Suggestions for paying off a loan

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miamivice
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Suggestions for paying off a loan

Postby miamivice » Fri May 19, 2017 5:39 pm

Recently, I made a big purchase and took out a loan for the first time ever, except for a primary residence.

Now I'm not very thrilled about having a $140,000 debt to my name. I am wondering if anyone here that has experienced debt has suggestions on how to pay it off the fastest.

Yes, I understand that I can take the money left over (income - expenses) each month and put toward the loan, and the more that I pay off the faster it will go down.

I'm just wondering what strategies those who have lived with debt have done to pay it off in the shortest amount of time.

delamer
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Re: Suggestions for paying off a loan

Postby delamer » Fri May 19, 2017 5:48 pm

Based on your formula, there are two options -- increase income or decrease expenses. No other magic bullets.

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Watty
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Re: Suggestions for paying off a loan

Postby Watty » Fri May 19, 2017 6:37 pm

If you bought a boat or an RV and decided that it was not a good decision then you could sell it.

miamivice
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Re: Suggestions for paying off a loan

Postby miamivice » Fri May 19, 2017 6:52 pm

Watty wrote:If you bought a boat or an RV and decided that it was not a good decision then you could sell it.


Making the purchase is a good decision. I have no regrets about that. I just don't like the loan. I'm trying to cash flow paying off the loan but finding having a 15 year loan to be a bit overwhelming. I'd like to pay it off in 5 years rather than 15.

MindBogler
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Re: Suggestions for paying off a loan

Postby MindBogler » Fri May 19, 2017 6:55 pm

Look up loan payoff calculators. There is no magic here. Pay more dollars each month and the payoff date moves closer. You can calculate the exact dollar amount required to pay off a 15 year loan in 5.

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Watty
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Re: Suggestions for paying off a loan

Postby Watty » Fri May 19, 2017 7:04 pm

miamivice wrote:
Watty wrote:If you bought a boat or an RV and decided that it was not a good decision then you could sell it.


Making the purchase is a good decision. I have no regrets about that. I just don't like the loan. I'm trying to cash flow paying off the loan but finding having a 15 year loan to be a bit overwhelming. I'd like to pay it off in 5 years rather than 15.


Getting a second job is an option some people use to get out of debt.

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jimb_fromATL
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Re: Suggestions for paying off a loan

Postby jimb_fromATL » Fri May 19, 2017 7:25 pm

You don’t give any details, but you are correct that paying as much extra on the loan as early as possible will save the most interest and time in debt.

Just don’t make the mistake of reducing, postponing, or neglecting to contribute up to the max allowed for any available tax-deferred and tax-advantage retirement plans before you pay any extra on virtually any manageable loan even -- almost always -- regardless of the rate.

Below are links to some of many threads where my posts show how even a relatively short time delaying retirement investing and paying taxes prematurely when you could have deferred them can cost anywhere from tens to hundreds of thousands to sometimes millions of dollars out of your probable future retirement income in exchange for saving only a tiny fraction as much interest that the remaining after-tax money will save on the relatively short term debts.
If you want to post some details such as your age, tax brackets for fed and state, the terms of the loan, how much you're contributing to retirement, how much you have in cash reserves and other taxable investments, when you plan to retire, and how much you have to spare to either pay down debt or invest elsewhere, we can tailor an example that is closer to your situation.

jimb

miamivice
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Re: Suggestions for paying off a loan

Postby miamivice » Sat May 20, 2017 9:50 pm

jimb_fromATL wrote:You don’t give any details, but you are correct that paying as much extra on the loan as early as possible will save the most interest and time in debt.

Just don’t make the mistake of reducing, postponing, or neglecting to contribute up to the max allowed for any available tax-deferred and tax-advantage retirement plans before you pay any extra on virtually any manageable loan even -- almost always -- regardless of the rate.

Below are links to some of many threads where my posts show how even a relatively short time delaying retirement investing and paying taxes prematurely when you could have deferred them can cost anywhere from tens to hundreds of thousands to sometimes millions of dollars out of your probable future retirement income in exchange for saving only a tiny fraction as much interest that the remaining after-tax money will save on the relatively short term debts.
If you want to post some details such as your age, tax brackets for fed and state, the terms of the loan, how much you're contributing to retirement, how much you have in cash reserves and other taxable investments, when you plan to retire, and how much you have to spare to either pay down debt or invest elsewhere, we can tailor an example that is closer to your situation.

jimb


Jim, you ask for detailed financial information here. I'm not going to bite.

I will say that I save between $20k and $30k a year for retirement, including company match. Our families max is $36,000 per year plus company match (maybe $45,000 a year?) If you can explain how I can get millions more in retirement by saving for retirement in lieu of paying down a $140,000 loan, I'm all ears.

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jimb_fromATL
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Re: Suggestions for paying off a loan

Postby jimb_fromATL » Sat May 20, 2017 10:53 pm

miamivice wrote:
Jim, you ask for detailed financial information here. I'm not going to bite.

I will say that I save between $20k and $30k a year for retirement, including company match. Our families max is $36,000 per year plus company match (maybe $45,000 a year?) If you can explain how I can get millions more in retirement by saving for retirement in lieu of paying down a $140,000 loan, I'm all ears.

Lots of details in my posts at those links.

Lacking details, here's an example to ponder for a $140K loan.

