Should I pay off these loans?

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Nearly A Moose
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Should I pay off these loans?

Post by Nearly A Moose » Fri Apr 14, 2017 1:08 pm

I had one of those "huh..." moments recently and could use some input from the forum. Here's the situation. We have a pile of money ($50,000) that will be used as down payment on a new house, likely in Spring 2019 (along with the proceeds from the sale of our current house). We will be adding to this each bonus season, and the goal has been to put it in a reasonably conservative short-term investment that wasn't a savings account. We also have student loans and a car loan still outstanding, which are all on trajectories to be paid off roughly within the next two years. They total about $39,000. I'm wondering if I should take the money out of the downpayment fund, pay off these loans immediately, and then redirect the monthly payment amounts from each loan to refill our downpayment fund.

More details:
* Downpayment fund: Currently just over $50,000; invested in Vanguard Limited Term Tax Exempt Fund (VMLUX; ~2 year duration; SEC yield 1.42%; 0.09% ER). We anticipate contributing another $50,000 to this fund in Dec. 2017, and after that it's unclear. We project needing anywhere from $0 to $100,000 from this fund to buy our next house, depending on purchase price and how much our existing house sells for.
*My student loans: $10,700 outstanding balance; 4.5% rate; Paying ~$680/mo for an early payoff around June 2018
*Wife's student loans: $17,600 outstanding balance; approx. 4.3% rate; paying $450/mo; anticipated payoff date Nov. 2020; plan was to finish my loan repayments and then use that cashflow to pay off hers early (note that these are approximations because she has a portfolio of loans with different rates and payoff dates; these numbers are close enough)
*Car loan: $10,500 outstanding balance; 1.5% rate; paying $460/mo; payoff ~ Feb. 2018
*Taxes: Marginal rate (fed+state) is about 50%; no tax benefits to student loan interest payments.

I was originally thinking of the loans and house fund independently, but it occurred to me that this all comes to a head at around the same time: the loans will all be paid off shortly before I think I'll need the downpayment money. Since I'm not otherwise using the downpayment money for anything, and since the loan interest rates are all at or above what I'm earning in the bond fund, why shouldn't I use the downpayment fund to pay off the loans, redirect the loan payments to rebuilding the downpayment fund, and "pay myself" the interest that I'd otherwise be paying my loan providers? If I paid off all the loans this month, it would take about 25 months to replenish the $39,000 into the downpayment fund.

Downsides I see:
*If for some reason we do need to move earlier (I don't think it's likely), we don't have the liquidity and would have to tap our broader taxable account
*Behavioral risk of not following through on always putting the loan payments into the house fund (we're generally pretty good at this, but I'm constantly amazed at the cost pressures associated with two very full-time parents having young kids in DC)
*"Only" saving $1500-$2000 in total interest (it's a bit complicated to back out exactly how much interest I'd pay given how I had been planning to accelerate my wife's student loan repayment)
*Lose admiral share status until I got back above $50,000 (admiral ER is 0.09%; investor ER is 0.19%)

Upside:
*Save $1500-2000 in interest payments
*Reduce some of the risk associated with the effects of rising interest rates on bond fund prices (although I'm just not that worried about this; I don't expect much movement in this fund)
*Eliminate all debt but mortgage
*Establish the automatic deposits into this account now, hopefully reinforcing good behavior and discipline

Overall, it looks like I should go for this. What do folks think?
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

bloom2708
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Re: Should I pay off these loans?

Post by bloom2708 » Fri Apr 14, 2017 1:48 pm

Do you have other cash/Emergency fund beyond the $50k saved for the down payment?

Clearing the student loans is a guaranteed 4.5%/4.3%. The car loan rate is low, but the car is depreciating each month. I am one that thinks you would be far ahead to clear the debts now. $1,590 of cash flow by paying the debts off plus interest saved. Track your spending closely (Mint or personal capital) and power save for the house down payment.

You don't want the student loans and car payment with the future mortgage. Too much clawing at your income along with your high tax rate.

After the debts are cleared, do you have pre-tax saving vehicles (401k/403b, etc.) to help move your income lower?

If you pay them off, make promise to not borrow in anticipation of the mortgage. Good luck!
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead | | Want to buy something? Watch this first: https://vimeo.com/41152287

Nearly A Moose
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Re: Should I pay off these loans?

Post by Nearly A Moose » Fri Apr 14, 2017 2:12 pm

bloom2708 wrote:Do you have other cash/Emergency fund beyond the $50k saved for the down payment?

