Need some direction: 5K payout in July....towards loans or Roth?

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JB2013
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Need some direction: 5K payout in July....towards loans or Roth?

Post by JB2013 » Sun Jun 03, 2018 8:33 am

I'm trying to determine the best course of action with a roughly 5K payout in July for money I've earned the company that they haven't paid me yet. I'm trying to make the decision that makes the most sense financially for my family and I. Putting money into the Roth tends to make the most "financial sense", yet I also know how amazing it would feel to have the monthly debts removed for more breathing room and peace of mind. Yet, I don't want to make this decision out of emotion either. Here are current debts:

Listed is balance, then monthly payment, then rate

$4,716.....$246...... 3.9%
$2,066..... $81 ..... 6.8%
$8,154 ..... $107 ..... 3.75%
$1,981 ..... $69 ..... 6.55%
$3,980 ..... $91 ..... 6.375%
$3,068 ..... $220 ..... 3.44% (Car loan maturing in August 2019)
$682 ..... $250 ..... 0% (This will be paid off In August)

No Credit Cards

Emergency Fund: $1,500

Retirement:

My Roth: $21,875
Her Roth: $2,910
My 401K: $21,705 (I'm currently taking the match up to 4%)

So currently I have a total of $24,647 in debt. My last listed debt is a medical bill and as I mentioned this will be done in August, so that will free up $250 per month that I've been paying on since last January. I have $1,057 coming out every month right now, and once August hits that will drop to $807.

My wife doesn't work as she stays home with the kids and I currently bring in $5,280 per month after tax.

So some help here: Do I take the 5K and dump it into the Roth for the 2018 year, or take this money and put towards some of the other loans to free up monthly cash flow to attack the other loans more aggressively? I figure I could pay off the car and that would free up another $220 per month. With the medical bill ending in August, that would free up a total of $470 that could accelerate other loans.

Any insight would be much appreciated!! Thanks in advance!!

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welderwannabe
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by welderwannabe » Sun Jun 03, 2018 8:37 am

That is a lot of loans. I would suggest you get out of debt...it saps the soul. Put the $5K on the debt then work to pay off the rest of them, then I would focus on the Roth.

If you arent committed to getting out of debt, then I would put the $5K in the Roth.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

runner540
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by runner540 » Sun Jun 03, 2018 8:39 am

I hate debt, and would suggest you pay off debt with all of the $5k. That would drive me nuts to have that many little bills. You can do the Dave Ramsey smallest to largest balance (which means you would pay off $682, $2066 and $1981), which also happen to be two of the higher interest rates. Keep putting as much money as you can toward your debts (once you pay one off, snowball that payment into the next debts). Then, you will have $1000+ per month to save for retirement.

radiowave
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by radiowave » Sun Jun 03, 2018 8:42 am

Is the $5k before or after taxes?

If it were me, I would put the extra cash into the emergency fund in a high yield savings account.
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mhalley
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by mhalley » Sun Jun 03, 2018 8:45 am

A lot of loans but all relatively small. Interest rate of less than 8%, I think I would tend to vote for the Roth. WCI has an invest or pay down debt post, 8% interest is his cutoff for loan payoff before investing. The roth can then substitute as an emergency fund if you don't have one.
https://www.whitecoatinvestor.com/pay-o ... or-invest/

Dandy
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by Dandy » Sun Jun 03, 2018 8:53 am

Pay off the highest interest rate loans first. You have 3 loans with over 6% interest you can pay off the top two with less than 5k. The extra and the monthly money freed up should go toward the last 6%+ loan. When all three of the 6% loans are freed up you can think about some $$ toward a Roth while still paying down the other loans.

Since you are the sole source of income, married with children make sure you have some emergency fund money. You don't want to clear out all your debts and then even a small unexpected expense gets you back into debt. So, if you don't have an E fund then allocate a thousand or two for it and still go with paying off the highest rate loan first. You might use a small portion of the monthly money freed up to augment your E fund while you still continue to pay down other debt. I would forgo the Roth until you have a decent E fund and all the 6% loans are paid off.

delamer
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by delamer » Sun Jun 03, 2018 12:40 pm

Pay off the 2 highest interest rate loans and then add the remainder to your energency fund.

With one income and a couple of kids, you need more emergency savings.

Cheryl604
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by Cheryl604 » Sun Jun 03, 2018 12:57 pm

I agree that the priority should be to get out of debt and build that E fund. But I disagree about what debt to take first. I would think pay off the almost 5,000 debt at 3.9% because that's your highest payment- you would then have an almost $250 extra to pay down other debts (next I would tackle the almost 2k at 6.5%) Then, when you pay off medical in August, you will have $500ish to throw at your debts each month. If I were you, I would let car payment run its course, since you are nearing end of life on that loan and probably have paid most of the interest by this point. That's just me though.

