Max out 401k w/credit card debt?

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Mistermooso
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Max out 401k w/credit card debt?

Post by Mistermooso » Sat Jun 02, 2018 11:33 pm

Hi everyone.

I'm 40 years old and have $100k in retirement funds. I currently have $42k in credit card debt. $25k of the debt is at 0% financing through the rest of the year. The remaining is fixed at 5%. I'm not increasing the credit card debt & am currently maxing out my 401k for the first time. I'm also spending $800 per month on 529's for my two kids.

My question is: should I continue to max out the 401k's and chip away at the credit card debt? Or should I pour all my resources into eliminating the debt even if it means I fall further behind on my 401k saving? Or is there a better solution I'm not thinking of.

Thanks!

The Wizard
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Re: Max out 401k w/credit card debt?

Post by The Wizard » Sat Jun 02, 2018 11:35 pm

CC debt is odious.
I would focus on eliminating it...
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sailaway
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Re: Max out 401k w/credit card debt?

Post by sailaway » Sat Jun 02, 2018 11:36 pm

Cut back on the 529 before the 401k. There are more student grants and loans than their are senior grants

greatwhite24
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Re: Max out 401k w/credit card debt?

Post by greatwhite24 » Sat Jun 02, 2018 11:37 pm

I was in a bit of credit card debt myself. After finding this website and following the boglehead way, I am now debt free. I suggest getting the debt knocked out asap. The weight that is lifted from you will be remarkable. Good luck.

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Mistermooso
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Re: Max out 401k w/credit card debt?

Post by Mistermooso » Sat Jun 02, 2018 11:41 pm

Thanks for the quick replies!

To be precise, are you all suggesting directing all discretionary "savings" dollars towards credit card debt before contributing $1 to 401k/529's or is there a balance you'd suggest aiming for?

sport
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Re: Max out 401k w/credit card debt?

Post by sport » Sat Jun 02, 2018 11:42 pm

If you don't start paying the credit card debt, what will you do when the 0% period ends? You will have a large debt at high interest. You need to get that balance reduced.

sport
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Re: Max out 401k w/credit card debt?

Post by sport » Sat Jun 02, 2018 11:43 pm

Mistermooso wrote:
Sat Jun 02, 2018 11:41 pm
Thanks for the quick replies!

To be precise, are you all suggesting directing all discretionary "savings" dollars towards credit card debt before contributing $1 to 401k/529's or is there a balance you'd suggest aiming for?
I would contribute to the 401k only up to the match amount, if any.

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Mistermooso
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Re: Max out 401k w/credit card debt?

Post by Mistermooso » Sat Jun 02, 2018 11:44 pm

sport wrote:
Sat Jun 02, 2018 11:42 pm
If you don't start paying the credit card debt, what will you do when the 0% period ends? You will have a large debt at high interest. You need to get that balance reduced.
My only plan was to try to move it to another card and hope for another balance transfer offer to keep the 0 or low interest rate while I chip away.

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Mistermooso
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Re: Max out 401k w/credit card debt?

Post by Mistermooso » Sat Jun 02, 2018 11:44 pm

sport wrote:
Sat Jun 02, 2018 11:43 pm
Mistermooso wrote:
Sat Jun 02, 2018 11:41 pm
Thanks for the quick replies!

To be precise, are you all suggesting directing all discretionary "savings" dollars towards credit card debt before contributing $1 to 401k/529's or is there a balance you'd suggest aiming for?
I would contribute to the 401k only up to the match amount, if any.
My company doesn't match so I'm assuming that means you'd advise $0 until the cc debt is paid off?

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whodidntante
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Re: Max out 401k w/credit card debt?

Post by whodidntante » Sun Jun 03, 2018 12:02 am

I don't really care that it is credit card debt. What normally makes credit card debt repugnant is when the rate is double digits more than inflation, and a revolving debt crutch that causes others to reach the specious conclusion that any rational human must have an emergency fund. But in your case the interest rate is low, so I can't complain about that. I can maybe complain about the revolving debt crutch but I don't know how you accumulated the debt. So how did you accumulate the debt?

Anyhoo, just to make the thread more fun, you should max the 401k but borrow from the 401k to pay off the credit card debt. :twisted:

DiploInvestor
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Re: Max out 401k w/credit card debt?

