I may die poor

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
international001
Posts: 1641
Joined: Thu Feb 15, 2018 7:31 pm

Re: I may die poor

Post by international001 »

EnjoyIt wrote: Fri Nov 20, 2020 12:19 pm

1) I do not think you should forgo 401k contributions to pay off your debt. The reason for it is that you are saving well over 7% in taxes contributing to a 401k as compared to your credit card debt. Yes the debt needs to be paid off, but I think you should look elsewhere for those funds
Paying off a 7% credit card is like investing 7% on a bond, tax free. Unlikely to match that on any 401k (assuming you are not loosing employer match).
But do the numbers on a spreadsheet if you have doubts
EnjoyIt
Posts: 4943
Joined: Sun Dec 29, 2013 8:06 pm

Re: I may die poor

Post by EnjoyIt »

international001 wrote: Fri Nov 20, 2020 6:58 pm
EnjoyIt wrote: Fri Nov 20, 2020 12:19 pm

1) I do not think you should forgo 401k contributions to pay off your debt. The reason for it is that you are saving well over 7% in taxes contributing to a 401k as compared to your credit card debt. Yes the debt needs to be paid off, but I think you should look elsewhere for those funds
Paying off a 7% credit card is like investing 7% on a bond, tax free. Unlikely to match that on any 401k (assuming you are not loosing employer match).
But do the numbers on a spreadsheet if you have doubts
OP is likely paying 26% in taxes and will be retiring in a lower tax bracket in a state with no state tax. The tax deduction is way more valuable than 7%. Especially since OP is actively paying it down relatively quickly already.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
User avatar
cchrissyy
Posts: 207
Joined: Fri May 05, 2017 10:35 pm

Re: I may die poor

Post by cchrissyy »

OP has enough money in a savings account to pay off the credit card.
They suggested involving the 401k but there is no need to involve that account at all.
Just pay the card off with the money you have. Stop paying interest. Don't cut your retirement contributions.
FLAFI
Posts: 1
Joined: Fri Nov 20, 2020 10:54 pm

Re: I may die poor

Post by FLAFI »

I suggest reading Mr. Money Mustache's ("MMM") blog: https://www.mrmoneymustache.com

MMM provides excellent advice on how to manage the lifestyle/expense side of the wealth building process. A great read to get unstuck from conventional thinking about expenses.
Last edited by FLAFI on Fri Nov 20, 2020 11:05 pm, edited 1 time in total.
stocknoob4111
Posts: 1585
Joined: Sun Jan 07, 2018 12:52 pm

Re: I may die poor

Post by stocknoob4111 »

all housing costs shouldn't exceed 30% of take home, but better 25%. So if you take home $6k do not exceed $1,500 in housing costs. And living in the bay area isn't an excuse, as Dave Ramsey says BASIC MATH and budgeting does not stop working just because you live in California. My thoughts are that you just don't earn enough to live in the Bay Area and make any financial progress. Think about moving elsewhere... especially consider places like Texas with very strong economy and wages and no state income tax which is an incredible combination.
goos_news
Posts: 55
Joined: Mon Jun 10, 2019 7:14 pm

Re: I may die poor

Post by goos_news »

I will add this, being in NorCal (other than, continue to take advantage of the 401K but use others sources to payoff that CC)

The Bay Area is a wide real estate market. However, rental prices are coming down in many areas, especially the city. You may be able to move or simply, when your lease is up for renewal, negotiate a rent waiver. Many places are doing one or two months -- they don't want to cut your lease rate but they are willing to keep a tenant. Use that money to pay down the CC.
randybobandy
Posts: 102
Joined: Fri Oct 05, 2018 10:51 am

Re: I may die poor

Post by randybobandy »

What a dramatic title.

I would not contribute $$ to a niece and nephew if I was wanting to improve my financial situation.

CC debt needs to go ASAP.

--Randy Bo Bandy
Grammar and spelling matter. | Quoting the OP isn't a necessity.
KRP
Posts: 4
Joined: Thu Aug 27, 2020 11:56 am

Re: I may die poor

Post by KRP »

Anonymous122 wrote: Tue Nov 17, 2020 1:41 am
I do have CC debt of $9k (inherited most from my ex) luckily my interest is only 7% (had the card for a while, always pay on time, and have a credit score around 780) it used to be 19k so I am putting a dent in it.

...

I do agree with the CC debt, but with COVID am I wrong for feeling cash is king for the time being?

...

