts: 316
Joined: Sun Mar 26, 2017 9:27 am

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by Finance-MD » Tue Apr 11, 2017 9:19 pm

If you paid off your car would you sustainably use that car payment amount toward investing? Or would you be tempted to 'spend' that money.
If you're tempted to 'spend' it, for some people it's better not to pay off the loan and invest the free cash today since it keeps you accountable long term.

If you want to split between debt and investing, I like the FS-DAIR method by financial samurai (he has a blog).

Take the debt interest rate and multiply by 10. That is the portion of your extra money that goes to debt, the remainder gets invested.

For example,
Extra $6500 today.
Car loan at 3.25%.
Multiply by 10
32.5%.

So 1/3 of the bonus goes to car as additional paydown ($2200), 2/3 to your Roth ($4300) using round numbers.

What's nice about this is if the interest rate is low, you're weighting your money to the higher yielding asset. If the interest rate is high, you are weighting it toward the higher 'guaranteed' rate.

Jack FFR1846
Posts: 10803
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by Jack FFR1846 » Tue Apr 11, 2017 9:32 pm

There's no one answer that's right for everyone.

When my wife and I were starting out and had lots of loans like you, I did the math (I'm an engineer) and paid extra towards the highest interest loan until it was gone and went down the line. (Avalanche)

Your post said you'd feel better paying off the car (small balance) then getting to the student loans (snowball). If that makes you feel good, do it that way.

Others who might feel fine taking out a $500k 4% personal loan to invest in a mutual fund might say to put the money in a Roth. I've always been a big "get rid of absolutely all debt" guy, but certainly putting money in a Roth is better than throwing it in the street or buying an electric dog polisher or something.

They're all good options.
Bogle: Smart Beta is stupid

aristotelian
Posts: 6678
Joined: Wed Jan 11, 2017 8:05 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by aristotelian » Tue Apr 11, 2017 10:04 pm

Just checking, could you be a candidate for a Traditional IRA? Then you get a tax deduction which you can put toward the debt while also getting to save for retirement. What is your tax bracket?

Topic Author
JB2013
Posts: 135
Joined: Mon Sep 12, 2016 1:04 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by JB2013 » Tue Apr 11, 2017 10:18 pm

aristotelian wrote:Just checking, could you be a candidate for a Traditional IRA? Then you get a tax deduction which you can put toward the debt while also getting to save for retirement. What is your tax bracket?
My tax bracket is 15%. I never looked much into the Traditional just because I assumed doing the Roth made the most sense due to no taxes later on.

Topic Author
JB2013
Posts: 135
Joined: Mon Sep 12, 2016 1:04 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by JB2013 » Tue Apr 11, 2017 10:23 pm

Finance-MD wrote:If you paid off your car would you sustainably use that car payment amount toward investing? Or would you be tempted to 'spend' that money.
If you're tempted to 'spend' it, for some people it's better not to pay off the loan and invest the free cash today since it keeps you accountable long term.

If you want to split between debt and investing, I like the FS-DAIR method by financial samurai (he has a blog).

Take the debt interest rate and multiply by 10. That is the portion of your extra money that goes to debt, the remainder gets invested.

For example,
Extra $6500 today.
Car loan at 3.25%.
Multiply by 10
32.5%.

So 1/3 of the bonus goes to car as additional paydown ($2200), 2/3 to your Roth ($4300) using round numbers.

What's nice about this is if the interest rate is low, you're weighting your money to the higher yielding asset. If the interest rate is high, you are weighting it toward the higher 'guaranteed' rate.
I'm definitely not one to spend if I free up the debt. I'm a pretty fugal guy. Takes me weeks to decide whether I should buy a used $4 blu ray on Ebay. I'd love to free up the debt considerably, but I can't help but wonder if putting some towards the Roth would be a smart idea long term. I have a very secure job so I'm not worried about not having immediate cash flow like some people worry about.

I've never heard of the FS-DAIR method, but I like the concept. I'll get around $750 in property tax refund this fall as well so I can put that towards the car as well.

aristotelian
Posts: 6678
Joined: Wed Jan 11, 2017 8:05 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by aristotelian » Tue Apr 11, 2017 10:28 pm

JB2013 wrote:
aristotelian wrote:Just checking, could you be a candidate for a Traditional IRA? Then you get a tax deduction which you can put toward the debt while also getting to save for retirement. What is your tax bracket?
My tax bracket is 15%. I never looked much into the Traditional just because I assumed doing the Roth made the most sense due to no taxes later on.
I think you can't go wrong with either one. Generally, in the 15% bracket Roth is going to be better because you are likely to have a higher tax bracket in retirement, so it is better to pay taxes at your current rate of 15%. However, you have some cash flow issues and debt, so you might be a candidate for Traditional.