Post by DiploInvestor » Sun Jun 03, 2018 2:35 am

Mistermooso wrote:
Sat Jun 02, 2018 11:44 pm
sport wrote:
Sat Jun 02, 2018 11:42 pm
If you don't start paying the credit card debt, what will you do when the 0% period ends? You will have a large debt at high interest. You need to get that balance reduced.
My only plan was to try to move it to another card and hope for another balance transfer offer to keep the 0 or low interest rate while I chip away.
Been there, done that. DW brought significant CC debt to the marriage, but love made me blind (and I had some CC debt of my own). Long before finding BH, I prioritized and got us out of debt eventually while bouncing the debt between 0% CC offers. However, I was still funding my TSP, and she was too, which is why we're well over 1 million today in overall retirement funds. My advice: pay the minimum payments on the 0% debt, and move it if you can to another 0% offer when the current offer expires. Stop paying the 529s for now, but keep funding your 401k at a decent rate (I was at 10% of salary for years). Use everything you have after this to pay off the 5% debt (and don't create any more debt, but you already know that). The 529 money alone would get the 5% debt paid in less than 2 years. Once that is paid off, start on the 0% debt and get it gone. Then start funding 401k at max level, fund IRA, and then fund 529s as best you can. Basically, prioritize the debt, but don't neglect retirement, especially at 40 y.o.
"History doesn’t repeat itself, but it often rhymes." -- Mark Twain // "If you have a garden and a library, you have everything you need." — Cicero

david
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Re: Max out 401k w/credit card debt?

Post by david » Sun Jun 03, 2018 3:57 am

A lot of this advice is predicated on knowing how much you make and spend in order to pay off this debt.
The more money you make, and savings elsewhere, the less of an issue. The less you make the more this looks like an emergency.

Without knowing how much you make, I would cut out the 529 savings, all of it, until the debt is paid off.
If you have a taxable account and hold bond funds, your bond funds are earning well under 5% and if its close or more than the risk is much much greater than the guaranteed earnings of just paying off the 5% loans. I'd consider liquidating taxable savings particularly bond funds to pay off this debt.
Cutting down discretionary purchases until it's paid off is also helpful.

I would also figure out how you came to be in thousands of dollars worth of debt. What was the spending on? Was it an emergency or job loss? Was it on frivolous things and lifestyle? Something in between? Answering these questions can make it easier in the future to not have these problems. Possibly having a larger emergency fund if it was a health crisis or job loss. Possibly better budgeting, or understanding your spending if it's a spending problem.

The 5% loan is expensive, but not frightening. Whatever that 0% loan jumps to is likely much more frightening. I'd be worried about that.

The Wizard
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Re: Max out 401k w/credit card debt?

Post by The Wizard » Sun Jun 03, 2018 4:32 am

Yes, knowing more about how the CC debt came to be would be helpful.
I maintain a certain target checking account balance (not really an emergency fund) so that the occasional month when a lot of various expenses converge can be dealt with easily.
As others suggest, cutting the 529s for a year or two is a good idea...
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Re: Max out 401k w/credit card debt?

Post by shipwreck » Sun Jun 03, 2018 5:14 am

whodidntante wrote:
Sun Jun 03, 2018 12:02 am

Anyhoo, just to make the thread more fun, you should max the 401k but borrow from the 401k to pay off the credit card debt. :twisted:
To add to the fun, you could make a few pennies off the situation with the 401k loan. Build up the 0% invested in US Treasuries until the payment is due at the end of the year . Take out the 401k loan for what you can't pay off . I am assuming you will get around 5% on the 401k loan. The 401k loans usually don't take partial payments so make the payment hurt. The 42k at 5% for 4 years is almost $1000 a month. Since no 401k match and unless you are trying to reduce income for some tax credit I would knock out the debt .

TwstdSista
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Re: Max out 401k w/credit card debt?

Post by TwstdSista » Sun Jun 03, 2018 5:33 am

At the minimum, I'd skip the 529 contributions until the debt was paid off. I'd also probably reduce the 401k contributions to either 10-15%.

(Disclaimer: I abhor debt....)

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dogagility
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Re: Max out 401k w/credit card debt?

Post by dogagility » Sun Jun 03, 2018 6:24 am

whodidntante wrote:
Sun Jun 03, 2018 12:02 am
Anyhoo, just to make the thread more fun, you should max the 401k but borrow from the 401k to pay off the credit card debt. :twisted:
Another example of why I like to read this board. Didn't think of this solution but me likey! :sharebeer
"The stock market is a device for transferring money from the impatient to the patient" -- Warren Buffett

retiredjg
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Re: Max out 401k w/credit card debt?

