How to dispose of semi-large pile of money
October 31, 2015 10:01 PM Subscribe
We're about to come into a somewhat large sum of money. We've never really had money before, and we're not sure how to manage it. We've got a variety of debt, and a strong desire for a house. What to prioritize?
We're about to have around $150,000 land in our checking account (post-withholding, so mostly free and clear of taxes?) I've got about $100,000 racked up in U.S. federal student loans, which are currently consolidated at a 5.5% interest rate. We've also got about $15,000 in credit card debt at various crappy interest rates spread out across 7 accounts, and about $18,000 more on a car loan. Our income is about $5,400/mo right now; we don't spend it particularly wisely, but we pay a bit more than the minimum on our accounts and live comfortably. There's usually not much left over at the end of a typical month, though. It's likely our income will be more like $6,500/mo before the year is out. Credit rating is currently in the 650s.
The idea of wiping out all of our debt in one fell swoop is extremely tempting, but right now we're two parents and a baby cooped up in a tiny apartment and the desire for a house and a yard is strong. Something like what we would want would go for about $350,000 to $400,000.
Right now our thinking is to (a) wipe out the credit card debt, (b) continue paying on the car and student loans, (c) use a chunk of the rest of the windfall as a down payment on a house, and (d) evaluate what to do with the rest once we're safely ensconced in a house. Does this sound like a reasonable plan of action? What should I be doing with the money until I'm ready to spend it? It doesn't seem normal or particularly safe to have that much just lying around in a checking account that's linked to my debit card.
We're about to have around $150,000 land in our checking account (post-withholding, so mostly free and clear of taxes?) I've got about $100,000 racked up in U.S. federal student loans, which are currently consolidated at a 5.5% interest rate. We've also got about $15,000 in credit card debt at various crappy interest rates spread out across 7 accounts, and about $18,000 more on a car loan. Our income is about $5,400/mo right now; we don't spend it particularly wisely, but we pay a bit more than the minimum on our accounts and live comfortably. There's usually not much left over at the end of a typical month, though. It's likely our income will be more like $6,500/mo before the year is out. Credit rating is currently in the 650s.
The idea of wiping out all of our debt in one fell swoop is extremely tempting, but right now we're two parents and a baby cooped up in a tiny apartment and the desire for a house and a yard is strong. Something like what we would want would go for about $350,000 to $400,000.
Right now our thinking is to (a) wipe out the credit card debt, (b) continue paying on the car and student loans, (c) use a chunk of the rest of the windfall as a down payment on a house, and (d) evaluate what to do with the rest once we're safely ensconced in a house. Does this sound like a reasonable plan of action? What should I be doing with the money until I'm ready to spend it? It doesn't seem normal or particularly safe to have that much just lying around in a checking account that's linked to my debit card.
Your current debt to income ratio will not allow you to pay for a $400,000 home, even if you put $100K down - you still won't have the income to cover your debt payments + the mortgage, taxes and maintenance.
Pay off your debt CC and car debt (an astounding $35K). Save $30K (6mos expenses) for an emergency fund. Save $30K for your future house, once your income is higher. Put the remaining money toward the remaining school debt. With the money you're not sending to the CC and car loan companies, continue saving for a house.
posted by samthemander at 11:18 PM on October 31, 2015 [16 favorites]
Pay off your debt CC and car debt (an astounding $35K). Save $30K (6mos expenses) for an emergency fund. Save $30K for your future house, once your income is higher. Put the remaining money toward the remaining school debt. With the money you're not sending to the CC and car loan companies, continue saving for a house.
posted by samthemander at 11:18 PM on October 31, 2015 [16 favorites]
That student loan debt is cheap debt, all things considered.
Pay down high interest debt immediately.
Avoid capital purchases.
Liquid capital is freedom. Say you wanted to start a new business. If you spent all of your money to pay off that student loan debt, now you'd have to go out on the market to get a loan for your business. That student loan is already manageable, plus you have cash you can work with on your own terms.
Liquid capital is freedom. Cheap debt is manageable.
posted by yesster at 11:57 PM on October 31, 2015 [4 favorites]
Pay down high interest debt immediately.
Avoid capital purchases.
Liquid capital is freedom. Say you wanted to start a new business. If you spent all of your money to pay off that student loan debt, now you'd have to go out on the market to get a loan for your business. That student loan is already manageable, plus you have cash you can work with on your own terms.
