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Putting the $1K in the Roth is a no-brainer. You leave yourself the ability to put your full $4K into the Roth for 2007.

The more interesting question is, what do you do with your snowball after the 7.9% CC is paid off? When your CC interest rates are all cheaper than you can earn at Emigrant, it's time to make value judgments about allocating the snowball. How much to debt, how much to e-fund, how much to Roth or other retirement savings, how much to other non-retirement savings? The answers here aren't clear-cut, but there is considerable value to giving the matter some thought and trying to figure out what makes the most sense for your situation.

Patzer


I found this reply to my "Roth or CC Debt" poll this morning, and I wanted to start a new thread with it because I think it's such an interesting question, worthy of discussion and debate amongst our insightful peanut gallery of reformed and reforming debtors.

For me, I think I still have several months before I have to face this question head-on, because after the 7.9% CC in the snowball, there's a card at 5.99% and another at a teaser 0% rate that expires in October. But after they are paid off, my remaining CC debt will be at 3.9%.

So what then? It's something I have been thinking about lately, and I'd be curious to know about the experience of others who have faced this hurdle and found a course of action that they are satisfied with. Or that you weren't satisfied with at first, and the process of iterations you went through to get somewhere you feel comfortable with. The reorganizing of financial priorities is one that we all have to face at some point in this journey, so on that note I'll turn this one over to the floor.

-Bethdig
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But after they are paid off, my remaining CC debt will be at 3.9%.

So what then?


The last year of our payoff, everything was at 0%. I'm sure we could have continuted to BT forever and put the money into something earning more interest. What we chose was to pay the minimums and snowball savings. Now that savings is built up to more than the balance on the card, we are keeping the money in savings but will pay off the debt before the rate goes up.

Our next debt is our cars - hefty balances on those loans, one at 5.9% and one at 4.9% For now we have decided to pay minimums on those and save money for 2006 and 2007 Roths. We are also taking advantage of another high-interest savings program this year, and that money will go to our 2008 Roths. It will probably take the rest of 2007 to meet those goals, and then we'll reevaluate the car situation. For now I'm satisfied that we are making more money by investing than we are losing on the car loans. I don't hate the car debt as much as the cc debt, although I hope to be smarter about our next cars.

In your case, I would probably do Roths before I paid 3.9% for life credit cards. Then I would probably snowball the efund, and at some point when it was large enough to pay off the 3.9%, I would pay off the rest of the CC debt.

For me it was easier to zero in on paying cc debt that it is to save. It's easy to skim off $200 for some treat, but I rarely skimmed off $50 from the snowball during cc paydown. So your psychology may change if you switch targets, too.
mm
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I'm in this situation now. We don't have any credit card debt, but we do have mortgage, car loan, and student loan debt. Since the length of the loans vary a lot from the car loan (4-year term) to the mortgage (30 year fixed) not only do I consider the interest rates but also how paying something off affects my cash flow.

For instance, my 2nd mortgage is at 6.5% and my car loan is at 4.5%. Logic would say that I should pay off the mortgage first. But its the car loan that impacts my cash flow the most. And our other money goals (like having kids or aggressively saving for retirement) are more impacted by our current cashflow than by the interest we're paying over time.

Yeah, I could snowball ALL my debt and have everything completely paid off in about 10 years. But I'd have virtually no savings at that point.

And the there's the psychological aspects of the debt. I HATE HATE HATE the car loan, but having the 2nd mortgage doesn't bother me all that much. I guess I consider the car loan as ugly consumer debt, but the mortgage I consider "good" debt (if there is such a thing).

I kinda decided that we will focus on paying down the car loan and saving at the same time. I'm not sure what we'll do once the car loan is paid off. I imagine we'll re-route the money to savings, and not bothere on paying down the mortgages and student loan any faster.
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yddemyma and I are a study in contrasts. The first debt I wanted to pay off was my student loans. I hated having them--I loved what they'd given me, but I felt they should be paid off ASAP. [I should note that our only other debt at the time was a car loan.]

Then came our original second mortgage. Then it was going to be our main mortgage, but we got a 2nd mortgage again instead, so that's being paid down. The mortgages bother both DH & me greatly--we do hope to pay off the first mortgage in about 10 years after the 2nd's gone if all goes well. To us, a paid off house is an extent of financial security.

And our car loan is last on the list, and unlikely to be paid off before it's time is up. Partly this is because we got a low 3% rate and partly because the other loans couldn't be paid off before this one was over and done with.

Selphiras
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The reorganizing of financial priorities is one that we all have to face at some point in this journey, so on that note I'll turn this one over to the floor.

I've always been most concerned about transitions. When I retired my mortgage, I spent a lot of time allocating the cash flow to the brokerage account, the new self-escrow account for taxes & insurance, and general savings. The idea was to make sure that all of the cash flow went to some form of savings and none of it leaked out into increased spending for no visible benefit.