Post by retiredjg » Sun Jun 03, 2018 7:03 am

The harsh reality of the situation is that you cannot afford to save money in 529 accounts at this point in your life because you do not have enough saved for retirement. I would save some for retirement and put a lot on the debt.

Paying for college is not as important as not being a financial burden to your children in your old age.

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Re: Max out 401k w/credit card debt?

Post by ChinchillaWhiplash » Sun Jun 03, 2018 8:28 am

Pay enough each month on the 0% to pay off before deadline. Keep maxing out your 401k. Pay off the 5% CC with any extra each month. Skip the 529. You CAN'T borrow for retirement. Your kids CAN borrow for college. For the 0% transfer, most CCs now charge a percentage of the balance for a transfer. You usually only get a state deduction for the 529 also. You can also borrow up to $50k against 401k. The interest rate would be lower than a student loan's more than likely and it gets paid back to your 401k. Just keep in mind that the payments are not tax deductible. You also have 5 years to pay it off. If you change jobs or get fired you will have less time.

Olemiss540
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Re: Max out 401k w/credit card debt?

Post by Olemiss540 » Sun Jun 03, 2018 9:37 am

Can you sell some stuff? Downgrade cars? Sell any expensive collectables or furniture? Have a yard sale? Get a second job? Get a third job?

I would treat the debt as an emergency. Your life is on pause while you lay under a mountain of consumer debt.

Knock this stuff out while putting a complete hold on 401k and 529. Have you ever been target shooting? Trying to hit 4 targets at once usually ensures nothing gets hit. FOCUS on one goal at a time and work as a team to smash it. This experience could end up a positive one for your family unit if you use it as a chance to communicate and collaborate.

Check out Financial Peace university or checkout a Dave Ramsey book (Total Money Makeover) at the library.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

olliema
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Re: Max out 401k w/credit card debt?

Post by olliema » Sun Jun 03, 2018 9:59 am

Can you max out your 401k while paying off your credit card debt and not incur new revolving debt in the process?

Think about your priorities
Investing 9,600/yr for kid's college
Investing 18,500/yr for retirement
Paying _____ / yr to remove CC debt

Kids can borrow for college, you can't borrow for retirement. The CC debt will never go away on its own. Will your kids pay your CC debt for you when you are older?

To lend context to last question - last week I moved my mother out of her house of 44 years - forced to sell because she can't afford upkeep/taxes - she got ~90k equity out of the deal - in 3-4 years she'll probably need to reverse mortgage her house to supplement SSI. What happens after that, I don't know.

When I cleaned out the basement I found my 401k statement - about $12,000 in 2001. 17 years later, have 1MM. (I'm 5 years older than you)

Write yourself a postcard from the year 2030 - what do you want it to say - and what do you need to do in 2018 to make it happen?

If you had enough cash flow, you could wipe your CC debt today with a 401k loan, paying yourself 5% or so, put the other part of the 401K in 100% stock, and arguably have a 58% stock / 42% fixed income sort of arrangement.

If you set the payment terms to 36 months, and you honestly thought the market was not going to grow past your loan's interest rate (plus the double taxation you're paying to pay the loan), you could view this as a legit move. If you can't pay it quickly or you do not want to assume anything about the market, this may not be a legit move.

But if you did such a loan, and rang up new CC debt, and became unable to keep investing, you could likely end up like my mother someday.

I would set myself up to start saving about 30-40k a year for retirement ASAP at your age. Get that balance up to 500K, and the compounding really starts to move. Good luck.

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FGal
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Re: Max out 401k w/credit card debt?

Post by FGal » Sun Jun 03, 2018 10:10 am

Just chiming in on the "stop contributing to the 529" bandwagon.

Kids can get loans, grants or other means of paying for schooling; you can't finance retirement. Saving/paying for college is a luxury you can't afford now.

If there's no match on your 401k, then you need to dial back on contributing to it, and pay down the debt ASAP.

Debt literally is money you spent from the future. The money you see coming in on your paychecks? It's already gone. As some others mentioned, you have a debt emergency. You don't have money to put into the 529s or 401Ks technically - all you're doing is digging that hole deeper when you aren't directing all available money into paying down the existing debt.