Liquid capital is freedom. Cheap debt is manageable.
posted by yesster at 11:57 PM on October 31, 2015 [4 favorites]
Once you've paid off your high interest credit cards, your credit score will go up dramatically, due to "credit utilization" portion of credit scoring.
Use that to your advantage if you do decide to buy property.
Keep a business mindset about everything. That cash stash you're getting is something you should be very careful with. Use other peoples money as long as it is inexpensive to do so. Let a bank take the risk on your future property value, while you pay a low interest mortgage rate at the same time you have lots of cash on hand (in a different bank).
posted by yesster at 12:17 AM on November 1, 2015 [4 favorites]
Use that to your advantage if you do decide to buy property.
Keep a business mindset about everything. That cash stash you're getting is something you should be very careful with. Use other peoples money as long as it is inexpensive to do so. Let a bank take the risk on your future property value, while you pay a low interest mortgage rate at the same time you have lots of cash on hand (in a different bank).
posted by yesster at 12:17 AM on November 1, 2015 [4 favorites]
take a slim percentage (maybe three or as much as five) and blow it, have fun with it. Because it's a windfall. These things don't happen very often.
Otherwise, all the prudent things everybody else is saying.
posted by philip-random at 12:39 AM on November 1, 2015 [6 favorites]
Otherwise, all the prudent things everybody else is saying.
posted by philip-random at 12:39 AM on November 1, 2015 [6 favorites]
I have to disagree with some of the people here. That student loan, while at a low interest rate, is nondischargeable debt, which means even if you declare bankruptcy, the debt continues. Bad things happen sometimes, which can blow up all kinds of financial plans. With the student loans gone, the biggest financial anvil wont be hanging over your head. Use the rest to pay off/down the highest rate cards, and call the others to see if they'll lower their rates. Stash the savings into an emergency/down payment fund.
posted by Marky at 1:24 AM on November 1, 2015 [4 favorites]
posted by Marky at 1:24 AM on November 1, 2015 [4 favorites]
A flat-rate financial advisor will be your best initial use of your windfall. This is a potentially life-changing amount of money, and you really do need professional advice.
posted by yesster at 1:28 AM on November 1, 2015 [6 favorites]
posted by yesster at 1:28 AM on November 1, 2015 [6 favorites]
SWAN (Sleep Well at Night) Program
1) Pay the credit card and car loan
2) Put 9 months equivalent to your after tax income into a money market fund
3) Apply the rest to your student loans.
I recognize that it is not as exciting as some alternatives. Zero debt and money in the bank in case things go south is how you live a relatively stress free financial life.
posted by jcworth at 1:59 AM on November 1, 2015 [11 favorites]
1) Pay the credit card and car loan
2) Put 9 months equivalent to your after tax income into a money market fund
3) Apply the rest to your student loans.
I recognize that it is not as exciting as some alternatives. Zero debt and money in the bank in case things go south is how you live a relatively stress free financial life.
posted by jcworth at 1:59 AM on November 1, 2015 [11 favorites]
i don't understand why people aren't, in general, suggesting you pay off the student debt. 5% is not cheap right now. you're unlikely to get a safe investment that pays much better than that.
i'd pay off all the debts and start being more careful with the wage you have. how come you have so much debt already? if you want a house, you need to start saving.
posted by andrewcooke at 2:48 AM on November 1, 2015 [27 favorites]
i'd pay off all the debts and start being more careful with the wage you have. how come you have so much debt already? if you want a house, you need to start saving.
posted by andrewcooke at 2:48 AM on November 1, 2015 [27 favorites]
I think it would be a mistake to buy a house right now and add to your debt load. I think you should pay off your student loans and your credit card debt and your car loan. Getting out from under all that debt will give you more money every month, since bits of it won't be continually siphoned to pay for those things, and I think it would be easier to get a mortgage for a house if you aren't carrying such a big debt load. And if you pay off all of your debts, you'll still have $17,000 left over, which you can invest in a Vanguard index fund. Don't touch that money and let it grow. In ten years, you'll have a pretty good emergency fund. In twenty years, it will be even better.
posted by colfax at 4:25 AM on November 1, 2015
posted by colfax at 4:25 AM on November 1, 2015
Pay off all the debts.
Continue to live at the same lifestyle you have been living, but now instead of making payments on your debt bank the amount you would have been using to pay them off.
