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Author: CPAScott Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308355  
Subject: Student loan or Car loan: A Decision Date: 7/25/2003 3:48 PM
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(see http://boards.fool.com/Message.asp?mid=19352968)

I've decided to eliminate both debts -- the one Sallie Mae loan now, and the car loan by the end of the year.

Of course, my severance won't cover that, so I have to dig into my e-fund to come up with the rest. But that's ok, because as part of this exercise I looked at how much I wanted in my e-fund and determined it to be overly conservative.

I based my optimal e-fund balance on my total fixed and discretionary expenses including the minimum payments on my student loans. This comes out to $2600/month (see my Cash Flow post at http://boards.fool.com/Message.asp?mid=19328564). For simplicity, I rounded that down to $2500 and thus calculated that my e-fund balance should be $15,000 (2,500 x 6).

But, as I said, that's overly conservative and thus my e-fund (which, prior to receiving my severance was at $14,000) is over-funded. Here's the logic.

Although it would be nice not to have to defer my student loans in the event of a financial crisis, the fact is at 1.8% keeping that money in the e-fund is a poor insurance policy. The risk of such crisis doesn't warrant it, and because the loans can be deferred, it's better to rely on such allowances if necessary. So, out come the student loans.

As I have also made the decision to eliminate my car loan over the next 5 months, I do not need to consider that in my e-fund either. There will be some risk until the loan is fully paid, but it's one I can accept. Thus, out comes that loan as well.

That leaves only two things -- my living expenses and my "discretionary" expenses. No loan obligations are included. From my Cash Flow budget, that works out to be $1,680. Rounding that down slightly to $1,675, the new calculation of my e-fund balance is just over $10,000 (1,675 x 6).

That means that I have everything from my severence PLUS another 4,000 to pay down debt.

For discussion purposes, let's add my severance to my e-fund and come up with a total.

Unfortunately, my severance is about $1,000 less than I anticipated due to the manner in which taxes were withheld on the lump sum portion. Because I started a new job without a lapse in employment, my regular salary at both companies plus the severance will propel me into the next tax bracket for this year, and thus I am currently estimating my tax liablity to see if I should adjust my current withholdings downward to reclaim some of that $1,000 this year.

For this discussion, however, let's leave that alone. Total severence received was about $10,500. Thus, total e-fund = $24,500 (14,000 + 10,500).

OK, the strategy:

Just today I sent Sallie Mae a check for $5,300 as a principal pay-down on one of the two high-rate loans I have there. E-fund balance remaining = $19,200 (24,500 - 5,300).

In order to pay off my car loan by December 2003, I need to make a payment of $6,200 in August. E-fund balance remaining = $13,000 (18,300 - 6,200).

But I must not forget the remaining balance in that Sallie Mae loan, which, after the $5,300 payment will be about $4,700. That payment will be made next week. E-fund balance remaining = $8,300.

Collectively, these three payments will cut my e-fund below it's new threshold by $1,700, and my intention is to pay that back begining in September by applying the former payment to Sallie Mae (about $100) for four months and then, when the auto loan is fully paid off, that balance as well (about $400) for another three months. I do have a car insurance payment that will happen in this timeframe (about $1000), but I don't want to murk up my calculations by including it here right now.

Running an Excel spreadsheet with all this data produced some amazing numbers. I'd like to share them with you. My analysis timeframe is one year (August 2003 - July 2004).

First, some quick facts:
As of August 1, 2003, I have $14,000 and owe $60,050.
Interest on the e-fund is 1.8% (variable)
Interest on the loans are:

* Car - 5.480% fixed
* SLMA 03 - 3.500% variable
* SLMA 07 - 6.875% fixed
* SLMA 08 - 6.875% fixed (this is the loan I'll eliminate)
* Perkins #1 - 5.000% fixed
* Perkins #2 - 5.000% fixed

Base scenario: Keep e-fund & severence.