I'm not theoretically opposed to increasing spending when a major debt is retired, but I do think that any increased spending should be a planned budget adjustment rather than a default increase because you feel rich. Hypothetically, suppose you have a snowball of $1500 when you retire the last debt. I can understand saying, "We've been living cheap to retire debt, so we want to add $300 to our monthly budget for spending that we don't have to track." The point is that this should be a concious allocation of a specific amount based on a decision that this is the most important use of those funds for your life situation.

I'm also a big believe in spreading the savings snowball around. Put a bit in the brokerage account, put enough in the escrow/freedom fund, build the e-fund to a level you're comfortable with, put some in the retirement accounts. The amount you regularly put to each purpose is easy to adjust if you decide later that a different allocation is better; but it's kind of a pain to set up a Roth IRA, start participation in an employer's 401(k), start a brokerage account, etc. Get the savings vehicles set up and get into the habit of putting something towards each of the savings vehicles that is important to you. Then when life changes--the last higher-rate CC is paid off, the mortgage is retired, you get a raise, whatever--it's easy to adjust how much you send to which savings vehicle. If you pay off the debt and then decide to set up a Roth IRA, it's too easy to let a month or two of the snowball get frittered away before the paperwork is finished.

As to how the various goals should be balanced, I think the allocation is very specific to your individual situation and temperament. I hate debt, which is a big part of why I don't have any other than current month CC charges. I want a large e-fund, because I have seen an e-fund of 8+ months' salary eaten up by the Mother of All Emergencies. I want to fund retirment accounts as much as I can. And I need to be concerned with getting my daughter through college and launching her into life as an independent adult. Against this background, my "snowball" is going towards retirement savings and e-fund. At some point, it will make sense to put some of it towards non-retirement investments; I hope to recognize that point in a reasonably timely manner.

Patzer
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It's been really great seeing everyone's responses here, and how different everyone's views are on what are "good" and "bad" debts to them (or at least "better" and "worse" debts).

I think it's interesting how we have this great formula for helping people get out of CC debt; i.e. the "snowball method" - which is almost universally agreed upon at this board as the best way to get yourself out of CC debt (with some minor quibbles regarding smallest balance vs. highest rate first, etc.) But when it comes to other debt, it is all so highly individual. Not the method per se, because of course the snowball works on whatever you aim it at: student loans, car loans, savings, mortgage. But the laser-sharp focus at getting to zero only seems to hold for CC debt. It's easy to understand why, CC company practices being "predatory" or what have you.

But when the "gazelle-like" intensity inevitably wanes, what then? To me, it's a bit like being on a diet where you can follow the "rules" to achieve your desired results, but unless you want to follow those "rules" forever, or gain the weight back, eventually you have to figure out how to eat in the real world. It's not a diet, it's a lifestyle change - that's what they always say at Weight Watchers.

Anyway, sorry to bore you with my musings. If anyone has gotten this far, thanks for reading!
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bethdig,

You wrote, It's been really great seeing everyone's responses here, and how different everyone's views are on what are "good" and "bad" debts to them (or at least "better" and "worse" debts).

Something everyone should bear in mind is that there's no such thing as "good" debt or "bad" debt. Debt is simply measured in terms of cost. What does it cost you to have that debt.

The less a debt costs, the less "bad" a debt is. Whether or not it's worth doing something else vs. paying down the debt depends on what risks you're taking or what opportunities you might be missing by paying off the debt.

But any time you defer paying off debt, remember that it will usually impact all future spending. The amount may not seem like much; but with compounding of interest over time, it can make a substantial difference in how well you live in your later years. Whether or not that cost is worthwhile typically boils down to a judgment call we all have to make from time to time.

- Joel
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bethdig says: It's been really great seeing everyone's responses here, and how different everyone's views are on what are "good" and "bad" debts to them

joelcorley replies: Something everyone should bear in mind is that there's no such thing as "good" debt or "bad" debt. Debt is simply measured in terms of cost. What does it cost you to have that debt.

I concur. There can be good and bad reasons to incur debt, but once the debt is in place it is neither good nor bad. It is just an obligation with terms and conditions attached.

Some people say a mortgage or a student loan is "good debt". I believe this is sloppy thinking. The most commonly cited reasons for taking out a mortgage or student loans are usually regarded as good reasons, but people take mortgages and student loans for bad reasons, too.

Most people would concede that getting a mortgage to buy a house is a good reaon. Some would quibble that it's a bad reason if you buy more house than you can afford. Many regulars here would say that paying off credit card debt is a bad reason to get a cash-out mortgage. Joel and I (and possibly others) would say that regardless of the reason, once that mortgage is in place it's neither good nor bad. It's just a debt with defined characteristics that should be managed in the context of your overall financial picture.