Stop all extras - no eating out, no drinks with friends, no $$ entertainment, and yes, stop contributing to the 529s completely and cut out the 401k out unless it's with a investment group like Vanguard that has super low fee awesome funds available, and even then if it was me I'd still suspend it for at least a year and direct every single penny not spent on things like food, shelter and gas other absolute basic essentials into paying off the enormous (ridiculous) amount of debt. I'd go hard core and take that debt out within a year or two if at all possible and then can start redirecting the money flow into filling up the retirement accounts (maxed) first, then any left over goes to saving for the kids (again, kids have more options and what if they don't even go to college?)

Learn to cook simple meals at home, get movies/music/tv shows for free at the library, find free things to do in your town (there's usually quite a few nice parks, events, etc if you look for them). Cut out the expensive stuff you can't really afford (just some examples no idea what may apply to your situation) like gym memberships, vacations, daily fast food/lunches out, hanging out with friends at bars or sporting events... again, you can't afford it.

Stop digging that hole deeper - you have the ability to climb out of that mess if you pay attention to where your money is going and deal with a year or two of slightly uncomfortable belt-tightening.
FIREd as of March 2015!

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Re: Max out 401k w/credit card debt?

Post by ChinchillaWhiplash » Sun Jun 03, 2018 10:54 am

Anybody know if it would be allowed to take out a 401k loan and then fund a 529 as tax deferred $s with the loan? Might be an option :greedy

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Re: Max out 401k w/credit card debt?

Post by cherijoh » Sun Jun 03, 2018 11:05 am

Mistermooso wrote:
Sat Jun 02, 2018 11:33 pm
Hi everyone.

I'm 40 years old and have $100k in retirement funds. I currently have $42k in credit card debt. $25k of the debt is at 0% financing through the rest of the year. The remaining is fixed at 5%. I'm not increasing the credit card debt & am currently maxing out my 401k for the first time. I'm also spending $800 per month on 529's for my two kids.

My question is: should I continue to max out the 401k's and chip away at the credit card debt? Or should I pour all my resources into eliminating the debt even if it means I fall further behind on my 401k saving? Or is there a better solution I'm not thinking of.

Thanks!
Does your company offer you a 401k match? I would prioritize that first then eliminating your CC debt. Have you stopped using your credit cards altogether or are you at least only using cards that don't carry a balance month to month? If you continue to charge on cards with a balance you rack up interest from day one. Also be sure you fully understand the terms of your 0% financing - a minor mistake can mean retroactive interest at exorbitant rates.

IMO you should stop 529 contributions until you are out of debt.

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Re: Max out 401k w/credit card debt?

Post by sport » Sun Jun 03, 2018 11:17 am

There is a "feature" of 0% credit card debt you should be aware of. If you make any new purchases on that card, the interest clock starts immediately on the new purchases. There is no grace period when you have a balance. To make matters worse, any payments you make will go towards the 0% balance and your new purchases will continue to be charged interest going forward, at some high rate. Remember, the bank is offering that 0% rate to make a profit, not as a favor to you. So, you should not use that credit card for any new purchases. If you need to use a credit card, use a different one.

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Re: Max out 401k w/credit card debt?

Post by Earl Lemongrab » Sun Jun 03, 2018 1:09 pm

sport wrote:
Sun Jun 03, 2018 11:17 am
There is a "feature" of 0% credit card debt you should be aware of. If you make any new purchases on that card, the interest clock starts immediately on the new purchases. There is no grace period when you have a balance. To make matters worse, any payments you make will go towards the 0% balance and your new purchases will continue to be charged interest going forward, at some high rate. Remember, the bank is offering that 0% rate to make a profit, not as a favor to you. So, you should not use that credit card for any new purchases. If you need to use a credit card, use a different one.
It's going to depend on what exactly the "0% card" means. If it's 0% on a balance transfer, then possibly. If it's a 0% card, then all transactions would be 0%.

The CARD act of 2009 mandates that all payments in excess of the minimum be directed to the highest interest rate debt on the card.

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Nate79
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Re: Max out 401k w/credit card debt?

Post by Nate79 » Sun Jun 03, 2018 2:55 pm

If you play with snakes long enough you are going to get bit. You need a plan to pay off the debt. Messing around with transferring the debt from one pocket to another is how broke people live.