Net savings (debt):
Principal owed at 7/31/2004 ($ 52,617.82)
Savings at 7/31/2004 24,918.92
Net savings (debt) ($ 27,698.90)
.
Principal reduction:
At 8/1/2003 $ 60,043.29
At 7/31/2004 52,617.82
Reduction $ 7,425.47
.
Savings effect:
At 7/31/2004 $ 24,918.92
At 8/1/2003 13,990.52
Increase (decrease) $ 10,928.40
.

Interest earned (paid):
Interest paid on loans ($ 3,638.05)
Interest earned on savings 428.40
Net interest earned (paid) ($ 3,209.65)

Decision scenario: Eliminate Loan 08 in August, Car loan by December 2003.

Net savings (debt):
Principal owed at 7/31/2004 ($ 37,098.44)
Savings at 7/31/2004 10,060.26
Net savings (debt) ($ 27,038.18)
.
Principal reduction:
At 8/1/2003 $ 60,043.29
At 7/31/2004 37,098.44
Reduction $ 22,944.85
.
Savings effect:
At 7/31/2004 $ 10,060.26
At 8/1/2003 13,990.52
Increase (decrease) ($ 3,930.26)
.
Interest earned (paid):
Interest paid on loans ($ 2,729.40)
Interest earned on savings 180.47
Net interest earned (paid) ($ 2,548.93)

Balance checks / net benefit calculations:

Principal:
Principal (2004) - Base scen. $ 27,698.90
Principal (2004) - Decision $ 27,038.18
Net benefit $ 660.72
.
Principal reduction:
Reduction - Decision scenario $ 22,944.85
Reduction - Base scenario 7,425.47
Difference $ 15,519.38
.
Net savings:
Savings - Base scenario $ 10,060.26
Savings - Decision scenario ( 3,930.26)
Difference $ 14,858.66
.
Principal v. savings:
Principal difference $ 15,519.38
Savings difference $ 14,858.66
Net benefit $ 660.72
.
Interest earned:
Net interest - Base scenario $ 3,209.65
Net interest - Decision scen. $ 2,548.93
Net benefit $ 660.72

Not bad, huh? $660.72 earned earned in twelve months. That's $55.06 SAVED each and every month. What really demonstrates this, though, is total amount paid (principal plus interest):

Base scenario $ 11,063.52
Decision scenario $ 25,674.25
Spending decrease (increase) $ 14,610.73

That $14,610.73 represents the additional cash needed to put this plan in action, which, in turn, returns a gain of $660.72 -- a return on investment of 4.5%!! (660.72 / 14,610.73). Hard to find that return in the market these days! And, seeing my former employer is putting up $10,500 of it, only about $4,100 comes from my pocket -- which, as we complete the circle, is just about what is sitting as "extra" in my e-fund right now.

To summarize, at 7/31/2004, I will have:
* Reduced my debts by an extra $15,500.
* Reduced my debt by a total of nearly $23,000.
* Saved $660 in interest.
* Maintained an emergency fund of $10,000.
* Earned 4.5% on the additional cash investment.

Ain't life grand? :-)


CPAScott
(who realizes that sometimes being an accountant really is fun!)
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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166151 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 4:01 PM
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I see some holes in your conclusions, but they are judgement based rather than numbers based, so we need not get into them. Since you are focused on killing debt, this looks like a reasonable plan. I would make two comments:

1. Aside from the two higher interest loans, the others are pretty low and you could beat those costs with many investments over longer terms. Not a big deal, but something to keep in mind.

2. You are switching jobs, which is sometimes a risky proposition. In case something goes wrong, might it not be a good idea to delay those big principal payments for a couple of months so that you can be sure things are working out?

Otherwise, good for you! How many other people would rush out and buy a new SUV instead!

(BTW, I just reserved a week's worth of time in Keuka Lake State Park campground for the first week in October. I won't freeze up there at that season, will I?)

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Author: CPAScott Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166152 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 4:07 PM
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I see some holes in your conclusions, but they are judgement based rather than numbers based, so we need not get into them.

Well, now you've piqued my curiousity. Issues with my e-fund strategy or funding level perhaps?



CPAScott
(first week of October should be nice -- especially when harvesting wine grapes!)