Clearing the student loans is a guaranteed 4.5%/4.3%. The car loan rate is low, but the car is depreciating each month. I am one that thinks you would be far ahead to clear the debts now. $1,590 of cash flow by paying the debts off plus interest saved. Track your spending closely (Mint or personal capital) and power save for the house down payment.

You don't want the student loans and car payment with the future mortgage. Too much clawing at your income along with your high tax rate.

After the debts are cleared, do you have pre-tax saving vehicles (401k/403b, etc.) to help move your income lower?

If you pay them off, make promise to not borrow in anticipation of the mortgage. Good luck!


Thanks. We have an E-Fund (not huge, but I'm comfortable with it), we max out our 401ks, and we have a separate taxable account (that we have earmarked for retirement).
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

Tal-
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Re: Should I pay off these loans?

Post by Tal- » Fri Apr 14, 2017 2:18 pm

If I can rephrase your question: Should you pay off your other debt before you buy another house? Without knowing more, I feel like the obvious and correct answer is yes.

Would you agree?
Debt is to personal finance as a knife is to cooking.

Nearly A Moose
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Re: Should I pay off these loans?

Post by Nearly A Moose » Fri Apr 14, 2017 2:28 pm

Tal- wrote:If I can rephrase your question: Should you pay off your other debt before you buy another house? Without knowing more, I feel like the obvious and correct answer is yes.

Would you agree?


I guess I view this as less of a debt payoff question and more of a returns and cashflow question. I haven't had that cashflow in my budget for several years and have been planning our next house purchase around not having that cashflow, so this seems like it's a win-win. (We will have to more in 2, 3 years tops due to the local schools, which is a shame.) Perhaps I'm most concerned about giving up that chunk of cash and trusting myself that it will be there again in 2-3 years when we need to buy.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

ulrichw
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Re: Should I pay off these loans?

Post by ulrichw » Fri Apr 14, 2017 2:43 pm

Nearly A Moose wrote:
Tal- wrote:If I can rephrase your question: Should you pay off your other debt before you buy another house? Without knowing more, I feel like the obvious and correct answer is yes.

Would you agree?


I guess I view this as less of a debt payoff question and more of a returns and cashflow question. I haven't had that cashflow in my budget for several years and have been planning our next house purchase around not having that cashflow, so this seems like it's a win-win. (We will have to more in 2, 3 years tops due to the local schools, which is a shame.) Perhaps I'm most concerned about giving up that chunk of cash and trusting myself that it will be there again in 2-3 years when we need to buy.


I agree with your interpretation, Moose. I don't know that I would consider it "obvious and correct" to pay off other debt before buying a house. There are a lot of reasons why one might want to buy a house before retiring all other debt (or why one might want to incur debt while owning a house). I'm not saying it would be a bad thing to pay off the debt, it's just situational, in my opinion, not "obvious."

In your particular case: The interest rates on your loans are all in that "is it worth paying off?" range, because there are investments that will potentially significantly outperform those interest rates (albeit not without risk).

But given that you are sitting on a chunk of change earning considerably less than those interest rates, and you don't anticipate needing those funds until after the debts would have been repaid, I would say it absolutely makes sense to retire those debts (with the possible exception of your car loan, due to its low rate - the value of extra liquidity might offset the slight expense of maintaining that loan - personally, I would pay it off, but you may value things differently from me).

TSR
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Re: Should I pay off these loans?

Post by TSR » Fri Apr 14, 2017 2:47 pm

I'd get rid of the "behavioral risk" portion of the "negatives." I mean, you're still going to want to own a home, right? So you've got a positive incentive to save back that money. And even if you still have some risk, that risk is just that you'll delay purchasing a home, not forego it altogether, while still being totally debt free? That doesn't seem like too much of a negative.

I'd say the real behavioral risk is what someone alluded to above, which is that you get too used to walking debt tightropes because you're good at it. And I think you ARE good at it, which is to say that you have a very good handle on the cash-flow issues, you're at near zero risk of being in any trouble with these loans, etc. But I favor economic decisions that limit your negative options while focusing your positive options. Thus, if you pay this off, you only have the positive option of saving back the money, not the negative option of, say, buying something silly, or pushing out your repayment dates, or what have you. I've been in your situation and I definitely don't regret paying off the loans sooner rather than later. This would be a different answer if you weren't maxing out tax-deferred savings, but you're good there too. I say go for it, but you're clearly in a good position no matter what you do, so don't sweat it too much!

inbox788
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Re: Should I pay off these loans?

