So currently I'm a few years out of school, good salary, own a house and married a wife who brought some CC debt to the table. Just turned 29.

Currently I'm down to ~10k in student loans, and ~$8k in CC debt, both rapidly declining.

I've got a 401k rolling along with around $33k in it growing at around 13% annually. So by quick math with compounding I could leave it alone and at 65 it should be creeping up on $3M, is that right?

We have ~1 month salary in savings. Both of us have good job security though, she's a teacher and I'm a non-contract engineer. Both of us have short/long term disability insurance as well.

So what needs to happen first, oh money gurus? I'm making double payments on my student loans, and flat rate payments on her CC debt that at the moment are ~2.5x the minimum amount. Should I continue at this rate? Lower my 401k contributions and take the extra and put it towards erasing debt? Stop savings contributions and go after the CC debt (9.99% rate)? Pay minimums on everything until the savings hit the 6 month salary mark?

Both of us are expecting decent pay raises in the near future (15-20% for me in January, 15% for her next summer) and we'll continue with the same lifestyle, using the extra income to go 100% to eliminating debt.

I'm not trying to consider stocks yet, should I? I feel like I want to get away from debt first.

Give me your thoughts.

 

My first priority would be to pay off the cc debt. The student loans should be at a lower interest rate than the cc debt and I think the student loan interest is a tax write-off so I'd pay as much as possible toward the cc at the expense of paying only the minimums on the student loans until the cc is paid off. Beyond that, you seem to be on a really good track.

 

First, pay off the CC and promise yourself to never carry an unpaid balance again.

Second, build up that 3-6 month cushion.

Third, keep adding to your 401k. The 13% return you're enjoying now will fluctuate.

Fourth, once you're out of debt and you don't want to put more in savings and 401k, open an investment account.

Fifth, ...

Sixth, profit!

Sounds like you've got a great start and a great plan. Stick with it.

 

She hasn't touched her CC since I started paying all the bills about a year ago, and I only use them for work related expenses, they're zero'd every month. Running them up will not be a problem, we're just trying to get rid of her school expenses. It's how she chose to get through school. Not what I would have done, but not what I'd call 100% reckless spending either.

Just want to make sure what we're doing is sound. Someone told me to get a consolidation loan, but I also feel like the last thing I need is yet another person to pay off. the payments are automated at the moment, so there's never any slippage on how much they're getting.

 

Pay off the CC first paying minimum to school. Then pay off the school. Next mortgage if you have one (If not then congratulations are you better off then 90% of the people in the US). After that I'd say keep putting in at least as much into the 401k as the company would match (or max out yearly amount if you like) and start to invest else where. Look into a Roth-IRA and then into stocks even if it's a simple S&P 500 or similar index.

Also don't forget to spread your money out so you are covered by the convernment. 100k per bank account, 250k per retirement fund I believe.

 

First, you should sell that fancy pants s2000 immediately, and get yourself reasonable, practical sporty car, like a Honda Prelude, for example.

1 month of savings for a couple who are both working and have access to available credit is plenty IMHO. I would concentrate on paying off the CC debt first, since at 9.99%, I'd almost guarantee it's a higher rate than your student loan. Plus the interest on the student loan is tax deductible, unless your income is too high. Do you have any auto loans? I would attack those after the CC, and before the student loan. Whatever you do, I would not reduce your 401k contributions now.

Andrew

 

I will assume your student loans are a pretty low interest rate, yes? Also, the interest on these is tax deducible up to $2500 (I wouldn't assume you'd go over this) With these assumptions in mind, I would pay the minimum monthly payment on these as long as interest rates don't drop below your percentage. For example, my loans are locked in at 3.25% fixed. In stead of paying double on this loan because I don't like paying 3.25% interest, I can stick the extra money in a simple online savings account pulling in close to 5% interest. In the end, I will be making more money in interest than I will be paying. So the net is positive, and the interest is more than negated.

Numbers as follows.. all made up, I don't owe $30k

1) Say I owe $30,000 in student loans over 30 years. My monthly payment with 3.25% interest would be about $130/month. In the end I will be paying $47,000, with $17,000 being interest. Paying double the minimum payment ($260) will still cost me $6,000 in interest over almost 12 years.

In this scenario, I lose $6,000 in interest in 12 years by paying my loan off at double the minimum payment.

2) I owe the same $30,000 over 30 years at 3.25% interest. I pay $47,000 over these 30 years with $17,000 in interest making $130/month payments.

I take the additional $130 month that I could be paying to the loan, and instead stick it in a regular online savings account paying 4.5% interest. After 30 years, this account will be worth $99,058.50 assuming interest rates do not change. So, in this scenario, I MAKE a lot of money by putting money into a higher yield account instead of paying off low interest debt.

This makes sense of course if you are able to safely make a higher interest rate somewhere else. Whoa that got too long

So, what I would do.

Minimum payments on student loans.
Maximum payments on credit card.
Keep with your current retirement funding.

Once CC debt is paid off:
Minimum payments on student loans.
contribution to 401k up to employer match.
increase hazard fund.
after this, fully fund an IRA.
If you want to save more, go back and fund 401k further.

What I currently do:
Minimum payments on student loans.
Fully maxed employer sponsored retirement.
Fully maxed additional IRA.
Minimum payments on my low interest car loans (pretty much even with the interest I receive from high yield accounts now)
as much money as I can afford into high yield accounts and offshore investments, and as much as I wish to lose on the stock market.

 

^^ well said...

 

Debt first, save second. All your savings money should go to paying the loans first, especially the revolving credit (cc's). Pay those first, then pay the student loans. Once you have all your debt paid you will compound the money you have to save (all the payments you were paying you are now saving).

Get ~3 months of emergency reserve put away into a high-interest savings account/money market account. Let it sit there and compound interest. Forget it, it's your last resort money.

Now with all that out of the way you are good to go with putting all your excess toward savings and investments.

When I found myself over-extended on the credit front the only way I found I could get any traction out of the hole was to pay the minimum on all debt except the most expensive. I'd put all I had against that one debt chipping away at it until it was paid off. By concentrating my efforts on just one debt it was paid down in only about 5 months. Once it was paid, I took that payment and applied it to the next most expensive debt. Each time I paid off one of the debts I would have more money to pay the next and they would get paid off at progressively faster rates. You will see tangible and very rapid progress and that may be the most important part of all.

 

I'm afraid that putting funds into an interest bearing account at less than 5.00% is not advantageous if you are above the 25% tax bracket. You really don't break even at 4.50% when you consider other factors.

To use your example:
Interest Rate * Tax bracket = Effective return
450 * .75 = 337.5 (3.375%)

If short term rates continue to drop, even this 1/8 point will be unsustainable. Also, you would gain additional flexibility by paying the balance off. Now if you can find an investment instrument with a guaranteed 6% return and did not expect your income to improve for the same term, I would carry the balance.