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166153 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 4:10 PM
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I mostly have quibbles with things like jumping up and down at the prospect of a 4.5% return, and shaving the e-fund that tight in the face of a job transition in a lousy economy. OTOH, accountants are much in demand and you are a better judge of your risk tolerance and funding needs than I could ever be.

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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166154 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 4:13 PM
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CPAScott,

Sounds like a really good plan and I found it very interesting to read your breakdown.

However, one thing that caught my attention was your reduction in monthly expenses. You went from an estimate of $2500 per month in expenses to $1675 in expenses by eliminating the two loans.

Later in your post, you mention that the payments were $100 to Sallie Mae and $400 to the car loan. It would appear that your monthly expenses would be reduced to $2000, not the $1675 you indicate. Am I missing something?

Is the remaining $325 possibly your current snowball that would no longer go towards those loans? Maybe I glossed over it in your post but I just want to make sure you didn't overlook something that results in a lower eFund than you really need.

dt

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Author: CPAScott Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166155 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 4:14 PM
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I mostly have quibbles with things like jumping up and down at the prospect of a 4.5% return, and shaving the e-fund that tight in the face of a job transition in a lousy economy.

Hmmm ... but 4.5% is MUCH better than 1.8%, so why not?

And, on the job thing, I guess I fail to understand why people are worried about taking a new job. Where's the risk? I suppose it's always possible to be fired in the first couple of months, but HIGHLY unlikely, dont'cha think?

You're not the first one who has discussed the risk of a new job (or should I say the lack of security), but I've never understood that argument. Why should there be any more risk of losing your job at a new company rather than at an old one? The position I am in is not a seniority-based kind of thing.


CPAScott
(who appreciates risk, but also appreciates return)

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Author: CPAScott Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166156 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 4:17 PM
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Later in your post, you mention that the payments were $100 to Sallie Mae and $400 to the car loan.

The $100 is the payment on one of the five student loans I have. In total, I spend $920/month on all my loans --

$450 to Sallie Mae for 3 loans ($300, 100 and 50)
$80 to two universities for Perkins loans ($40 each)
$390 to PeopleFirst for the car

As far as an e-fund is concerned, if the car loan is paid, then all of these obligations should be excluded from consideration.



CPAScott

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Author: jrsmith13 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166157 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 4:18 PM
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You are a NERD!

Just kidding - I'm glad SOMEONE is that anal about keeping track of their numbers. I sort of do mine by "instinct".

(High interest rate = BAD, Lower interest rate = BETTER)

I'm so happy for you getting that severance. I keep wishing I'd win the Lotto - if I could have a $10K-$12K windfall, I'd be REALLY ON TRACK. But I guess I'll have to do it the SLOW way...

jrsmith13

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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166158 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 4:19 PM
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Hmmm ... but 4.5% is MUCH better than 1.8%, so why not?

It is certainly better than the 1.8% but it is possible to achieve better rates right now. In March of this year I established an IRA for myself and my DW and invested in a broad index fund. So far, both of the funds have returned better than 4.5%

You're not the first one who has discussed the risk of a new job (or should I say the lack of security), but I've never understood that argument. Why should there be any more risk of losing your job at a new company rather than at an old one? The position I am in is not a seniority-based kind of thing.

While I personally do not consider changing jobs to be all that risky, it is possible that the job will not turn out to be what you had hoped and you could be miserable in your new position. Also, while your position may not be seniority based, it is often easiest for a company to eliminate the most recently hired person when a cutback is needed.

There is a certain degree of risk involved in changing jobs but I am in the same camp as you and do not feel it is necessary to alter your plans on account of it. But you should be aware of the risk and be aware of a contingency plan in the event the job would not work out.

dt

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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166159 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 4:21 PM
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The $100 is the payment on one of the five student loans I have. In total, I spend $920/month on all my loans --

Gotcha. I had a feeling that is what the difference was after re-reading your post but just thought I would ask.

As far as an e-fund is concerned, if the car loan is paid, then all of these obligations should be excluded from consideration.