Only then start exploring options for upgrading your living arrangements.
Do not get sucked into the American Dream of having a house in the 'burbs with a yard and a mortgage. There are now many options opening up to you. Consider for example that you could change your jobs to telecommute ones and buy a much, much less expensive and much more spacious rural property if your lifetime happiness would be enhanced by owning your own land.
Consider that you might now be able to afford to send one of you for some training to get into a better employment position.
Not being in debt is the equivalent of not being a serf. Once the debts are paid you have options that you never even dreamed of. Wait awhile before deciding which option to pick. Do your damnedest to avoid choosing more debt and indentured servitude again.
And finally - where did that money come from? Remember to enjoy gratitude towards whatever good humans made your windfall possible, whether they were the framers of law, or an ancestor who provided for her descendants or something else. Someone somewhere had your back.
posted by Jane the Brown at 4:38 AM on November 1, 2015 [9 favorites]
Continue to live at the same lifestyle you have been living, but now instead of making payments on your debt bank the amount you would have been using to pay them off.
Only then start exploring options for upgrading your living arrangements.
Do not get sucked into the American Dream of having a house in the 'burbs with a yard and a mortgage. There are now many options opening up to you. Consider for example that you could change your jobs to telecommute ones and buy a much, much less expensive and much more spacious rural property if your lifetime happiness would be enhanced by owning your own land.
Consider that you might now be able to afford to send one of you for some training to get into a better employment position.
Not being in debt is the equivalent of not being a serf. Once the debts are paid you have options that you never even dreamed of. Wait awhile before deciding which option to pick. Do your damnedest to avoid choosing more debt and indentured servitude again.
And finally - where did that money come from? Remember to enjoy gratitude towards whatever good humans made your windfall possible, whether they were the framers of law, or an ancestor who provided for her descendants or something else. Someone somewhere had your back.
posted by Jane the Brown at 4:38 AM on November 1, 2015 [9 favorites]
First, be 100% sure you won't owe more tax than you think. Bonuses are typically withheld at a 25% flat rate, which could be more or less than you need. An hour with an accountant will answer this and any other tax-related questions and will be well worth it.
Second, definitely pay off the credit cards.
Third, set aside a good chunk for your future. I'm assuming you're relatively young now. $50k set aside for your retirement will turn into a much larger sum of money once you're ready to stop working, even if you never add another penny.
Fourth, make sure you have an emergency fund of at least three months of expenses.
Lastly, pay off debt with whatever is left.
posted by zrail at 4:56 AM on November 1, 2015 [5 favorites]
Second, definitely pay off the credit cards.
Third, set aside a good chunk for your future. I'm assuming you're relatively young now. $50k set aside for your retirement will turn into a much larger sum of money once you're ready to stop working, even if you never add another penny.
Fourth, make sure you have an emergency fund of at least three months of expenses.
Lastly, pay off debt with whatever is left.
posted by zrail at 4:56 AM on November 1, 2015 [5 favorites]
I'm in the camp of "pay off all the debt." I'd personally rather have no debt and then have to build an emergency saving account from scratch, rather than keep the debt in order to have the emergency savings immediately, but I know opinions vary on this. The bottom line is that (as you well know) your financial picture currently isn't great, with significant debt and not much savings, so the real key is to not have this situation repeat once the windfall has been used.
And do check the tax situation before committing the money -- it would really suck to get to tax time, find out you owe a big chunk of change, and have nothing in hand to pay that bill.
Something like what we would want would go for about $350,000 to $400,000.
I earn more than you and have a mortgage on a cheaper house than that, and there's no way I would be comfortable with that kind of obligation even with your windfall. Houses are expensive and come with non-negotiable costs, like furnaces and roofs, while a big mortgage payment takes a lot of flexibility out of your monthly income. If you are feeling down because you are comparing yourself to friends who are in fancier houses, remember that they may be there because of family support, rather than because an expensive house is independently viable at their current income level.
posted by Dip Flash at 5:23 AM on November 1, 2015 [5 favorites]
And do check the tax situation before committing the money -- it would really suck to get to tax time, find out you owe a big chunk of change, and have nothing in hand to pay that bill.
Something like what we would want would go for about $350,000 to $400,000.
