No. of Recommendations: 0
I need some help.

Our situation:

I have available both 403b and 457b at my workplace and can maximize each out for this year (2004) to a tune of $13,000 each for a total of $26,000. BUT, I get no matching funds on either.

My wife can max out her 401k to $13,000 AND she has a 50% employer match on the first 6% of her salary that goes in to the 401k.

We currently have no Roth or other IRA accounts.

We currently max out my 403b and her 401k. After that we have about $1000 per month(to save or pay off debt), beyond minimum payments and monthly bills.

Besides the mortgage, we currently have:

a.) $12,000 on one credit card (locked at 4%)
b.) $7,000 on another credit card (around 9%)

We had been paying down the b.) 9% credit card balance at an average of $2500 per month before we began maxing out the 401k and 403b in January 2004.

We have also saved up about $6800 as an emergency fund, which should take us through 6 months if one of us lost a job and about 3 months if we both lost jobs.

Her 401k currently has a value of $20,000 and my 403b has a value of $14,000. Her's include the matching, of which she is fully vested and contuinues to be on future matching funds.

Our 2003 AGI was about $80k, and with the $26k taken out for the 401k and 403b in 2004, we should save quite a bit on taxes next year. BUT . . .

Should we:


1.) Drop back on the retirement funds (except for minimum required to get her matching) until the credit cards are paid off?

-OR-

2.) Keep maxing out the 401k and 403b and payoff the credit cards with the extra $1000 a month (current plan).

-OR-

3.) Stop putting funds into my 403b (that receives no matching) and put it into a Roth, then take what is left and pay off the credit cards.

I don't think we can afford to start the 457b, but would be nice idea.

We are both currently 34 and I would like to retire at 55 if possible.

Please advise.

Thanks,

William


Print the post Back To Top
No. of Recommendations: 0
It makes little sense to me to have $7,000 in high interest credit card debt and at the same time $7,000 cash in an E-Fund. I'd pay off the debt immediately with the cash you have. You can always get cash advances on your credit cards in case of emergency.

Beyond that, it doesn't matter if you fund the Roth or the 403b, assuming the 403b has decent investment options. You might do the Roth, just to have a little balance. You could also use the Roth as an e-fund, since you can withdraw the principal anytime.

Nick
Print the post Back To Top
No. of Recommendations: 0
3.) Stop putting funds into my 403b (that receives no matching) and put it into a Roth, then take what is left and pay off the credit cards.

If it were me, I think I would go with this option. While it was not mentioned, I would also scale back your DW's 401(k) to the point required to receive the full matching amount.

Given your available snowball each month and the difference in maxing your 403 vs. Roths for you and DW, you should be able to knock out that credit card debt fairly quick. You indicate that you can max your 403b this year to the tune of $13,000. Since that does not receive a matching contribution, you could fund a Roth for both of you totaling $6000 and have $7000 to go towards debt. That does not account for differences in your taxes however.

Generally speaking it is best to pay off debt before investing, unless your investment return is guaranteed to return a better percentage. However, I think you would be fine in funding the 401(k) to the level required for matching and fund Roth IRAs. These are opportunities you cannot catch up on later once the debt is paid.

dt
Print the post Back To Top
No. of Recommendations: 0
It makes little sense to me to have $7,000 in high interest credit card debt and at the same time $7,000 cash in an E-Fund. I'd pay off the debt immediately with the cash you have. You can always get cash advances on your credit cards in case of emergency.

Nick, with all due respect I think it would be a bad choice to rely on cash advances to cover an emergency. Typically the interest rates on cash advances are near 19% and it could result in one quickly falling into deep debt.

For instance, assume the OP and spouse both lose their jobs. Rather than having an eFund to last them 3 months, they immediately have to tap a cash advance at 19% interest. Since the cash advance is being used for living expenses, how do they pay off the cash advance? Most likely be paying the minimum payment while racking up large finance charges.

IMHO, it is very wise to have some semblance of an eFund while paying off debt. The level of the eFund should be whatever makes the person the most comfortable. For some people that might be $500 and others it might be $5000. It all depends on circumstances.

While I agree paying off the debt should be a priority, I think one needs to heed a little caution and plan for the worse case scenario. By relying on a cash advance, I would think that leads to more problems and ultimately more cost.

dt
Print the post Back To Top
No. of Recommendations: 0
One thing not mentioned here is a home equity loan or line of credit. You should be able to reduce the rate on the 9% loan plus take a deduction on the interest if you itemize. I estimate that you currently pay $52 per month ($7000 x 9% / 12) per month on this loan so you should be able to afford some closing costs. Depending on the rate, you may want to roll in the 4% balance.

I'm inclined to keep funding the 401k & 403b accounts. You mention putting $26k into these accounts which, at 30% tax rate, saves you $7800 per year. Take the tax savings alone and you have the first CC paid off in one year.