I would agree with that. As your expenses change, it is important to re-evaluate your eFund to ensure it is still meeting your needs.

dt

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166160 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 4:22 PM
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4.5% is better than 1.8%, but 8 or 10% even even better. Depends on your risk tolerance, though.

I guess that there are just more unknowns when you take a new job. I have been in situations where I found a new job after a layoff and belatedly came to the realization that it was a spot on a sinking ship and my direct supervisor was bent on making me miserable (only person that has ever made me fantasize about killing them; I'm a pacifist). If I were in great shape financially, I would have headed for the lifeboats, but I didn't financially have that option.

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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166161 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 4:25 PM
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I'm so happy for you getting that severance. I keep wishing I'd win the Lotto - if I could have a $10K-$12K windfall, I'd be REALLY ON TRACK. But I guess I'll have to do it the SLOW way...

It can really speed things up. A year and a half ago, I negotiated a severance with my employer and in turn with moving to a job that doubled my salary, I hammered out that credit card debt in no time.

There is a lot to be learned with doing it the slow way even if it is more painful. The clearest proof of that I have is that in the past when I bailed out my DW and paid off her credit card debt for her, she did not learn to manage her money properly or how to properly use a credit card. The result....she added more debt to her CC!

dt

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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166163 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 4:27 PM
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I have been in situations where I found a new job after a layoff and belatedly came to the realization that it was a spot on a sinking ship and my direct supervisor was bent on making me miserable

I didn't know you worked at my last employer as well! :)

dt

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166164 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 4:30 PM
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One thought - I would pay the car off first while making regular students loan payments because of the benefits of student loan. If you get in a bind, you can get forbearance or payment reduction. I know you're not planning to need it but you may want to consider this in your thoughts.

rad

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Author: kirbivore One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166193 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 8:43 PM
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I'm assuming you are talking about Keuka Lake in upstate NY. I am a native upstate NY'er (Syracuse area). The first couple weeks of October are unpredictable when it comes to the weather. I've experience days ranging from the 30's to the 70's in temperature in early October. I'd say check the weather about a week beforehand to give yourself some kind of idea. Syracuse basketball 2003 National Champs!!!!

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Author: windyelliott Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166196 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/25/2003 10:03 PM
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"on the job thing, I guess I fail to understand why people are worried about taking a new job. Where's the risk?"

I have a sys admin friend who recent left a job at PEC for what was going to be a great job at a new company. He was going to get promoted to managment and get a huge raise. He wasn't there longer then 4 weeks before he was laid off because of downsizing. My guess is that this is rare, but it does happen and when it happens it sucks. Luckily he was only out of work for a week before he was employed again, but in this job market he was very lucky.

I think that most of the risk with a new job is that it won't be what you thought it would be, so you get there and realize that you can't stand the folks you work for or what you are doing.

Some folks decide it isn't worth it and try to get out only to find out there is no place to go.

I have personal experience with this one. I got hired away from a wonderful company with a promise of new challenges and more money. When I got there I found out the place was a management disaster and the clients were always upset and disappointed with our work and the salesman were always selling products that hadn't been designed yet. It was a nightmare. I decided to try to get out, but found that my company had such a bad reputation that nobody wanted to hire their people! It sucked. I finally walked out and was out of work for a week before I found my current job.

I guess what I am trying to say is that new jobs are always a risk. Some industries are probably more risky then others, but I think some degree of risk is always there.

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Author: exeter17 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166241 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/26/2003 5:44 PM
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(BTW, I just reserved a week's worth of time in Keuka Lake State Park campground for the first week in October. I won't freeze up there at that season, will I?) ***

Best time to go, just remember not to eat the fish you cathc as they might make you sick (the signs are posted but in October they may have been vandalizedby that time).

If you can swing it - try to see Cayuga lake too - the waterfalls in Ithaca are GORGEOUS

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Author: HoneyRyder Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 166806 of 308355
Subject: Re: Student loan or Car loan: A Decision Date: 7/31/2003 10:37 PM
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yes, I love the Finger Lakes region too.....great wine!




HR - from the Chenango Valley




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