Post by inbox788 » Fri Apr 14, 2017 4:46 pm

Nearly A Moose wrote:*Save $1500-2000 in interest payments

Yes, go for it. Put the student and car loans on autopayment into your savings or investment account. You're already committed to $680+450+460 every month, it's just a matter of where you direct it. Also, you can continue savings beyond the period of the loan, so if you have it on autopay, you forget that the loan (to yourself) is already paid off and keep on saving and investing. A good thing to forget.

Consider it a consolidation loan to yourself and you reap all the interest payments (savings) and it's a zero cost!

mortfree
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Re: Should I pay off these loans?

Post by mortfree » Fri Apr 14, 2017 4:56 pm

I would pay off the 10,700 student loan now...

then re-evaluate in a few months.

It doesn't have to be all or nothing...

don't you have about 21 months to go on the car loan?? either way, don't pay that one off early

dziuniek
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Re: Should I pay off these loans?

Post by dziuniek » Fri Apr 14, 2017 5:01 pm

I would definitely pay off the car note - can't deduct this in most situations.

As far as student loans, you can pay off it down enough to still get maximum interest deductible.

mortfree
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Re: Should I pay off these loans?

Post by mortfree » Fri Apr 14, 2017 5:07 pm

dziuniek wrote:I would definitely pay off the car note - can't deduct this in most situations.

As far as student loans, you can pay off it down enough to still get maximum interest deductible.


Interesting point on the interest deduction... however, with the 10,500 auto loan ($460) and 10,700 loan ($680) being the same amount, wouldn't freeing up almost $200 more per month by paying off the student loan be well worth skipping the interest deduction? assuming OP gets to deduct it.

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Watty
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Re: Should I pay off these loans?

Post by Watty » Fri Apr 14, 2017 5:34 pm

Nearly A Moose wrote:.... We have a pile of money ($50,000) that will be used as down payment on a new house, likely in Spring 2019 (along with the proceeds from the sale of our current house).

......
*My student loans: $10,700 outstanding balance; 4.5% rate; Paying ~$680/mo for an early payoff around June 2018
*Wife's student loans: $17,600 outstanding balance; approx. 4.3% rate; paying $450/mo; anticipated payoff date Nov. 2020; plan was to finish my loan repayments and then use that cashflow to pay off hers early (note that these are approximations because she has a portfolio of loans with different rates and payoff dates; these numbers are close enough)
*Car loan: $10,500 outstanding balance; 1.5% rate; paying $460/mo; payoff ~ Feb. 2018


Assuming that you have a good emergency fund then paying off any of the loans that would be paid off by the spring of 2019 is practically a no brainer easy choice as long as you then save your "loan payments" each month. All the money would be re-saved by the spring 2019 and you would have also saved some interest.

Paying off your wife's student loans that would not normally be paid off after the spring of 2019 would be less of an easy choice so you would need to look at the individual details of each of those loans. I would suspect that by the spring of 2019 that her loans might be down to about $5,000 so it might not make a lot of difference if you just paid those off too.

Somewhere in the plan you should also start saving up to be able to pay cash for any future cars.

TBillT
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Re: Should I pay off these loans?

Post by TBillT » Fri Apr 14, 2017 5:57 pm

I am in a different financial situation, but just paid off the college loans I was covering for our children, and some they were covering. I wanted to get rid of the burden, hassle and interest payments, given it's hard to think of good ways to make decent interest on savings these days anyways. Did some last year, did some this year. All gone now.

Nearly A Moose
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Re: Should I pay off these loans?

Post by Nearly A Moose » Fri Apr 14, 2017 8:30 pm

Thanks all for weighing in. Based on what I'm hearing, I think we'll probably pay off the student loans but perhaps keep the car loan, as it's interest rate is at or below what the bond fund is yielding, and all else equal I'd probably prefer the liquidity just in case it's needed sooner. And we'll set the amount that had been going to these loans to autodeposit into our Vanguard account. To those who pointed it out, I'm not eligible for the student loan interest deduction. I got to claim that exactly once, which I guess is a good thing...

We'll noodle on this more over the weekend. If anyone else thinks this is a particularly good or bad idea, I'd love to hear your thoughts.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

dziuniek
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Re: Should I pay off these loans?

Post by dziuniek » Fri Apr 14, 2017 8:37 pm

mortfree wrote:
dziuniek wrote:I would definitely pay off the car note - can't deduct this in most situations.

As far as student loans, you can pay off it down enough to still get maximum interest deductible.


