What would you do? Payoff...

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dignan
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What would you do? Payoff...

Post by dignan » Wed Oct 26, 2016 11:48 am

My wife and I recently received a small life insurance policy of 18k that we've been sitting on for a few months. We now have a total emergency savings of 29k. We've already contributed the max amount to our ROTH accounts. We have a condo as an investment and like to keep emergency savings to help cover the mortgage if we ran into the problem of not finding/having a tenant.

We have a student loan amount of 24k (half is 2.55% and other half is 3.75% interest), which is our only debt (aside from our primary mortgage 2.875% and condo 4.875%). We've been debating what to do and would like to hear from the boglehead community.

What would you do?
A. Pay off total student loan and restart emergency savings
B. Pay off a large portion of student loan (like half?)
C. Continue paying off student loan aggressively and keep emergency savings intact
D. Other

I appreciate your input.

Edit - I forgot, I should probably point out that we also have paper bonds totaling $5800. So we have a total of ~$34800.
Last edited by dignan on Wed Oct 26, 2016 12:23 pm, edited 1 time in total.

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rob
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Re: What would you do? Payoff...

Post by rob » Wed Oct 26, 2016 11:50 am

5K is not enough of an emergency fund IMO... especially with a rental. I would pay off the 3.75% 1/2 of the student loans, which allows you to get rid of that while still having an emergency fund.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

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Hub
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Re: What would you do? Payoff...

Post by Hub » Wed Oct 26, 2016 11:54 am

Are you maxing out your 401k this year? You could adjust your paycheck to get that done by the end of the year while using this money to cover the monthly shortage that may cause.

I agree that you want an emergency fund more like $20k than $5k. Maybe you just put a bunch in taxable investments planning on not using it but knowing that it is still technically part of your emergency fund.

BrklynMike
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Re: What would you do? Payoff...

Post by BrklynMike » Wed Oct 26, 2016 11:55 am

I'm not a fan of spreading windfalls around. For example, the conventional wisdom of taking half your tax refund to pay off debt or save and use half for fun. To me, you just don't make enough progress with whatever you are trying to do. While this is obviously a personal decision, I'd keep the money in my emergency fun because tenant issues can always come up. Then, depending upon the cash flow impact, I'd focus on paying down the debt. If the monthly payment is not big, then I'd invest. Just my two cents.
"In a world of uncertainty, one should focus more on the consequences than the probabilities." - Benjamin Graham

bloom2708
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Re: What would you do? Payoff...

Post by bloom2708 » Wed Oct 26, 2016 12:00 pm

Keep $15k in your Emergency Fund.

Pay off the 3.75% student loan. Pay $2k off the lower rate student loan.

Another option is to grab a copy of The Total Money Makeover by Dave Ramsey. Read it cover to cover. See if being "debt free except the house" resonates with you. The next step would be "We're debt freee....dom."

Dave would suggest keeping $1k in your Emergency Fund and pay off the student loans. In your example you have an extra $4k to keep your Emergency Fund at $5k.

Good luck.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

orca91
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Re: What would you do? Payoff...

Post by orca91 » Wed Oct 26, 2016 12:06 pm

We need OP to clear something up here. It seems most are reading the $18k was received and that is now part of the EF for $29k ($29k total). I'm reading it as the $18k was recently received and they already had a $29k EF separate ($47k total). Which way is correct, OP?

dignan
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Re: What would you do? Payoff...

Post by dignan » Wed Oct 26, 2016 12:11 pm

Hub wrote:Are you maxing out your 401k this year? You could adjust your paycheck to get that done by the end of the year while using this money to cover the monthly shortage that may cause.

I agree that you want an emergency fund more like $20k than $5k. Maybe you just put a bunch in taxable investments planning on not using it but knowing that it is still technically part of your emergency fund.
I have not maxed out. I currently am at 10%. I don't know if I feel comfortable doing what's suggested with my paycheck.

Independent George
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Re: What would you do? Payoff...

Post by Independent George » Wed Oct 26, 2016 12:12 pm

What are your total monthly expenditures? I'd try to keep at least 20k in the emergency fund, but that still leaves $9k available to pay down debt.

I'd target the 3.75% student loan first, because (1) student loan debt cannot be discharged in bankruptcy, (2) the condo is an investment property, so the cost of debt has to be weighed against the interest being deducted as an expense on your rental income, and (3) the condo can always be sold, thus negating the debt; you're stuck with the student loans until you pay them off.

dignan
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Re: What would you do? Payoff...

Post by dignan » Wed Oct 26, 2016 12:14 pm

orca91 wrote:We need OP to clear something up here. It seems most are reading the $18k was received and that is now part of the EF for $29k ($29k total). I'm reading it as the $18k was recently received and they already had a $29k EF separate ($47k total). Which way is correct, OP?
We now have 29k total, which includes the 18k. We had about 11k as an emergency fund originally and was working toward bringing that number up.

orca91
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Re: What would you do? Payoff...

Post by orca91 » Wed Oct 26, 2016 12:21 pm

Gotcha, I read it wrong.

I like IG's post above... throw $9k at the higher interest student loan, keep $20k in EF, and continue aggressively paying down the student loans.

Goal33
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Re: What would you do? Payoff...

Post by Goal33 » Wed Oct 26, 2016 1:17 pm

dignan wrote:
Hub wrote:Are you maxing out your 401k this year? You could adjust your paycheck to get that done by the end of the year while using this money to cover the monthly shortage that may cause.

I agree that you want an emergency fund more like $20k than $5k. Maybe you just put a bunch in taxable investments planning on not using it but knowing that it is still technically part of your emergency fund.
I have not maxed out. I currently am at 10%. I don't know if I feel comfortable doing what's suggested with my paycheck.
I would recommend maxing out the 401k and using your extra cash if you're short as well, assuming you're in at least the 25% bracket.
A man with one watch always knows what time it is; a man with two watches is never sure.

dignan
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Re: What would you do? Payoff...

Post by dignan » Fri Oct 28, 2016 1:25 pm

I think we're going to go the route of paying 9k and continue aggressively paying the student loan. We appreciate everyone's advice.

emoore
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Re: What would you do? Payoff...

Post by emoore » Fri Oct 28, 2016 2:56 pm

I think any of the options presented are good, just depends on what you feel comfortable with. I'm ok with some debt so I've payed the minimum on my student loans (2.25%) so that I could max out my 401k and Roth IRA. It was worked well for me.

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