I earn more than you and have a mortgage on a cheaper house than that, and there's no way I would be comfortable with that kind of obligation even with your windfall. Houses are expensive and come with non-negotiable costs, like furnaces and roofs, while a big mortgage payment takes a lot of flexibility out of your monthly income. If you are feeling down because you are comparing yourself to friends who are in fancier houses, remember that they may be there because of family support, rather than because an expensive house is independently viable at their current income level.
posted by Dip Flash at 5:23 AM on November 1, 2015 [5 favorites]
I am also in the "NO MORE DEBT" camp.
I haaaaaaaaaate debt. I hate owing people money, even if I know I have the cash flow to pay it back according to the contract. Hate it.
We came into a chunk of money this year (savings bonds I didn't know about, inheritance), and we paid off student loans. The whole idea of "I will always owe this money, I can't sell the house/car/stuff and pay it back, I have to ACTUALLY pay it back" was more than I wanted to deal with. Yes, it would've been nice to finish part of the basement, or upgrade the car, or something, but dang it's nice to not have that debt on our backs.
What was your plan before this money showed up?
posted by Ms Vegetable at 5:31 AM on November 1, 2015 [1 favorite]
I haaaaaaaaaate debt. I hate owing people money, even if I know I have the cash flow to pay it back according to the contract. Hate it.
We came into a chunk of money this year (savings bonds I didn't know about, inheritance), and we paid off student loans. The whole idea of "I will always owe this money, I can't sell the house/car/stuff and pay it back, I have to ACTUALLY pay it back" was more than I wanted to deal with. Yes, it would've been nice to finish part of the basement, or upgrade the car, or something, but dang it's nice to not have that debt on our backs.
What was your plan before this money showed up?
posted by Ms Vegetable at 5:31 AM on November 1, 2015 [1 favorite]
If you want a house and a yard, have you considered renting one? Then you're not on the hook for another massive debt, and you're not subject to unexpected financial shocks (roof dies, heater dies, etc.) that you may be too stretched by your mortgage to handle.
posted by escabeche at 5:39 AM on November 1, 2015 [9 favorites]
posted by escabeche at 5:39 AM on November 1, 2015 [9 favorites]
A credit score of 650 is rather low for mortgage purposes... A mortgage lender will not see you as a good risk, and you could be very disappointed to find you're rejected for a mortgage if you apply now. Also, if you get your credit score up to the 800 range, your interest rate will be lower. In fact, your car loan might have been at 0% had you purchased the vehicle with a higher credit score. The best way to raise your score is to pay off the credit card debt completely as others have said (and not incur any more -- make it part of your lifestyle to not charge more than you can afford, and pay your bills in full every month!), plus have a decent amount of liquid savings. I understand what some posters are saying about student loans being non-dischargeable debt, however I would still put complete repayment of them near the bottom of the priority list in favor of setting up savings (after paying off the credit cards and car note). I totally second edeezy's and samthemander's ideas. With the student loans being your only outstanding debt, you can start doing some serious saving, and once the loans are paid off, you will be well-situated to make a down payment and apply for a mortgage.
posted by RRgal at 5:41 AM on November 1, 2015 [1 favorite]
posted by RRgal at 5:41 AM on November 1, 2015 [1 favorite]
Many others have good advice for you: put away some emergency savings, pay off your car loan and credit card debt, and then - seriously - pay off as much of that student debt as possible. If you were more disciplined with money generally, then sure, it might be smart to invest the remainder rather than paying down your (relatively) low-interest student loans, but I don't think that's a good idea for you.
You don't say how much you're spending on your debt every month, but my guess is it's significant - certainly hundreds and hundreds of dollars - and would go a long way toward moving you into a bigger rental. Buying a house would not be a responsible choice, and I agree with others that you're unlikely to get that mortgage anyway.
You've heard all that before, but here's what I really came here to say. Something about your phrasing threw me:
[A house] like what we would want would go for about $350,000 to $400,000.
Yikes. You need to reframe your thinking.
I totally get it, thinking that way. I would love a single family house in my neighborhood, and those start at about $600k if you get a deal. But just because that's what I want - a 3/2 house on the street where I live - doesn't mean I can afford it.
You can't think about large expenditures that way - "well, the thing I want costs $x, so I will pay $x." I wonder if that's also how you ended up with an $18k car loan - presumably there exist cheaper cars that would meet your needs, but the one you wanted was $25k (or whatever). Money doesn't work like that.
