SRS Using investments to pay debt

Discussion in 'On Topic' started by seismic, Jun 13, 2009.

  1. seismic

    seismic New Member

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    Not sure if this is the right forum or not, but here goes:

    So, I've got some investments. I've also got some credit card debt and my wife has student loans.

    The credit card debt:
    1/3rd @ 20% interest (used to be 12% :wtc:)
    2/3rd @ 0% interest for the next year, then 10% for the life of the balance

    Student loans:
    I believe half of them are at 6% and the other half at 10%

    I was thinking about taking some investment money out to pay off the credit card that is gaining interest--leaving the interest free balance alone for now.

    Is this a good idea, or is it stupid? I figure I'm not going to gain as much money as I'm going to pay in interest. Should I just take everything out of my investments and pay off as much debts as I can? Then I could use all my extra money to pay off the remaining debts until they're clear, then fill the investments back up.

    None of this is related to retirement, it's all in a brokerage account, which was a gift from my Father to use as a down payment on a house. At this point I'm not making anywhere near enough money to be living in a house, in fact, I'm living in a property of his and not paying rent. :hs:
     
  2. Diesel66

    Diesel66 My standards for women is like rent-a-centers stan OT Supporter

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    do you have a rainy day fund ? ~6 months of living expenses. If you do, then it's a good idea to at least get rid of that 20% loan. But if you don't have that savings, then you can be in deep shit if you lose your job or something
     
  3. seismic

    seismic New Member

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    I have $500 in a savings account that we use as the emergency fund, but these investments could also count as a rainy day fund...
     
  4. Diesel66

    Diesel66 My standards for women is like rent-a-centers stan OT Supporter

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    $500 is nothing. And you shouldn't count anything rosky as a rainy day fund.
     
  5. seismic

    seismic New Member

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    Well I've decided to move the investments to a short term mutual fund and cash out the remaining bonds that I have and add to it until I have about 6 months of earnings in it. Whatever's left over I'll use to pay the highest interest credit cards with.

    I'm going to keep the $500 as a sort of overdraft protection in case we need something and we're short on cash.
     
  6. OniMinion

    OniMinion ...recalls when this forum was actually about cars OT Supporter

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    One major car repair could easily clear that money!
     
  7. seismic

    seismic New Member

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    Ya, thankfully I have a cousin who's boyfriend is a mechanic and he's been helping with all the big repairs. We did our 120k mile service on our Volvo ($700 according to Midas) for $70. Next up is my 96 Integra which needs a timing belt, water pump, etc. for it's 180k mile service.

    If that $500 did get cleared out, we'd probably use some of the short term investment money, or possibly would be able to get help from parents.
     
  8. OniMinion

    OniMinion ...recalls when this forum was actually about cars OT Supporter

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    A lot of those investments have penalties for pulling out early. Make sure you are aware of what those are, and what the consequences would be.
     
  9. GregFarz78

    GregFarz78 New Member

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    $500 shit that wouldn't cover a month of utilities bills for me...how much debt are you talking on the CCs? I'd pay down the 20% one first, then put as much as you can into the other CC. Wouldn't worry about the student loan if its a small amount you have 10 years to pay it back and you can claim the interest on it.
     
  10. seismic

    seismic New Member

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    Well the $500 is just kind of a "whoops i'm short on cash and need to get groceries" overdraft protection kind of deal. We don't really count on it to do anything other than make sure we don't get overdraft fees if something small were to come up.

    We owe ~$2,400 on the interest bearing (20%) card, and ~$3,800 on the interest free (for a year) card.

    I've got ~$8,400 in the investment account right now. Which is almost 4 months of my wages. We just live off my income right now. So, we could pay off the credit cards easily with that, which would free up the $200-300/mo we've been paying on the cards. There's no minimum payment on the interest free card (been paying $50-100/mo) and about a $65 dollar minimum (been paying $100-300/mo) on the interest bearing card.

    My wife has been out of school for almost 6 years now, I think. We've been paying minimums, and have asked for an extension a few times. She has two student loans, one is government based and is somewhere around 5% interest and the other is private at around 10%. I don't remember the exact rates. I want to say there's between $20 and $30,000 there from her four years of school.

    For the short term investment, I don't see any fees. It's a short term growth bond fund (USSBX).
     
    Last edited: Jun 16, 2009
  11. 60druidgurubash

    60druidgurubash OT Supporter

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    unless you can make more than 20% after taxes on your investments then obviously you should pay off the credit card.
     
  12. vodkacollins

    vodkacollins New Member

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    any way to combine the balance's of the 2 card and put it all on the interest free for a year card? that would help if you could put big chunks of money straight towards that
     
  13. seismic

    seismic New Member

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    No, but I've tried. The card with the interest free period is close to it's maximum with it's current balance. I chose to just move that instead of splitting up the balance on multiple transfers to different cards because the card I chose will end up having a 10% APR after the promotional period ends.

    The other cards we have are all at 0 balance, but if we were to transfer to those cards, once the 0% was over, we'd most likely be paying 20% interest or higher.
     