Goal33
Posts: 1104
Joined: Sun Apr 12, 2015 12:30 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by Goal33 » Tue Apr 11, 2017 10:42 pm

Personally I'd do the Roth
A man with one watch always knows what time it is; a man with two watches is never sure.

User avatar
rob
Posts: 3071
Joined: Mon Feb 19, 2007 6:49 pm
Location: Here

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by rob » Tue Apr 11, 2017 11:16 pm

The roth is a use it or lose it proposition (you don't get to use it future years).... I would do the roth from what you describe.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

User avatar
siamond
Posts: 5135
Joined: Mon May 28, 2012 5:50 am

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by siamond » Tue Apr 11, 2017 11:34 pm

rob wrote:The roth is a use it or lose it proposition (you don't get to use it future years).... I would do the roth from what you describe.
Yup, agreed.

OP, don't rush to repay loans with a low interest rate, the math just doesn't add up... I wish I had understood that when I was younger...

Blender
Posts: 155
Joined: Wed May 13, 2015 10:56 am

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by Blender » Tue Apr 11, 2017 11:42 pm

JB2013 wrote:Would you be concerned though if missing out on Roth contributions? I always hear people talk about once you lose it it's gone.
To some degree it would depend on your age and how many years you'd have left that you can contribute to a Roth. But from a purely financial perspective I look at it this way: you have a guaranteed 3.45% return from "investing" in your car loan. You get an even higher guaranteed rate (maybe, depends on tax deduction) from your student loans. So, you can either take your $6.5K and put it into a Roth and hope you beat those return rates during the period until your loans are paid off, or put them towards the debt to get a guaranteed rate of return and hopefully sleep better at night as well.

Yes, you lose this years Roth contribution, but there's next year and all the years after that. Your money needs to work for you no matter where you put it. So if paying off debt you're taking the guaranteed rate of return versus giving up an unknown rate of return (during the same period) and future tax free growth off of gains during that period (if any) via a Roth.

Another way to look at any debt vs. investment type questions, is to ask the question would you take out a 3.45% loan to fund your Roth? If you would, put your money into a Roth otherwise put it towards the car loan.

MoonOrb
Posts: 1009
Joined: Thu Jan 24, 2013 6:58 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by MoonOrb » Tue Apr 11, 2017 11:58 pm

I'd put every single dollar of this into your tax advantaged accounts. Your 401k up to the match, your Roth, then fully fund your 401k. Then a spousal IRA after that, if that's something you can do.

If you have enough left over after that and are choosing between taxable investing and paying off your loans, I'd still chose taxable investing, but that's just me.

KATNYC
Posts: 480
Joined: Fri Apr 07, 2017 4:34 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by KATNYC » Wed Apr 12, 2017 12:51 am

Blender wrote:
JB2013 wrote:Would you be concerned though if missing out on Roth contributions? I always hear people talk about once you lose it it's gone.
To some degree it would depend on your age and how many years you'd have left that you can contribute to a Roth. But from a purely financial perspective I look at it this way: you have a guaranteed 3.45% return from "investing" in your car loan. You get an even higher guaranteed rate (maybe, depends on tax deduction) from your student loans. So, you can either take your $6.5K and put it into a Roth and hope you beat those return rates during the period until your loans are paid off, or put them towards the debt to get a guaranteed rate of return and hopefully sleep better at night as well.

Yes, you lose this years Roth contribution, but there's next year and all the years after that. Your money needs to work for you no matter where you put it. So if paying off debt you're taking the guaranteed rate of return versus giving up an unknown rate of return (during the same period) and future tax free growth off of gains during that period (if any) via a Roth.

Another way to look at any debt vs. investment type questions, is to ask the question would you take out a 3.45% loan to fund your Roth? If you would, put your money into a Roth otherwise put it towards the car loan.
That's our thinking as well but with a 4.99% variable rate HELOC, it's the equivalent of borrowing 4.99% cash to invest.

We are going to refi into a 10/1 ARM at 3.5%, pay down a lump sum after closing (closed TD & Fidelity accounts), pay extra payments of $1,500/month for a year (1 year waiting period for his 401K) so by May 2018 when he can contribute to 401K the ARM will be on track to be paid off after only 9 years/8 months to avoid a rate hike. This is the calculation even if we don't pay any additional lump sum or extra payments although we still will make extra payments monthly while directing the $1,500 to his 401K.