NEW EDIT
I know should pay off my CC, I have the same BofA card for 15 years, I read my statement every month (if I am reading it right, interest charged is "only" approx 150 a month... I know its still money - but its not 9000 x .07 = 630
[Edit: I see someone later in the thread made the same point...but it's important for the OP to learn how to fish so I'll leave it here]

Let's try to reverse engineer an approximate guess at your credit card's annual percentage rate given the numbers stated:

$150/month (let's assume that's an average) interest charged x 12 months = $1,800 in interest charged over one year (regardless of your payments)

$1800 new interest/year divided by the $9000 starting account balance is roughly (1800/9000) = 0.2 or 20% Annual Percentage Rate.

So you are paying at least 20% APR, if you made no payments in 12 months. If you did make payments each month, the 20% APR estimate is actually too low (because your $150/month is relative to a declining amount owed).

The difference between poor people and non-poor people is a modest amount of extra homework, and perhaps not letting any lender lull you into a false sense of indifference over 150/month....good for you on taking the first steps...you are on your way to not dying poor!
User avatar
cchrissyy
Posts: 207
Joined: Fri May 05, 2017 10:35 pm

Re: I may die poor

Post by cchrissyy »

another basic point about how credit cards work is you shouldn't put any new spending on the card with the balance. I can't tell for sure but it sounds like this is your only credit card and therefore you are probably using it for everyday spending and bills?
User avatar
grabiner
Advisory Board
Posts: 28207
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: I may die poor

Post by grabiner »

EnjoyIt wrote: Fri Nov 20, 2020 9:13 pm
international001 wrote: Fri Nov 20, 2020 6:58 pm
EnjoyIt wrote: Fri Nov 20, 2020 12:19 pm

1) I do not think you should forgo 401k contributions to pay off your debt. The reason for it is that you are saving well over 7% in taxes contributing to a 401k as compared to your credit card debt. Yes the debt needs to be paid off, but I think you should look elsewhere for those funds
Paying off a 7% credit card is like investing 7% on a bond, tax free. Unlikely to match that on any 401k (assuming you are not loosing employer match).
But do the numbers on a spreadsheet if you have doubts
OP is likely paying 26% in taxes and will be retiring in a lower tax bracket in a state with no state tax. The tax deduction is way more valuable than 7%. Especially since OP is actively paying it down relatively quickly already.
But the contribution can be made up. If you are paying 7% on a card, you can pay $10,000 this year rather than investing in a 401(k), and then have $10,700 more to invest next year after the card has been paid off; you will still get the tax deduction.

Your example is correct for an investor immediately before retirement, who loses the opportunity to invest in a 401(k) if the investment is not made this year. Such an investor might want to put the maximum $26,000 into a 401(k) this year, then withdraw the money next year in a lower tax bracket to pay off the credit card.
Wiki David Grabiner
KRP
Posts: 4
Joined: Thu Aug 27, 2020 11:56 am

Re: I may die poor

Post by KRP »

grabiner wrote: Sat Nov 21, 2020 8:43 pm
EnjoyIt wrote: Fri Nov 20, 2020 9:13 pm
international001 wrote: Fri Nov 20, 2020 6:58 pm
EnjoyIt wrote: Fri Nov 20, 2020 12:19 pm

1) I do not think you should forgo 401k contributions to pay off your debt. The reason for it is that you are saving well over 7% in taxes contributing to a 401k as compared to your credit card debt. Yes the debt needs to be paid off, but I think you should look elsewhere for those funds
Paying off a 7% credit card is like investing 7% on a bond, tax free. Unlikely to match that on any 401k (assuming you are not loosing employer match).
But do the numbers on a spreadsheet if you have doubts
OP is likely paying 26% in taxes and will be retiring in a lower tax bracket in a state with no state tax. The tax deduction is way more valuable than 7%. Especially since OP is actively paying it down relatively quickly already.
But the contribution can be made up. If you are paying 7% on a card, you can pay $10,000 this year rather than investing in a 401(k), and then have $10,700 more to invest next year after the card has been paid off; you will still get the tax deduction.

Your example is correct for an investor immediately before retirement, who loses the opportunity to invest in a 401(k) if the investment is not made this year. Such an investor might want to put the maximum $26,000 into a 401(k) this year, then withdraw the money next year in a lower tax bracket to pay off the credit card.
The OP is not going to find a better investment than retiring the 20% APR credit card debt...and the extra sadness is that 20% rate is being paid down with after tax net income. Friends don't let friends carry credit card balances.
Post Reply