  14. seismic

    seismic New Member

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    I thought it was that simple too, but then one needs to factor in a "safety net" in times like this. I don't realistically think there's any chance of me losing my job. However, my parents are usually offering to help financially, and soon, they will be in a position where helping would be very difficult.

    So I think I'm probably going to have to sacrifice some income for insurance of not going into deeper debt if I were to lose my job.
     
  15. calisteph6

    calisteph6 Active Member

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    the dumbed down answer is that you should use investments to pay the debts that are accruing more interest than the investments are making.

    ex. investment is earning 5%
    CC #1 is accruing interest of 20%
    CC #2 is accruing interest of 3.5%

    so your soultion would be pay off CC #1 first and pay the minimum on CC #2. Reasoning: you pay more interest on CC#1 than you earn on your investment, but you earn more on the investment than CC#2. You will have to re-do your approach several times a year.
     
  16. calisteph6

    calisteph6 Active Member

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    and personally, I would say paying off CC's comes before an emergency fund. You can always use the CC again, but you save money in the long run by paying them down early, you gain little by having a large emergency fund and NOT paying off the debts early.
     
  17. seismic

    seismic New Member

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    What if my credit rates get lowered?

    My main concern is not having the income to pay back the cards in a reasonable timeframe. If I use the investments now to pay off the cards, then have no savings left and lose my job, I could potentially run up more on the cards than I could pay back in a reasonable timeframe. Which would causing the interest from those future charges to cost more than the interest I would have saved by paying them off now.

    Right now I'm paying $40/mo in interest on the two balances put together because one is at 0%.

    What if I lost my job, had no savings (because I paid off the debts) and charged up $8,000? There's $160/mo not counting the compounding.

    Then again, if I paid off the credit card debts I could put the money I would have been paying on the cards into savings, and hopefully establish a six-month fund in a year or two.

    Too much thinking...
     
  18. Spaceering

    Spaceering I bite.

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    well you dont have to pay them off completely, just make your emergency fund smaller. Shit happens either way, so just take it as it comes. I dont have much debt, but when i do have some, I just try to pay off as much as I can as fast as I can :eek3:



    I never really have an emergency fund, because for me when emergencies happen, I never have enough in a fund to cover the cost anyway
     
  19. GregFarz78

    GregFarz78 New Member

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    The other side of this issue is you and your wife really need to learn how to budget with that much debt and little to no emergency fund you're spending way beyond your means. I would pay both cards off completely then cut them up. You'll still have a little bit left in your investment account. Also consolidate the school loans.
     
  20. seismic

    seismic New Member

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    We've only charged $100 in the last year or more. We used to have a lot more debt than this. Plus, we're living with no extra income from the family, which we used to have. At this point, we're just digging out of the hole.
     
  21. D7

    D7 OT Supporter

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    Dave Ramsey has a great get out of debt and pay off your mortgage early program called Financial Peace University. Check out his website and see what is offered in your area or do the online course. Suze Orman also has something similar but I'm not familiar with it other than I know someone who did it and has been pleased.

    One of my favorite pieces of Dave Ramsey's course is when he talks about the credit card people and how they harass their clients when things go bad. That doesn't apply to you in that way, but, I would turn the tables and be persistent about getting them to reduce the 20% interest rate : call them every week and ask them to lower it.

    Personally, I wouldn't use assets to reduce debt so that would be my advice to you. Figure out how to tighten your budget or bring in more income and get the debt paid off.
     
  22. METALLlC BLUE

    METALLlC BLUE New Member

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    I applied for Credit Cards with zero interest rates when I had high debit. Then when I got the card, I transferred money from high interest cards to the zero interest card. I then paid it off consistently using slightly higher than the minimum.
     
  23. seismic

    seismic New Member

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    Thanks! Suze Orman was the reason I asked the question in the first place. Basically her whole idea about six months ago was to use all available money to pay off debts before having a savings, but she's since changed that to building a six month savings fund first and then paying off debts.

    I've tried asking the card company to lower the interest rate. They basically told me "them's the breaks" and wouldn't do anything about it. I've had the card 8 years and it has a $25k limit. It's a great card and they've always refunded late fees, so I thought they would lower the limit, but that didn't work. The two late fees, over eight years, that I had were from the payments not being mailed on time.
     
  24. seismic

    seismic New Member

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    I've thought about that too, but I decided against it because I've already got 4 cards in my credit history, and I thought that was kind of high. Only two of them are active.
     
  25. seismic

    seismic New Member

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    I lucked out. I have had savings bonds sitting in my safe that my Dad has been purchasing on my behalf since about a year after I was born. We cashed some when I was around 16 to start my initial investment, which was around $12k--now $8k :wtc:--and I still have some left over.

    My conservative estimate for the bonds that I have left to cash is about $13.5k. I'm going to cash everything that's older than five years, which is the majority of it. That should be enough to pay off the cards and double the emergency fund, which means all my extra money can go to starting a college fund for my one year old, retirement, and student loans. :) :)

    Thanks for all the advice guys! I feel like I won the lottery. I totally forgot about these bonds. Definitely makes me appreciate the thought my Dad had, thinking ahead of time!!
     

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