Another way to look at it: if you can pay $1000 off per month, you will have the $7000 balance paid off in around 8 months and pay ~$200 in interest which, to me, isn't a huge deal either way. Whatever decision you make isn't likely to increase or decrease that number by a large amount, even with a 20% swing in the market either way. I would stay on your current plan.

Bottom line, you have good instincts and you seem to have control of the situation. For that, you should be commended.

-murray
Print the post Back To Top
No. of Recommendations: 0
Nick, with all due respect I think it would be a bad choice to rely on cash advances to cover an emergency. Typically the interest rates on cash advances are near 19% and it could result in one quickly falling into deep debt.

You have to look at probabilities. There's less than a 1% chance that over the next three months both people will lose their jobs and have to tap in to a 19% cash advance line. But if they don't pay off their credit card debt, there's a 100% chance they'll have to pay 9% interest. Would you rather have a 100% chance of paying me $900 or a 1% chance of paying me $1900?

I think the e-fund, like dollar cost averaging, is sometimes misunderstood and blindly followed. Yes, a cash buffer is a good idea in case of emergency. But if, for example, you're laid off, ask your self if some of the following might apply to you:

-You'll get serverence
-You'll get unemployment
-You can liquidate your taxable assets as needed
-You'll get a bigger tax refund since your withholding was based on a full year of employment
-Your spouse will still be employed
-You'll be able to find a new job

And keep in mind the cost of an e-fund. A $6,000 e-fund invested at 10% for 30 years is worth over $100,000.

Nick
Print the post Back To Top
No. of Recommendations: 0
Would you rather have a 100% chance of paying me $900 or a 1% chance of paying me $1900... and a 99% chance of paying me $0.

I thought you left off part of this :-)

Another item that might apply:

-Do you have a HELOC ready to be used? Like you said, $6000 earning 3% for 30 years so you don't have to pay 6% on a HELOC for a year or $6000 earning 10% and paying 6% on a HELOC for a year.

-murray
Print the post Back To Top
No. of Recommendations: 0
Oh, yes the mortgage details:

We financed through CountryWide and had such good credit that we did a 80/20, 100% finance (80% convential 30 year(6.75%)/20% HELOC(variable but currently around 6.5%). We tired of renting, but had little to put down in 2002, when we bought.

So the HELOC is kind of booked up, have about $2000 credit available on the $32k HELOC.

We do not plan on moving anything else into it, as that plan may fail as credit cards may REFILL up.

So we are planning on paying off the $7000-9% CC first, then the HELOC (6.5% variable), then the $12,000-4% CC last.

I think we are going to back $'s out to almost all but what is needed to get the matching on the 401k.

Our goal this year is to kill the debt (at $3000-4000/month) and build the E-fund a little more, then fund the Roths. Next year we should be debt free and max out the Roths, 401k and 403b.

I just wanted to thank ALL of you for the great feedback, already the membership fee has been worth the advice.


- William
Print the post Back To Top
No. of Recommendations: 0
100% finance (80% convential 30 year(6.75%)

You may want to look at refinancing. Our local bank is offering 30 year loans at 5.5% which is a whopping 1.25% lower than your current loan! http://www.oakbankonline.com/rates.htm

This could save you ~$1200 in interest the first year on $100,000 mortgage which should cover the closing costs. Call around to your local banks to see what the rates are. You should be able to save a bundle of cash here!

So we are planning on paying off the $7000-9% CC first, then the HELOC (6.5% variable), then the $12,000-4% CC last.

That sounds like a good plan to me! Remember, a HELOC can act as part of your Efund in a true emergency.

I think we are going to back $'s out to almost all but what is needed to get the matching on the 401k.

I would be careful not to do this for more than one year. Make sure you keep your spending low as the temptation to spend that extra cash may be large and you will take a big tax hit as I mentioned before (almost as much as one of your loans). I still think it's better to keep the money in the 401k/403b because of taxes and the difficulty of catching up on savings if you delay.

Our goal this year is to kill the debt (at $3000-4000/month) and build the E-fund a little more, then fund the Roths. Next year we should be debt free and max out the Roths, 401k and 403b.

Again, resist the urge to spend the extra money on a new car or furniture so you don't keep the money out of the retirement savings for more than a year because you will definitely regret it later!

Good luck! As I said before, you are probably way ahead of the general public when it comes to taking control of your money!

-murray

Print the post Back To Top
No. of Recommendations: 0
You may want to look at refinancing. Our local bank is offering 30 year loans at 5.5% which is a whopping 1.25% lower than your current loan! http://www.oakbankonline.com/rates.htm

This could save you ~$1200 in interest the first year on $100,000 mortgage which should cover the closing costs. Call around to your local banks to see what the rates are. You should be able to save a bundle of cash here!


You could also use a 5/1 ARM and pay the loan off like it is a 30 year loan. The extra payments due to lower interest of the ARM during the first 5 years will extend your savings to 9+ years even under worst case scenario for the ARM. Since most mortgage loans don't last (refinance, move) more than 9 years, you have a good probably of saving money.

IF
Print the post Back To Top
Advertisement