Similary, many people would agree that getting an education that allows you to earn a good living is a good reason to take out student loans. Some would look further and say that students who have a party-heavy lifestyle frequently borrow more than they should to get that education. Suppose there are two students who pursue the same course of study, have similar incomes and support from their families, and are offered identical financial aid packages. If one student graduates with $20K in student loans and the other graduates with $50K in student loans, many regulars here would say that the second student managed his money poorly. The decisions made by the second student were probably inferior to the decisions made by the first student; but the first student's debt isn't "good", and the second student's debt isn't "bad". The debt is just debt that the new graduates need to deal with in their financial lives.

Patzer


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Check Sam's Club and Costco for diamonds. They seem to have good prices and if she doesn't like any of the settings, both stores sell loose diamonds which can be taken to a custom jeweler to make a unique setting.

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Bethdig,

It is really useful to put everything into the same big budget - all taxable and non-taxable income and all benefits and taxes - and all specific dollar estimates for future savings goals.

For example, if I were saving up a down-payment for a house - I would also add an amount to save specifically to furnish said house.

It was especially motivating to consider taxes left on the table; for example in the 25% tax bracket. One could invest conservatively returning only 5% per year for 5 years (while you're learning how to save and invest) and still have a total average return of 10% each year for a full 5 years after putting that money away in the first year! It really helped me to trim my budget elsewhere in order to fully fund a medium-term savings account - so that the next year I could take more of my compensation off the table - and book as an immediate return on investment - the amount I didn't pay in taxes.

I first did this when I was thinking of starting my own business and really wanted to look at what it takes to generate billable hours and specifically I would need to earn to pay for all the employer sponsored benefits. And in addition how much my business would need to grow annually to compensate for risk and to keep pace with income growth through promotions and raises in my regular job.

It made sense for me to continue my traditional career but after looking at things that way I manage all my time and money, including my paycheck from my regular job, as if I were running a business; a monthly budget with quarterly review and semi-annual cost cutting, capital investments, specific performance goals, etc. It was tedious to set up at first - but became really liberating to appreciate where my time and money gave me the most enjoyment and value - which is of course very personal - the proverbial "sleep at night" principle.
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For example, if I were saving up a down-payment for a house - I would also add an amount to save specifically to furnish said house.

********************************

Also don't forget to set aside something for moving costs and any utility deposits

Molly
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OneupOnedown,

Your system of considering taxes "left on the table" is an interesting one when considering returns on investing. Just curious, how do the taxes you pay later on that money figure in to your calculations?

Your budgeting system sounds fairly advanced to me; I can barely keep up with the Excel spreadsheet I've set up to track monthly income and outgo. I definitely have lots of room to grow and figure out a system that works for DH and I. And DH can barely keep up with the way I have things set up now! So perhaps it's best for us to keep it simple. I think half (or more) of the battle is just finding a way of managing finances that works for you - once you've got that, the upkeep is relatively simple.
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Bethdig,

Just curious, how do the taxes you pay later on that money figure in to your calculations?

Do you mean long term? Not much, because just like paying the utilities each month, the exact amount may vary depending on many other factors - that are unknowable in advance.

All income is income in the year in which it is earned. All taxes are an expense in the year in which they must be paid. However, the tax cost of each type of earning - dividends, long-term capital gains, interest, etc. is predictable for the next tax year or two. Retirement savings can only be funded from earned income (yours or DH).

Ideally - the taxes you don't pay on tax-deferred retirement contributions get set aside in savings, until they are large enough to cover 6 - 12 months of living expenses, and after that they can accumulate for investment.

Budgeting:

Your budgeting system sounds fairly advanced to me; I can barely keep up with the Excel spreadsheet I've set up to track monthly income and outgo.

Well it certainly didn't start out that way. The most important thing to know about budgeting is that it's a draft! It will be revised - the only question is: How often? For some time - everything will be an estimate and tracking spending and saving is the best you can do. It does get easier though, and later when you're living consistently below your means it can become simpler.

One thing that might help - is to set a target savings amount, and see if you can go a full 6 months without dipping into it. If you can - then your budget is working (and maybe you can adjust your savings goals higher).

IMO - while carrying low rate CC or student loan debt it makes sense to accumulate money in savings up to 6-12 months expenses or the debt balance - before investing. The CC debt is the real kicker - if someone gets hit by a bus - or any other less catastrophic scenario that can cause you one CC payment snafu - you could lose your low rate. Then you want to have the cash sitting there to just pay the darn thing off. The downside risk of carrying your CC debt is the potential cost of losing control of the terms. An estimate might be penalty rate = 30% APR x 3, or x # months it would take to pay it all off or BT (which typically costs 3% or more).


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OCD
An estimate might be penalty rate = 30% APR/12 = 2.5% x 3 months
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I think I would pay the debt off first then contribute to the Roth. I am ok with a mortgage and maybe a car loan then I would do the Roth. For me I am just not comfortable carrying the credit card debt for any period of time and would rather focus on paying it dowm.

I owe 5,900 to Discover at 0% until 3/08 then it goes to 10.24% . I intend to have it payed off by the end of the teaser. I do not have a Roth but if I was going to start one I would wait until this is paid off.

--George
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