Interesting point on the interest deduction... however, with the 10,500 auto loan ($460) and 10,700 loan ($680) being the same amount, wouldn't freeing up almost $200 more per month by paying off the student loan be well worth skipping the interest deduction? assuming OP gets to deduct it.


1. Sure, but the OP mentions $680 for an early pay-off, which I imagine is throwing monthly extra at the principle balance?

2. It's the accountant in me! :twisted:

3. All that being said, out of all the loans I've yet to pay off myself (auto x 2, mortgage, student loans) - student loans annoy me the most. I might always have a mortgage or rent payment, as well as a car loan (if I can't pay cash), but student loans - that should be gone forever should you pay them off.

On the fence here.

~dizzy

edit: incoherent ramblings, it's friday(?) night.

Nearly A Moose
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Re: Should I pay off these loans?

Post by Nearly A Moose » Fri Apr 14, 2017 10:30 pm

dziuniek wrote:
mortfree wrote:
dziuniek wrote:I would definitely pay off the car note - can't deduct this in most situations.

As far as student loans, you can pay off it down enough to still get maximum interest deductible.


Interesting point on the interest deduction... however, with the 10,500 auto loan ($460) and 10,700 loan ($680) being the same amount, wouldn't freeing up almost $200 more per month by paying off the student loan be well worth skipping the interest deduction? assuming OP gets to deduct it.


1. Sure, but the OP mentions $680 for an early pay-off, which I imagine is throwing monthly extra at the principle balance?

2. It's the accountant in me! :twisted:

3. All that being said, out of all the loans I've yet to pay off myself (auto x 2, mortgage, student loans) - student loans annoy me the most. I might always have a mortgage or rent payment, as well as a car loan (if I can't pay cash), but student loans - that should be gone forever should you pay them off.

On the fence here.

~dizzy

edit: incoherent ramblings, it's friday(?) night.


Yes, I'm currently paying $685 on my student loans. I think I owe about $350ish right now. My autopay was set up before some rate reductions kicked in (setup monthly debit, pay on time x months in a row, etc). I'm glad I didn't know enough back then to go and update the autodraft amount, as it has me a couple years ahead on payoff.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

dziuniek
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Re: Should I pay off these loans?

Post by dziuniek » Mon Apr 17, 2017 5:55 pm

Nearly A Moose wrote:
dziuniek wrote:
mortfree wrote:
dziuniek wrote:I would definitely pay off the car note - can't deduct this in most situations.

As far as student loans, you can pay off it down enough to still get maximum interest deductible.


Interesting point on the interest deduction... however, with the 10,500 auto loan ($460) and 10,700 loan ($680) being the same amount, wouldn't freeing up almost $200 more per month by paying off the student loan be well worth skipping the interest deduction? assuming OP gets to deduct it.


1. Sure, but the OP mentions $680 for an early pay-off, which I imagine is throwing monthly extra at the principle balance?

2. It's the accountant in me! :twisted:

3. All that being said, out of all the loans I've yet to pay off myself (auto x 2, mortgage, student loans) - student loans annoy me the most. I might always have a mortgage or rent payment, as well as a car loan (if I can't pay cash), but student loans - that should be gone forever should you pay them off.

On the fence here.

~dizzy

edit: incoherent ramblings, it's friday(?) night.


Yes, I'm currently paying $685 on my student loans. I think I owe about $350ish right now. My autopay was set up before some rate reductions kicked in (setup monthly debit, pay on time x months in a row, etc). I'm glad I didn't know enough back then to go and update the autodraft amount, as it has me a couple years ahead on payoff.


I don't have the exact number due to refinancing, etc, but we started with approximately $113,000 u\in student loans 8-) .

We are down to... drumroll... $48,000 :)

Sandtrap
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Re: Should I pay off these loans?

Post by Sandtrap » Mon Apr 17, 2017 6:02 pm

yes yes

Nearly A Moose
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Re: Should I pay off these loans?

Post by Nearly A Moose » Mon Apr 17, 2017 8:17 pm

dziuniek wrote:
Nearly A Moose wrote:
dziuniek wrote:
mortfree wrote:
dziuniek wrote:I would definitely pay off the car note - can't deduct this in most situations.

As far as student loans, you can pay off it down enough to still get maximum interest deductible.


Interesting point on the interest deduction... however, with the 10,500 auto loan ($460) and 10,700 loan ($680) being the same amount, wouldn't freeing up almost $200 more per month by paying off the student loan be well worth skipping the interest deduction? assuming OP gets to deduct it.


