Advice Requested: Pay down debt?


N

number6

I recently received a bonus of $2000 (after taxes) and am not sure what
to do with the money.

I have come to this newsgroup about once a year for the past 3 years
asking advice and each time I've gotten great advice. 3 years ago my
wife and I were in debt for about $50k and my wife had just stopped
working to stay at home with our newborn daughter. Amazingly, we somehow
not only managed to make ends meet these past 3 years but we also were
able to pay down a large amount of our debt.

So...I'm back with a new request for advice : )

We have the following debts:

Car 1: $4500 owed, at $201 per month
Car 2: $2500 owed, at $277 per month

HELOC: $6000 owed @ about 8.25% interest (double what it was when we
first opened it...)

I just received, unexpectedly, $2000 in cash and it's sitting in my
checking account. I could do one of the following:

1. Pay off one of the cars.
2. Pay down some of the HELOC.
3. Put it in my savings account.

We took the risk of not having an "emergency" fund/savings the past few
years. We did have some 'emergencies' where we didn't have the cash to
cover the expenses, and all of those were home repair costs (our
heating/cooling unit went belly up and needed replacement).

Considering we were able to pay off about $30,000 in long-term student
loan debt over the past 2 years I'm thrilled with where we're at now.
I'd like to get debt free.

So I have the $2k in cash now. I will have a bonus in February of about
$4500 coming to me. Once my wife goes back to work full-time we plan on
buying a new house and selling our existing one. We have equity of about
$120k in the house, so the absorption of the HELOC balance isn't bugging
me much. My thinking is I should pay off one of the cars. Or should I
really start building savings (cash savings for emergencies that is --
we of course already have retirement savings plans in the form of 401k's
and ira's setup with contributions).

I have two young kids - ages 2 and 3. I'm very secure in my job and
expect a promotion within the next 4 or 5 months, which will add to my
income stream. Advice?
 
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J

John A. Weeks III

number6 <[email protected]> said:
I recently received a bonus of $2000 (after taxes) and am not sure what
to do with the money.
Car 1: $4500 owed, at $201 per month
Car 2: $2500 owed, at $277 per month
Take the $2000, and then do whatever unnatural act you have to
in order to scrounge up another $500, and pay off car #2. That
might not be the mathematical best thing (that would be to pay
off the highest interest rate first). But if you pay off car
#2, you accomplish 3 things:

1) you get out from under one of your creditors, so one less
thing to worry about or to bother you.

2) you free up $277 a month, which will make a huge difference
in your monthly budget (and allow you to accelerate other payments).

3) you have a victory to celebrate. This is the key result.
You have a completed payoff, a major battle victory in your
war on debt. It is time to take a few bucks, and go do something
fun with the family because you really earned it.

-john-
 
J

John

There are three ways to look at this. All are valid in some way.

1. Pay off the loan that has the highest payment. That will free up the
greatest cash flow.

2. Pay off the loan with the highest interest rate. That will reduce
your overall cost of funding.

3. Pay off the loan that you can raise again if something happens. As
you noted that you do not have cash reserves then paying off a car vs.
the HELOC could be the difference of having less flexibility later.

There could be some minor tax impact (deducting the interest on the
HELOC) or just leaving the cash in savings so you have a emergency
cash.

You also might be able to consolidate some of the debt onto the HELOC
plus use the $2K. Just be careful about paying off the car loans as you
might not be able to get a fresh car loan for the same amount.

My personal bias given the limited info is to pay down the HELOC and
remain nimble. As you have very successfully reduced the debt by 30K in
2 years you can likely address the car loan debt over the months to
come.

John Corey
 
J

jIM

Take the $2000, and then do whatever unnatural act you have to
in order to scrounge up another $500, and pay off car #2. That
might not be the mathematical best thing (that would be to pay
off the highest interest rate first). But if you pay off car
#2, you accomplish 3 things:


2) you free up $277 a month, which will make a huge difference
in your monthly budget (and allow you to accelerate other payments).
I agree with John Weeks. Pay off Car #2, free up the $277, then use
this to double the payment on car #1.

Once both cars are paid off, I would suggest securing some cash for the
probable move to a new house.
 
Z

zxcvbob

John said:
Take the $2000, and then do whatever unnatural act you have to
in order to scrounge up another $500, and pay off car #2. That
might not be the mathematical best thing (that would be to pay
off the highest interest rate first). But if you pay off car
#2, you accomplish 3 things:

1) you get out from under one of your creditors, so one less
thing to worry about or to bother you.