Instead, it's this: "Taking into account my present financial situation, the long-term costs of home ownership, and what I know about my own spending habits, I can afford to spend $x on a monthly mortgage payment." And then you find the house that best meets your needs within that price range. It's not really about the house that you want, it's about the house that is most acceptable to you within your price range.
posted by goodbyewaffles at 6:31 AM on November 1, 2015 [26 favorites]
You don't say how much you're spending on your debt every month, but my guess is it's significant - certainly hundreds and hundreds of dollars - and would go a long way toward moving you into a bigger rental. Buying a house would not be a responsible choice, and I agree with others that you're unlikely to get that mortgage anyway.
You've heard all that before, but here's what I really came here to say. Something about your phrasing threw me:
[A house] like what we would want would go for about $350,000 to $400,000.
Yikes. You need to reframe your thinking.
I totally get it, thinking that way. I would love a single family house in my neighborhood, and those start at about $600k if you get a deal. But just because that's what I want - a 3/2 house on the street where I live - doesn't mean I can afford it.
You can't think about large expenditures that way - "well, the thing I want costs $x, so I will pay $x." I wonder if that's also how you ended up with an $18k car loan - presumably there exist cheaper cars that would meet your needs, but the one you wanted was $25k (or whatever). Money doesn't work like that.
Instead, it's this: "Taking into account my present financial situation, the long-term costs of home ownership, and what I know about my own spending habits, I can afford to spend $x on a monthly mortgage payment." And then you find the house that best meets your needs within that price range. It's not really about the house that you want, it's about the house that is most acceptable to you within your price range.
posted by goodbyewaffles at 6:31 AM on November 1, 2015 [26 favorites]
With your current financial situation, this money sn't enough to get you in a $350k house.
Most important, figure out your tax liability for this money. You don't want a surprise on your taxes this year.
Pay off the credit cards and stop using them.
Pay off the car loan.
Put $25k in savings as an emergency fund.
Put the rest on student loans.
Figure out a budget and start spending wisely.
Finish paying off the student loans and start saving for a house.
Find a better rental in the meantime if you need more space.
posted by LoveHam at 6:39 AM on November 1, 2015 [5 favorites]
Most important, figure out your tax liability for this money. You don't want a surprise on your taxes this year.
Pay off the credit cards and stop using them.
Pay off the car loan.
Put $25k in savings as an emergency fund.
Put the rest on student loans.
Figure out a budget and start spending wisely.
Finish paying off the student loans and start saving for a house.
Find a better rental in the meantime if you need more space.
posted by LoveHam at 6:39 AM on November 1, 2015 [5 favorites]
I'll be the dissenting voice.
Buy a house!
First, you do need a financial planner and a mortgage person.
And absolutely pay the credit cards yesterday and keep a big emergency fund. Your credit score will probably get into the 700s and you will get a good mortgage.
I might put a chunk against student loans, but a portion of that is tax deductible. And there are ways to minimize your payments on those. (Income based, etc., but talk to the financial planner.)
If you pay all of the student loans, you can't buy a house.
Here's the thing about the house:
- owning a home will build wealth for you over your lifetime
- mortgage rates are at near historic lows
- a friend's financial advisor told her to buy a more expensive home because of the tax advantages of having a mortgage and the upside of the current real estate market
If the real estate market continues to improve and rates rise, you could be priced out in the future. And you may qualify for a low downpayment mortgage, so you may be able to keep more of that $150k.
Don't buy too much house, and don't buy one that needs lots of repairs, but buy now since you can. You should be able to find a house with a payment not too far above your current rent (unless you somehow have a really cheap rental).
And once you have a mortgage you have stable monthly housing costs while your income rises.
If you are risk adverse to the real estate market, ask your agent which neighborhoods were least hit by the last downturn and buy in those areas.
My back of envelope budget:
$33k debt
$50k savings
$40k house downpayment (could be less, ask loan people)
Send the remainder to the student loans as your financial advisor specifies
Have fun!
posted by littlewater at 6:55 AM on November 1, 2015 [1 favorite]
Buy a house!
First, you do need a financial planner and a mortgage person.
And absolutely pay the credit cards yesterday and keep a big emergency fund. Your credit score will probably get into the 700s and you will get a good mortgage.
I might put a chunk against student loans, but a portion of that is tax deductible. And there are ways to minimize your payments on those. (Income based, etc., but talk to the financial planner.)
If you pay all of the student loans, you can't buy a house.