1. Sure, but the OP mentions $680 for an early pay-off, which I imagine is throwing monthly extra at the principle balance?

2. It's the accountant in me! :twisted:

3. All that being said, out of all the loans I've yet to pay off myself (auto x 2, mortgage, student loans) - student loans annoy me the most. I might always have a mortgage or rent payment, as well as a car loan (if I can't pay cash), but student loans - that should be gone forever should you pay them off.

On the fence here.

~dizzy

edit: incoherent ramblings, it's friday(?) night.


Yes, I'm currently paying $685 on my student loans. I think I owe about $350ish right now. My autopay was set up before some rate reductions kicked in (setup monthly debit, pay on time x months in a row, etc). I'm glad I didn't know enough back then to go and update the autodraft amount, as it has me a couple years ahead on payoff.


I don't have the exact number due to refinancing, etc, but we started with approximately $113,000 u\in student loans 8-) .

We are down to... drumroll... $48,000 :)


Over halfway there! I think my wife and I had about that much total when we both started (and before we met). In hindsight, in quite glad I didn't catch that my auto payment amount didn't decrease when my interest rate incentives kicked in - this has given me a nice view into what accelerating the payoff can look like.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

Nearly A Moose
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Re: Should I pay off these loans?

Post by Nearly A Moose » Mon Apr 17, 2017 8:19 pm

Sandtrap wrote:yes yes


Scheduled the transfer from Vanguard to my checking account and got my payoff quotes from the lenders. Planning to zap the student loans out of existence on Friday, then will crack a cold one in their memory :)

Decided to continue paying the car loan. The interest rate is very low, and I think on the margin we value the liquidity at this point.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

dziuniek
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Re: Should I pay off these loans?

Post by dziuniek » Wed Apr 19, 2017 6:56 pm

Nearly A Moose wrote:
Sandtrap wrote:yes yes


Scheduled the transfer from Vanguard to my checking account and got my payoff quotes from the lenders. Planning to zap the student loans out of existence on Friday, then will crack a cold one in their memory :)

Decided to continue paying the car loan. The interest rate is very low, and I think on the margin we value the liquidity at this point.


Nice!

Atleast you got rid of the loan that could follow you into retirement.

dcd72
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Re: Should I pay off these loans?

Post by dcd72 » Thu Apr 20, 2017 7:23 am

*Car loan: $10,500 outstanding balance; 1.5% rate; paying $460/mo; payoff ~ Feb. 2018


Help me out with this - assuming you haven't yet made the April 2017 payment, you are paying $460/month and contemplate 14 months until payoff. But that translates to $6440 in payments, and your balance is $10,500. Even without considering the (low) interest rate, you still come up short in 14 months. How will this work?

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knpstr
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Re: Should I pay off these loans?

Post by knpstr » Thu Apr 20, 2017 7:40 am

Nearly A Moose wrote:Scheduled the transfer from Vanguard to my checking account and got my payoff quotes from the lenders. Planning to zap the student loans out of existence on Friday, then will crack a cold one in their memory :)


Congrats, speaking from experience, they will NOT be missed!
:beer
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

Nearly A Moose
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Re: Should I pay off these loans?

Post by Nearly A Moose » Thu Apr 20, 2017 11:21 am

knpstr wrote:
Nearly A Moose wrote:Scheduled the transfer from Vanguard to my checking account and got my payoff quotes from the lenders. Planning to zap the student loans out of existence on Friday, then will crack a cold one in their memory :)


Congrats, speaking from experience, they will NOT be missed!
:beer


The money transferred in from Vanguard quicker than I expected, so as of yesterday, no more student loans! It's actually a bit of an anticlimactic feeling, but I suspect that might change next month when my investment account starts increasing by what I was paying in loans...
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

Nearly A Moose
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Re: Should I pay off these loans?

Post by Nearly A Moose » Thu Apr 20, 2017 11:26 am

dcd72 wrote:
*Car loan: $10,500 outstanding balance; 1.5% rate; paying $460/mo; payoff ~ Feb. 2018


Help me out with this - assuming you haven't yet made the April 2017 payment, you are paying $460/month and contemplate 14 months until payoff. But that translates to $6440 in payments, and your balance is $10,500. Even without considering the (low) interest rate, you still come up short in 14 months. How will this work?


Here's an easy answer: my big fat thumbs typed 2018, but that should have been 2019 :/ . Would love to get this one off the books, but I think I'll feel better with the liquidity at this point.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

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