I am very nervous for you about the low balance of that E fund. You are one unexpected disaster away from having to take yet another loan. Every single unspent dollar each month should be going to that E fund, including a dedicated transfer from your paycheck each month until you at least get the 3 month expenses- ideally 6 month in the long run.

Flyer24
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by Flyer24 » Sun Jun 03, 2018 2:00 pm

I would put it towards debt then start building your EF. I followed Dave’s method to get me out of multiple debts totaling $20k. It works.

https://www.daveramsey.com/get-started/debt

triyoda
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by triyoda » Sun Jun 03, 2018 2:15 pm

delamer wrote:
Sun Jun 03, 2018 12:40 pm
Pay off the 2 highest interest rate loans and then add the remainder to your energency fund.

With one income and a couple of kids, you need more emergency savings.
this

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ruralavalon
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by ruralavalon » Sun Jun 03, 2018 3:03 pm

I suggest:

1) use the $5k to immediately pay off debts (I suggest you zero out the $1.9k @ 6.6% and the $2.1k @ 6.8%, the rest on the on the 6.375% loan);

2) use the cash flow freed up to accelerate payoff of the remaining debts;

3) then use the freed up cash flow to build the emergency fund a little higher; and

4) then use the freed up cash flow for additional contributions to your tax-advantaged accounts (I don't know whether the 401k or Roth IRA would be better, without more information).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

mortfree
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by mortfree » Sun Jun 03, 2018 5:31 pm

i would payoff the 4716 first.

Rest to EF

Maybe then Redirect that $246 payment to the next lowest balance.

And soon enough you will also have that $250/month to use.

megabad
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by megabad » Sun Jun 03, 2018 5:58 pm

ruralavalon wrote:
Sun Jun 03, 2018 3:03 pm
I suggest:

1) use the $5k to immediately pay off debts (I suggest you zero out the $1.9k @ 6.6% and the $2.1k @ 6.8%, the rest on the on the 6.375% loan);

2) use the cash flow freed up to accelerate payoff of the remaining debts;

3) then use the freed up cash flow to build the emergency fund a little higher; and

4) then use the freed up cash flow for additional contributions to your tax-advantaged accounts (I don't know whether the 401k or Roth IRA would be better, without more information).
+1

TheAncientOne
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by TheAncientOne » Sun Jun 03, 2018 6:10 pm

Keep it simple. Use 4K to pay off the two highest interest rate loans and put the remaining 1K into your underfunded emergency fund. Going forward, I'd take advantage of your lower monthly payments to increase your 401k. A 4% contribution, combined with an equal amount from your company is not enough. You should be able to get that up to 10% with the three (including the one that will be paid off in two months) loans finished.

JB2013
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by JB2013 » Sun Jun 03, 2018 9:22 pm

Thanks for everyones feedback. It seems like there's a mix of suggestions here. I think I've always just had some type of worry over not contributing the max to the Roth knowing that I'm losing the compounding interest. But I agree putting more in the Emergency fund would be a smart thing to do and to avoid future debts if something were to happen. I also like the idea of increasing my 401K contribution as it's something that is just done automatically and I don't have to think about it. But with the 5K I think I plan on putting half into the ER fund and then putting towards the higher rate loan.

terran
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by terran » Sun Jun 03, 2018 9:39 pm

I agree with the advice to pay off the debt, but not with establishing an emergency fund instead of contributing to Roth. Once the debt is paid off I would move enough of the Roth the bonds to act as a comfortable emergency fund, and then keep contributing. Best case is you don't need the emergency fund and you have more money in Roth, worst case is you need some of the emergency fund and you need to withdraw some of your contributions (not gains) tax free. See https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

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ruralavalon
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by ruralavalon » Mon Jun 04, 2018 11:48 am

In my opinion, paying off the 6+% loans as a priority is a no brainer. That's like getting a guaranteed 6+% return on investment, you can't get anything close to that as a guaranteed return on any other use of your money.

JB2013 wrote:
Sun Jun 03, 2018 9:22 pm
. . . . .
I also like the idea of increasing my 401K contribution as it's something that is just done automatically and I don't have to think about it. But with the 5K I think I plan on putting half into the ER fund and then putting towards the higher rate loan.
If there are good very low expense ratio funds offered in your 401k, then it can be better to increase contributions to your 401k rather than do contributions to your IRA.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

boglewill34
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by boglewill34 » Mon Jun 04, 2018 12:14 pm

delamer wrote:
Sun Jun 03, 2018 12:40 pm
Pay off the 2 highest interest rate loans and then add the remainder to your energency fund.

With one income and a couple of kids, you need more emergency savings.
This is exactly what I would do.

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BL
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Re: Need some direction: 5K payout in July....towards loans or Roth?

Post by BL » Mon Jun 04, 2018 12:19 pm

I would think of the Roth as a secondary emergency fund- but only for serious emergencies!

Getting over 6% payback by paying off loan is a great return.

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