Here's the thing about the house:
- owning a home will build wealth for you over your lifetime
- mortgage rates are at near historic lows
- a friend's financial advisor told her to buy a more expensive home because of the tax advantages of having a mortgage and the upside of the current real estate market
If the real estate market continues to improve and rates rise, you could be priced out in the future. And you may qualify for a low downpayment mortgage, so you may be able to keep more of that $150k.
Don't buy too much house, and don't buy one that needs lots of repairs, but buy now since you can. You should be able to find a house with a payment not too far above your current rent (unless you somehow have a really cheap rental).
And once you have a mortgage you have stable monthly housing costs while your income rises.
If you are risk adverse to the real estate market, ask your agent which neighborhoods were least hit by the last downturn and buy in those areas.
My back of envelope budget:
$33k debt
$50k savings
$40k house downpayment (could be less, ask loan people)
Send the remainder to the student loans as your financial advisor specifies
Have fun!
posted by littlewater at 6:55 AM on November 1, 2015 [1 favorite]
Is your monthly income before or after taxes? If it's before, then you need to seriously reconsider how much house you can afford.
In your situation, I would pay off the credit card debt and the student loan debt. The interest rate on the student loan is higher than a mortgage rate and with the level of debt you have, it's like having a mortgage. I would keep the car debt though so I would have an ample emergency fund. That will leave you about $32,000 left for an emergency fund. After that, I would start saving for a down payment on a house. Take what you would have been paying each month on your student loan and credit card and have it automatically go into a hidden account for your down payment.
posted by parakeetdog at 8:11 AM on November 1, 2015
In your situation, I would pay off the credit card debt and the student loan debt. The interest rate on the student loan is higher than a mortgage rate and with the level of debt you have, it's like having a mortgage. I would keep the car debt though so I would have an ample emergency fund. That will leave you about $32,000 left for an emergency fund. After that, I would start saving for a down payment on a house. Take what you would have been paying each month on your student loan and credit card and have it automatically go into a hidden account for your down payment.
posted by parakeetdog at 8:11 AM on November 1, 2015
Do. Not. Buy. A $350-400K house at this time, with your income. That's crazy.
I have owned two homes already. I purchased the first one (a condo) for $185K when I was making $7500/mo. I rented out one of the rooms to a roommate, and turned around and used the rent for part of my mortgage, taxes and monthly assessment. My new husband and I sold that condo and used the investment plus appreciation to purchase a fixer upper with a yard.
It is tempting to think "Wow! I could maybe just leap over all of the incremental saving and scrimping and live in my dream house and..."
Nope. Stop. I would definitely pay off the car and the credit card debt, and avoid running up more credit card debt. Paying off the student loans? Well...hmm. It would depend upon if I could invest in something that would make more interest than I was paying in student loan interest. In this housing market, I am unsure of the reality of that.
A $40K downpayment is 20% of a $200K house/condo. We wanted our downpayment to be 20% of the cost of our house so we could avoid paying PMI. And we wanted our mortgage to be no more than 1/3-1/2 of our NET income per month. Could we have lived in a fancier house/neighborhood starting years ago? Of course. Would we have paid the bank more than our house was worth (when the real estate market slipped down) and have gotten ulcers/sleepless nights from the worry? I know from our personalities that we would have. We've stayed financially secure thus far because we have been conservative, and we enjoy our lives without fear of debt hanging over our heads. It's a very good feeling. Especially with kids.
YMMV.
posted by jeanmari at 8:25 AM on November 1, 2015 [6 favorites]
I have owned two homes already. I purchased the first one (a condo) for $185K when I was making $7500/mo. I rented out one of the rooms to a roommate, and turned around and used the rent for part of my mortgage, taxes and monthly assessment. My new husband and I sold that condo and used the investment plus appreciation to purchase a fixer upper with a yard.
It is tempting to think "Wow! I could maybe just leap over all of the incremental saving and scrimping and live in my dream house and..."
Nope. Stop. I would definitely pay off the car and the credit card debt, and avoid running up more credit card debt. Paying off the student loans? Well...hmm. It would depend upon if I could invest in something that would make more interest than I was paying in student loan interest. In this housing market, I am unsure of the reality of that.