I would stop all investments and pay off the debt. If you had any taxable accounts or can sell anything I would do that also. This is a life style change that is needed. The pain of not investing for the few months it takes to pay off the debt is good pain.

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Re: Max out 401k w/credit card debt?

Post by delamer » Sun Jun 03, 2018 3:11 pm

Olemiss540 wrote:
Sun Jun 03, 2018 9:37 am
Can you sell some stuff? Downgrade cars? Sell any expensive collectables or furniture? Have a yard sale? Get a second job? Get a third job?

I would treat the debt as an emergency. Your life is on pause while you lay under a mountain of consumer debt.

Knock this stuff out while putting a complete hold on 401k and 529. Have you ever been target shooting? Trying to hit 4 targets at once usually ensures nothing gets hit. FOCUS on one goal at a time and work as a team to smash it. This experience could end up a positive one for your family unit if you use it as a chance to communicate and collaborate.

Check out Financial Peace university or checkout a Dave Ramsey book (Total Money Makeover) at the library.
Don’t know anything about target shooting 8-), but I agree with this advice.

$42,000 in credit card debt is a financial emergency. You have to think of the worst case scenario. What happens if you have to refinance the 0% debt at the end of the year and you are paying 10% or more?

Assuming you are half way through maxing out your 401(k) for the year, you can put about $14,000 toward the debt if you stop the 401(k) and 529 contributions for this year. Then figure out where you can ring out every penny to pay off the rest as quickly as you can.

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Re: Max out 401k w/credit card debt?

Post by jharkin » Sun Jun 03, 2018 3:16 pm

sport wrote:
Sat Jun 02, 2018 11:43 pm

I would contribute to the 401k only up to the match amount, if any.
+1

401k up to match only, nothing into the 529 or anything else until the CC debt is erased. You should be putting every available dollar on that until its gone.

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Re: Max out 401k w/credit card debt?

Post by HornedToad » Sun Jun 03, 2018 4:03 pm

Mistermooso wrote:
Sat Jun 02, 2018 11:44 pm
sport wrote:
Sat Jun 02, 2018 11:43 pm
Mistermooso wrote:
Sat Jun 02, 2018 11:41 pm
Thanks for the quick replies!

To be precise, are you all suggesting directing all discretionary "savings" dollars towards credit card debt before contributing $1 to 401k/529's or is there a balance you'd suggest aiming for?
I would contribute to the 401k only up to the match amount, if any.
My company doesn't match so I'm assuming that means you'd advise $0 until the cc debt is paid off?
I would eliminate the 5% CC debt first. The 0% can be slower and ideally find a balance transfer to give you time to slowly remove it. I agree that 529's should be lower on priority list.

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Re: Max out 401k w/credit card debt?

Post by MilleniumBuc » Sun Jun 03, 2018 4:25 pm

Earl Lemongrab wrote:
Sun Jun 03, 2018 1:09 pm
sport wrote:
Sun Jun 03, 2018 11:17 am
There is a "feature" of 0% credit card debt you should be aware of. If you make any new purchases on that card, the interest clock starts immediately on the new purchases. There is no grace period when you have a balance. To make matters worse, any payments you make will go towards the 0% balance and your new purchases will continue to be charged interest going forward, at some high rate. Remember, the bank is offering that 0% rate to make a profit, not as a favor to you. So, you should not use that credit card for any new purchases. If you need to use a credit card, use a different one.
It's going to depend on what exactly the "0% card" means. If it's 0% on a balance transfer, then possibly. If it's a 0% card, then all transactions would be 0%.

The CARD act of 2009 mandates that all payments in excess of the minimum be directed to the highest interest rate debt on the card.
It also depends on what kind of fees and length those “0%” transfers are at. Usually at higher debt the offers for 0% include 3-5% in fees, and not usually longer than 1 year. Need to consider all those fees as well.

Jablean
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Re: Max out 401k w/credit card debt?

Post by Jablean » Sun Jun 03, 2018 7:30 pm

You are 40 and primed for a mid-life crisis and irrationally pleased with your 0% credit card that only lasts for another 6 months. Took me two and a half years to pay off $25,000 credit debt after a job loss/mid life crisis moving cash every year for 3-4% transfer fees each time usually to cards we already had so we didn't get credit score dinged. Dropped all retirement etc to get it paid off. I don't understand your love of 529 funding. Do you get a state tax break? That's not money for you if the kids actually don't use it. Bite the bullet, pay things off.

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