    Assuming top tax brackets of 25% federal and 6% state totaling 31.%;
    debts totaling $140,000 at 5.% with total payments of $1484.92 for P&I for 120 months;
    a 401(k) plan earning an average APY of 7% for 35 years until retirement and 4% after retirement:

    If you were to postpone contributing $1500 per month to the 401(k) and pay the extra $465 taxes, applying the remaining after-tax $1035 to pay down the debt will pay it off in 63 months and lock in a savings of $18,620 interest and 57 months in debt. But that is in exchange for paying an extra $29,446 in taxes over the next 63 months instead of deferring and investing the money where it can earn compound interest for the rest of your life.

    If you resume the contributions to the 401(k) after the 63 month delay but don't reinvest the freed-up payments, then the loss of compound interest for the time for compounding plus the money paid in taxes would cause you to come up short by $159,217 at the end of the loan period.

    At the same earnings rate, that would grow to a shortage of $911,585 at retirement time.

    If it then averaged earning a more conservative 4% and you lived another 30 years you would then lose the $3039 per month interest that it could have earned every month without touching the balance. The $911,585 you won't have plus the $1,093,902 it won't be there to earn would be a total of lifetime loss of $2,005,488 That is 108 times as much as the interest you saved on the debt.

    While I've never known anybody who actually continued to live more frugally so they could reinvest the money after getting out from under the burden of a big debt, if you were to religiously reinvest the after-tax $1485 freed-up payments with no delay for the remainder of the loan period earning the same rate, you'd come up short by $59,817 at the end of the original loan period, which would grow to a deficit of $342,477 at retirement time.

    Then at 4% earnings the $1142 per month interest it would not be there to earn for the next 30 years could add up to a potential lifetime loss of $753,449. That is only 40.5 times as much as the interest you saved on the debt.
If you were paying more tax, or if you were forfeiting any employer matching payments, or if you were to earn more nearly the long-term stock market averages, the potential loss of retirement income could run into some real money.

jimb

miamivice
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Re: Suggestions for paying off a loan

Postby miamivice » Sat May 20, 2017 11:12 pm

deleted.
Last edited by miamivice on Sun May 21, 2017 8:59 am, edited 4 times in total.

JGoneRiding
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Re: Suggestions for paying off a loan

Postby JGoneRiding » Sat May 20, 2017 11:20 pm

I always trust Jims numbers it's what he does! :)

As far as ideas it's all mind games. Stop the cable and pay that to the debt, lower the phone plans

Or just take the next month principal payment and plan to pay that in addition then increase for the next month. Fairly painless if you can keep it up.

Lyonsguy
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Re: Suggestions for paying off a loan

Postby Lyonsguy » Sat May 20, 2017 11:34 pm

I once paid off an 8% 2nd mortgage by utilizing a 28k credit card 0% no transfer fee 12 month float. during those 12 months I paid the 2nd mortgage amount plus extra, but into my 1st mortgage. Then at 12 mo the I paid off the credit card in full from a transfer from a home equity line of credit at 4%. Then I spent the next 1.5 years paying off the home equity line of credit. This only works if you are making substantial extra payments each month. The time/value of money was critical to pay a lump sum up front and defray the payment until later (while waiting at 0% interest).

this was pretty crazy and the credit card offer aligned pretty much perfectly. But the principal remains. Get a lower interest rate, pay extra. Cut costs elsewhere and attack the loan (Dave Ramsey style).

miamivice
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Re: Suggestions for paying off a loan

Postby miamivice » Sun May 21, 2017 8:58 am

One thing that I'll say is the Bogleheads popular notion and I don't align when it comes to maxing out our retirement accounts.

From my calculations, I'm not a believer is contributing our maximum ($36,000) to 401ks, as that would result in nearly $50,000 a year accrual in a 401k after company matches are thrown in. Take $50,000 and save it for 30 years (from age 30 to 60) and you come up with something like $5 million, which at a 4% SWR translates to about $210,000 in annual income. This is in addition to social security and our defined payment (pension) plans. We simply don't need $210,000 to $300,000 a year in retirement income.

Rather, we save between $20k and $30k each year, including company matches. I think this amount will provide for a nice retirement while still allowing us to a significant amount of non-retirement money for flexibility on using prior to retirement. We don't want to put everything we have into accounts that we cannot touch until retirement (or age 65, whichever comes first).

So, I think the argument about whether I am paying off the loan with extra payments or saving for retirement is not the correct argument. We save for retirement regardless, and I don't adjust the amount that we save for retirement based on the loan. I adjust the amount we save for retirement based on our projected needs and how we are doing on that progress bar.

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BolderBoy
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Re: Suggestions for paying off a loan

Postby BolderBoy » Sun May 21, 2017 9:15 am

miamivice wrote:One thing that I'll say is the Bogleheads popular notion and I don't align when it comes to maxing out our retirement accounts.

From my calculations, I'm not a believer is contributing our maximum ($36,000) to 401ks, as that would result in nearly $50,000 a year accrual in a 401k after company matches are thrown in. Take $50,000 and save it for 30 years (from age 30 to 60) and you come up with something like $5 million, which at a 4% SWR translates to about $210,000 in annual income. This is in addition to social security and our defined payment (pension) plans. We simply don't need $210,000 to $300,000 a year in retirement income.

Okay, fair enough. I think some of the BH mantra comes from the idea that one can't foretell the future. If the opportunity to maximize should disappear down the line, one might be glad one maximized while the opportunity was ripe. You can always cut back (even way back) on retirement plan contributions as the years go by and your calculations prove you've got it made.

We all pay our money and take our chances in life...

Insofar as the loan question goes, in my case I took a second job and paid it off in a few years.
“Where you stand, depends on where you sit” - Rufus Miles | "Never underestimate one's capacity to overestimate one's abilities"


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