A $40K downpayment is 20% of a $200K house/condo. We wanted our downpayment to be 20% of the cost of our house so we could avoid paying PMI. And we wanted our mortgage to be no more than 1/3-1/2 of our NET income per month. Could we have lived in a fancier house/neighborhood starting years ago? Of course. Would we have paid the bank more than our house was worth (when the real estate market slipped down) and have gotten ulcers/sleepless nights from the worry? I know from our personalities that we would have. We've stayed financially secure thus far because we have been conservative, and we enjoy our lives without fear of debt hanging over our heads. It's a very good feeling. Especially with kids.
YMMV.
posted by jeanmari at 8:25 AM on November 1, 2015 [6 favorites]
A financial guy I knew briefly said to always take care of debt first, and he had a good point that drove it home for me:
Your average debt charges between 6-25% interest. Your average savings account only gives 1% interest. So if you pay off your debt, that's kind of a way to get a 25% return on your interest (because that's less money you'd need to be paying in future) rather than a savings account that only gives you 1% interest.
posted by EmpressCallipygos at 8:41 AM on November 1, 2015 [8 favorites]
Your average debt charges between 6-25% interest. Your average savings account only gives 1% interest. So if you pay off your debt, that's kind of a way to get a 25% return on your interest (because that's less money you'd need to be paying in future) rather than a savings account that only gives you 1% interest.
posted by EmpressCallipygos at 8:41 AM on November 1, 2015 [8 favorites]
A $40K downpayment is 20% of a $200K house/condo.
If this is an option where the anonymous asker lives, this is not a bad approach and is in keeping with a conservative approach to money and housing. A lot of urban areas, though, are priced such that this isn't viable for either renting or owning, and people end up paying much higher percentages of their salaries towards housing than traditional/conservative guidelines would suggest. And if someone has their heart truly set on a $400k house, they may not see a much cheaper condo or house as acceptable, even if it is the right decision from a budgetary perspective.
Doing this would imply setting aside $40k for the purchase and using the rest to pay down debt (possibly setting some aside for an emergency reserve also). There are also a set of costs to consider when buying and moving to a new place -- the cost of moving, immediate fix up costs, and the almost inevitable situation of continuing to pay rent on the old place while you start making payments on the new place -- that need to be factored in as well, and are not easy to manage without savings.
posted by Dip Flash at 8:57 AM on November 1, 2015
If this is an option where the anonymous asker lives, this is not a bad approach and is in keeping with a conservative approach to money and housing. A lot of urban areas, though, are priced such that this isn't viable for either renting or owning, and people end up paying much higher percentages of their salaries towards housing than traditional/conservative guidelines would suggest. And if someone has their heart truly set on a $400k house, they may not see a much cheaper condo or house as acceptable, even if it is the right decision from a budgetary perspective.
Doing this would imply setting aside $40k for the purchase and using the rest to pay down debt (possibly setting some aside for an emergency reserve also). There are also a set of costs to consider when buying and moving to a new place -- the cost of moving, immediate fix up costs, and the almost inevitable situation of continuing to pay rent on the old place while you start making payments on the new place -- that need to be factored in as well, and are not easy to manage without savings.
posted by Dip Flash at 8:57 AM on November 1, 2015
It does not sound reasonable that you could afford to pay the mortgage, taxes, insurance, maintenance, etc on a $400,000 house on your income. If you go down that road with this money, you will have even more debt and very likely higher monthly expenses. That's not a good place to be and could easily end with you losing the house.
Use this money to pay off all your debt and then you can start fresh. Even 5.5% is pretty good high interest right now, so you are much better off getting out of the student loan and all your other debt than doing anything else with this money. There is no risk free 5.5% investment to compete with paying off your student loans. Pay it all off, be debt free, and then start saving.
Make a budget and start saving for a downpayment, if that's what you want to do in the long term. Work on your budget and your spending so that you can afford a more suitable rental in the shorter term.
posted by ssg at 9:35 AM on November 1, 2015 [2 favorites]
Use this money to pay off all your debt and then you can start fresh. Even 5.5% is pretty good high interest right now, so you are much better off getting out of the student loan and all your other debt than doing anything else with this money. There is no risk free 5.5% investment to compete with paying off your student loans. Pay it all off, be debt free, and then start saving.
Make a budget and start saving for a downpayment, if that's what you want to do in the long term. Work on your budget and your spending so that you can afford a more suitable rental in the shorter term.
posted by ssg at 9:35 AM on November 1, 2015 [2 favorites]
If you want to buy a house, buy a house.