The car loan is relatively low in comparison to our HELOC rate so in the end, it's a matter of personal preference given your relatively low debt. We think it's possible to build up retirement funds and pay down debt at the same time so long as you evaluate the choices, like you have here. We should have investigated a 10/1 ARM as soon as the renovations were done instead of letting 6 months pass (although we've paid double payments, not just interest).

You may already have a great option but we used this calculator to determine which rate & lump sum/extra payment schedule would put us on track for the 401K May 2018 contributions. https://www.vertex42.com/Calculators/de ... lator.html You can add any extra payments on page 2. Calculator is on page 2.

mortfree
Posts: 1977
Joined: Mon Sep 12, 2016 7:06 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by mortfree » Wed Apr 12, 2017 2:44 am

For perspective the ONLY debt I have is an 8k car loan at 1.9%. People here have told me I should pay this off.

I max 401k, max Roth, and try to max my wife's Roth.

Also remember that the 2017 Roth contributions can be made up to April 15, 2018.

My details are in a thread that starts with Age 40 in the non-investing forum

UncleBen
Posts: 300
Joined: Wed Feb 19, 2014 8:43 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by UncleBen » Wed Apr 12, 2017 6:10 am

If someone posted a thread "1 year, 3.45% CD at Main Street Credit Union", there would be a flurry of posts and a near stampede of BH's. I say pay off the car. How great is it going to feel to only have the SL debt (not counting perhaps a mortgage)? You won't be getting the bonus in time to fund 2016's ROTH anyway. And you have the rest of the year to fund 2017's ROTH if you choose that over the SL payoff.

NiceUnparticularMan
Posts: 1740
Joined: Sat Mar 11, 2017 7:51 am

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by NiceUnparticularMan » Wed Apr 12, 2017 6:26 am

Financially, I think the stronger case is for making use of your expiring ability to make a Roth contribution.

But you've got a long time to go, and you want to be happy along the way. If debt payments are interfering with your happiness, that can be an "investment" worth making.

Here is one idea--how do you feel about paying off your car loan but simultaneously scheduling an automatic monthly contribution to your Roth in about the same amount as your car loan payments? Your net cash flow doesn't change but now you are investing, not paying off debt, and you can cancel it any time as needed. People will rightly say such monthly investments rather than lump sum is generally not helpful as an investment strategy, but here you are de facto "investing" the money not yet in the Roth at your car loan rate, which is not a bad "return". And as long as you don't tell yourself this makes sense for market timing reasons, but instead for giving yourself financial flexibility and piece of mind, I would see no problem with it.

NiceUnparticularMan
Posts: 1740
Joined: Sat Mar 11, 2017 7:51 am

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by NiceUnparticularMan » Wed Apr 12, 2017 6:29 am

UncleBen wrote:If someone posted a thread "1 year, 3.45% CD at Main Street Credit Union", there would be a flurry of posts and a near stampede of BH's.
Of course if they were sticking to their allocation plans, they would be selling other fixed-rate assets to buy those CDs, not selling their higher-risk/higher-return assets to do so.

Topic Author
JB2013
Posts: 135
Joined: Mon Sep 12, 2016 1:04 pm

Re: Put $6,500 bonus check to pay off car or max out Roth for the year?

Post by JB2013 » Wed Apr 12, 2017 8:55 am

Thanks for people's comments. It's helpful to have more things to think about for my situation. I think part of the problem is that I've been grounded in such a "get out of debt" mentality that it's difficult to think of doing something else. I've listened and read up on some of Dave Ramsey's concepts which have given me good things to think about, especially about people spending crap on things they don't need, which thankfully I don't have a problem with.

It seems, however, his idea of investing is different than most around here. He would be very critical of anyone investing with any debt whatsoever. I listened to a call on his radio show where a guy in his late twenties had a car loan of $5,000 and then $25,000 in student loans. The caller was asking how to best allocate his income (think he made around $65k). He asked if he should take advantage of the match which was 50% up to 8%, but Dave said, "Are you kidding me? Dude, you are 30K in debt right now. You're broke. You can't invest." Dave went on to say that he wouldn't even advise investing even if the match was 100% up to 8% because "you're broke."

I get so excited seeing the balance of my Roth going up, but I don't want to make an emotional decision either.

Post Reply