Credit Cards Paid Off! Now what?

[daisymae1]

I have never posted on here, but my husband and I got a lot of information off of here and I am happy to say that after 6 months of diligence we paid off $13,000 in credit card debt! Now I have a question

Now that our high interest debt is gone we are left with 2 car loans and 3 student loans. All of these loans have relatively small balances and low interest rates, but the minimum payments on all of them eat up $1100/month out of our budget, and if we continue paying $2000 - $2500 extra each month on debt we can have them all paid off by the end of this year (7 more months). BUT, we only have $10,000 in savings currently so I am wondering what you would do, is it smarter to cut back our repayment plan to an extra $1000 per month and build up our emergency fund? Or do we power through to the end of they year with our measly savings and get all of our loans (less our mortgage) paid off?

Thank you!

[Manuel]

Hi daisymae1,

First of all, WOW! and congratualation. You can be really proud of your achievement.
This is a good inspiration for everybody.

To me, I would power throught to the end of the year and kill those loans . I am Ok with risk.

But, it always depens on the level of security of your sources of income and your monthly expenses.
If you have solid sources of income, your $10,000 in savings would cover up most of the short-term emergencies.
And you will be able to get through that 7 months.

But, if you have risky sources of income you have to keep that in mind, stay patient and play safe.

Hope that help.

Good luck!

[frugalwarrior2]

good job on killing those balances. Now get rid of those loans. Which one makes you the maddest. Attack that one. And keep going. $10,000 is a good base and if you kill those nasty loans you will need less per month if a job loss or medical emergency should hit.

[daisymae1]

Thanks! That is my gut instinct as well. Our income is pretty solid especially because it comes from three separate sources and we can cover our monthly expenses even if we lose any one of those income sources. We are so used to living on a tight budget now that my inclination was to just eliminate the rest of the debt. It will feel so great to be down to only our mortgage, and because we are relatively high income we can build our savings up quickly next year.

Thanks again! Lurking on this forum has probably saved my marriage. We are finally on the same page and even though it has been hard to stop keeping up with all of our friends and neighbors I can see the light at the end of the tunnel and it is worth it.

[ilovechocolate]

daisymae, are you also saving some regularly for retirement? You have a great savings of $10K but no matter your age, it's never too early to start saving for the day when you won't be employed.

[daisymae1]

We are saving toward retirement, but not enough. We put about $1200/month into retirement accounts and we would like to at least double that figure once our debt is paid off. We are in our early 30s so we have time but I can feel it sneaking up and we currently only have about $100k saved.

[Manuel]

We put about $1200/month into retirement accounts and we would like to at least double that figure once our debt is paid off.

I think that you have the right mindset and that this is the way to go.

7 months from now you'll be able to increase that monthly amount for your retirement and 7 months can go really fast when you stick to a well designed plan.

Rgds,

[old guy]

BUT, we only have $10,000 in savings currently

"Risk" is the key - a single worker could lose 100% of income with a job loss. A couple would lose about half that much. The farside is the risk is having too much EF, eg, a $100,000 savings account (dead money) means that, 30 years from now, your investment funds will be about $2,00,000 less - a big price to pay foe 'safety'.

We keep our EF capped at about $5000 - that covers a car repairs, an AC, a furnace, washer/dryer - the usual stuff. But if a BIG emergency happened we would need to sell some shares from our Taxable Fund - that would be major illness, disability, death of spouse, etc. Some things aren't as major as people imagine - eg, a totaled/stolen car, you make a cc down payment on a new car and wait for the insurance check, not much EF needed.

saving toward retirement, but not enough. We put about $1200/month into retirement account

s

First, I wouldn't think of it as 'retirement' account, before those were invented we called it 'life savings", a 'retirement fund' is way to abstract for young people, there is almost always a need that is more urgent that beckons your income stream. Second, be aware of the GOAL. The goal is not to be debt-free, the goal is to apply your income to its "highest and best use".
Your current $1200/m, invested at 11%/yr (the historic market average) will be $3,200,000 in 30 yrs. Is that close to your goal? More, less? Do you have 30 yrs? Or are you already age 55? The point is - you may already have the right plan.

As for your remaining loans - it depends on the rate and the term, if the rate is under 6% and the term is over 5 years, I would keep the loans, and instead of prepaying, direct that income stream to building wealth (highest and best use).

[daisymae1]

Thanks old guy that is actually kind of why we are struggling. Our student loans are only at a 5% interest rate and our car loans are both 0%. We are relatively young (34) and have over 30 years to retirement at 65. We have struggled with what amount we need in our IRAs because we just don't know how to calculate how much money we will need in the long run.

We do want to have about $50k in an easily accessible emergency fund because my husband works in a volatile industry (he is a pilot) so we like having a cushion that we could draw from without penalty.

I am new to the forum, is there a board where people talk about saving and investing? I know we should be doing more, and I want to set a good financial example for our kids. We both came from upper middle class families where money was never an issue, but our parents all had unhealthy relationships with money and so we feel lost in the world of finance.

[old guy]

Here's a site that may help -
Political Calculations: The S&P 500 at Your Fingertips

Check a few 30-yr blocks of time, they average about 11%/yr. You'll seldom find a 30-yr block that goes down to 9%/yr - and some 30-yr blocks average 14%/yr - either answer is acceptable, your family will do great if you happen to hit a 30-yr block. But I remember agonizing your question back in 1963 when I got my engineering degree, ie "but will MY 30-year block work out?" Fortunately, I invested incrementally & steadily (even thru the Carter years, lol) for 35 years and we built a major portfolio.

We have struggled with what amount we need in our IRAs because we just don't know how to calculate how much money we will need in the long run.

We avoided the usual calculation about outliving your money, using it all, dying broke - instead, we put away enough for 'in perpetuity'. Ie, we can live off of the interest, leave some in for seed money to offset inflation, and our account should keep growing to the end of our lives.

Hopefully, one of you is good with math and probabilities, if you can perform the math that gives you confidence in your decisions and makes it much easier to stick with your plan during the negative years. (Pilots spend a lot of time on risk assessment and risk management, in fact risk management is a large part of the job).

about $50k in an easily accessible emergency fund because my husband works in a volatile industry (he is a pilot) so we like having a cushion that we could draw from without penalty.

Don't think of your funds as 'only IRA-type stuff, locked away for 30 yrs'. We invest mostly in the SP500 Index Fund. But we spread among all 3 tax classifications - taxable, posttax (roth), pretax(IRA\401k). The US Tax Code continually changes, you cannot predict the 2050 Tax Code - it could be Flat Tax, VAT tax, Fed Sales Tax, Fair Tax, or anything else. But you can diversify the tax status of your money, that way, no matter what the Tax Code becomes, you'll only be wrong with part of your money, never 100%. By the way, if you put your $50k in an SP500 Fund in a taxable account, it is available in one day, no penalty - and it grows tax deferred.

[PlainCash4]

Great job !. Just put what you can away for a rainy day.

[CPA-Kim]

Pay off student loans ASAP. Keep 0 percent loans (free money) and plow the rest into retirement...or if you believe you need more liquid savings for something you plan on buying in the future...savings.