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Subject:  Re: the agony of waiting to fund that 457S!! Date:  10/27/2000  3:29 PM
Author:  BGPenhollo Number:  25783 of 88807

Marce wrote...

"The game plan is to eliminate the consumer debt in one year by increasing the monthly payments on the cards until they're completely eliminated. Currently I'm only putting $100 monthly into that 457S plan and it's AGONY knowing that I can't make up for it later.

Any thoughts on this? The debt is less than $13K at 6%...."

Hi Marce,

My 1st question... Are you absolutely certain that the $13k is at 6% interest? Or is this one of those teaser rates where you get 6% interest for the first X months?

My recommendation depends on the long term interest rate you are paying on the $13K.

Also another caveat... I am assuming that a 457S allows investments to be tax sheltered in a similar fashion as 401K or IRA. My recommendations are for those using 401k or IRA's. I also assume that your investment will be LTBH that will produce more than a 9% rate of return. If this is not the case, then pay off your debt 1st.

Long TERM interest on $13k greater than 9%

If you are or will eventually be paying 9% or more in interest than you should rid yourself of this $13K debt as quickly as possible.

Long TERM interest on $13K less than or equal 7%

If you are paying less than 7% now and in the future on the $13K, then you should decide what length of time is reasonable or if the debt has a set number of payment periods, you should NOT pay off the loan ahead of schedule but meet the schedule.This might let you invest more in your 457S.

If this is all credit card debt be careful NOT to pay just the minimum the credit card company says is due. The reason is that many times the minimum due is less than the interest being charged and compounding interest on loans will work against you just as compounding interest on an investment works for you.

Long TERM interest on $13k falls between 7% and 9%.

This is kind of a gray area where you may want to pay a bit more against the debt. The higher the interest rate the more you'd pay against your $13K debt. This is a place where you may want to balance paying a bit more interest so you can invest more today.

The idea is that if your rate of return on your investment equalled the interest rate on your debt, then paying off your debt or investing would be a wash. In many cases, investing in equities or equity funds, the LT rate of return will average 10% to 11%. This means that your money invested in an average equity would return more than your money used pay off a debt having a 6% interest rate. There is a risk on any investment with a return greater than that guaranteed by the government but the risk is very small when investing long term as we do for retirement.

There is always a risk when investing whereas paying off the debt is a guaranteed 6% return (reduction) in the loan. It all depends on how much risk you want to shoulder versus a sure return of paying off debt.


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