2) you free up $277 a month, which will make a huge difference
in your monthly budget (and allow you to accelerate other payments).

3) you have a victory to celebrate. This is the key result.
You have a completed payoff, a major battle victory in your
war on debt. It is time to take a few bucks, and go do something
fun with the family because you really earned it.

-john-

I agree completely with John. $2000 is not enough money where the
interest rate between one loan versus another makes much difference.
$277 per month in extra free cash however will make a bid difference.

Best regards,
Bob
 
T

thewiz

number6 said:
I recently received a bonus of $2000 (after taxes) and am not sure what
to do with the money.

I have come to this newsgroup about once a year for the past 3 years
asking advice and each time I've gotten great advice. 3 years ago my
wife and I were in debt for about $50k and my wife had just stopped
working to stay at home with our newborn daughter. Amazingly, we somehow
not only managed to make ends meet these past 3 years but we also were
able to pay down a large amount of our debt.

So...I'm back with a new request for advice : )

We have the following debts:

Car 1: $4500 owed, at $201 per month
Car 2: $2500 owed, at $277 per month

HELOC: $6000 owed @ about 8.25% interest (double what it was when we
first opened it...)

I just received, unexpectedly, $2000 in cash and it's sitting in my
checking account. I could do one of the following:

1. Pay off one of the cars.
2. Pay down some of the HELOC.
3. Put it in my savings account.

We took the risk of not having an "emergency" fund/savings the past few
years. We did have some 'emergencies' where we didn't have the cash to
cover the expenses, and all of those were home repair costs (our
heating/cooling unit went belly up and needed replacement).

Considering we were able to pay off about $30,000 in long-term student
loan debt over the past 2 years I'm thrilled with where we're at now.
I'd like to get debt free.

So I have the $2k in cash now. I will have a bonus in February of about
$4500 coming to me. Once my wife goes back to work full-time we plan on
buying a new house and selling our existing one. We have equity of about
$120k in the house, so the absorption of the HELOC balance isn't bugging
me much. My thinking is I should pay off one of the cars. Or should I
really start building savings (cash savings for emergencies that is --
we of course already have retirement savings plans in the form of 401k's
and ira's setup with contributions).

I have two young kids - ages 2 and 3. I'm very secure in my job and
expect a promotion within the next 4 or 5 months, which will add to my
income stream. Advice?
Pay off the car loan that is a high rate or get ur kids a college 529
plan. It's that simple.


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.
 
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N

number6

John said:
Take the $2000, and then do whatever unnatural act you have to
in order to scrounge up another $500, and pay off car #2. That
might not be the mathematical best thing (that would be to pay
off the highest interest rate first). But if you pay off car
#2, you accomplish 3 things:

1) you get out from under one of your creditors, so one less
thing to worry about or to bother you.

2) you free up $277 a month, which will make a huge difference
in your monthly budget (and allow you to accelerate other payments).

3) you have a victory to celebrate. This is the key result.
You have a completed payoff, a major battle victory in your
war on debt. It is time to take a few bucks, and go do something
fun with the family because you really earned it.
Thanks John, and everyone else who responded with advice. I very much
appreciate it. I will put the $2000 towards the balance of car #2.
Hopefully I'll be able to pay off the rest within a month but worst case
scenario it takes two months to pay off the remaining balance.

Then in February when I get my bonus I'll pay the other car off and will
have only he HELOC debt left. I have a $20k line of credit on the HELOC
and have used up $6k of it. When my wife stopped working I upped the
HELOC in the event of emergency. So even though we've used up all of our
extra cash/bonus money/tax money etc over the past 3 years on paying
down our huge student loans and other debts, I was okay with it knowing
that if I were to lose my job or anything major happened I had the HELOC.

Thanks again.

m
 
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J

jjj_soper

number6 said:
So I have the $2k in cash now. I will have a bonus in February of about
$4500 coming to me. Once my wife goes back to work full-time we plan on
buying a new house and selling our existing one.
That's great about paying down so much debt, I'll just add one thing.
People have been getting stuck lately when they buy a new home and then
can't sell their current one for the price they expected, the long
debated housing bubble is finally popping.

So make sure your house is sold before commiting to a new one, even if
you need to rent for a stretch (which may pay for itself if home prices
continue falling). www.thehousingbubbleblog.com is fun reading for
these issues.
John
 

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