However!!! First run a budget. It sounds like your current situation is tenuous. You don't have money left over at the end of the month, and you're somewhere between putting more things onto the credit cards and just not having enough left over that you can pay much more than the minimum. If that is true, then having a windfall that wipes off all your existing credit-card debt isn't going to help you long-term because you'll just make more (especially if that moves you into more-expensive housing).
So. That said, you want to live in a house, larger and owned by you, instead of renting. Run the mortgage numbers. $400k house means that if your down payment isn't at least 20%=$80k, you will be paying PMI, and it'll take another 5k in closing costs. Then you're paying 30-year fixed 4% or so on 320k, or $1,500/month, plus about $500/month in taxes and insurance, and it's important to set aside $2k/year or so to handle house emergencies and upgrades. So if you're currently spending less than $2000 on rent (and currently unable to decrease your credit card debt) you really need to figure out the budget!!! And resiously consider that you can't afford to own a house.
I agree with others that simplifying your debt situation is important. Pay off all the credit cards. Pick one and put the others away (freeze them in a block of ice in the freezer, they're accessible in a worst-case scenario but not available for casual use. Also, keeping accounts open means no unusual activity, no changes to credit rating). $15k done.
Consider how much your $18k car loan is costing you on a monthly basis. You may want to pay that off and call it done.
Now, you've got 150k-85k-15k-18k=30k left over. If you have no emergency fund, this could then be the emergency fund. Major debt payments are taken care of, emergency fund handled, slightly more expensive place to live set up... so the only remaining thing is, can you really truly live a zero-balance or positive-savings lifestyle in this context? Because if you can't, there's no point in setting yourself up to fail. Keep renting.
posted by aimedwander at 11:00 AM on November 1, 2015 [1 favorite]
However!!! First run a budget. It sounds like your current situation is tenuous. You don't have money left over at the end of the month, and you're somewhere between putting more things onto the credit cards and just not having enough left over that you can pay much more than the minimum. If that is true, then having a windfall that wipes off all your existing credit-card debt isn't going to help you long-term because you'll just make more (especially if that moves you into more-expensive housing).
So. That said, you want to live in a house, larger and owned by you, instead of renting. Run the mortgage numbers. $400k house means that if your down payment isn't at least 20%=$80k, you will be paying PMI, and it'll take another 5k in closing costs. Then you're paying 30-year fixed 4% or so on 320k, or $1,500/month, plus about $500/month in taxes and insurance, and it's important to set aside $2k/year or so to handle house emergencies and upgrades. So if you're currently spending less than $2000 on rent (and currently unable to decrease your credit card debt) you really need to figure out the budget!!! And resiously consider that you can't afford to own a house.
I agree with others that simplifying your debt situation is important. Pay off all the credit cards. Pick one and put the others away (freeze them in a block of ice in the freezer, they're accessible in a worst-case scenario but not available for casual use. Also, keeping accounts open means no unusual activity, no changes to credit rating). $15k done.
Consider how much your $18k car loan is costing you on a monthly basis. You may want to pay that off and call it done.
Now, you've got 150k-85k-15k-18k=30k left over. If you have no emergency fund, this could then be the emergency fund. Major debt payments are taken care of, emergency fund handled, slightly more expensive place to live set up... so the only remaining thing is, can you really truly live a zero-balance or positive-savings lifestyle in this context? Because if you can't, there's no point in setting yourself up to fail. Keep renting.
posted by aimedwander at 11:00 AM on November 1, 2015 [1 favorite]
"buying a house" is never just the purchase of the house. Home ownership is a never-ending pile of extra costs that you don't have to think about when you rent. Insurance and gardeners (or the endless drudgery and associated expense of yard work) and repairs and the toilet's backed up again and the plumber charges $100 a visit and ugh did you hear that noise we need to replace the garage door opener and oh god is that rats in the attic again and ON AND ON. Don't stretch for it when you're not flush. You'll get overwhelmed quickly.
Pay off the debts as much as you can. Then see where you are after a year of saving with a budget and no payments. But first, as someone said above, make absolutely sure that you've set aside the amount you owe as taxes. You can get very nastily surprised.
posted by fingersandtoes at 12:25 PM on November 1, 2015 [4 favorites]
Pay off the debts as much as you can. Then see where you are after a year of saving with a budget and no payments. But first, as someone said above, make absolutely sure that you've set aside the amount you owe as taxes. You can get very nastily surprised.
posted by fingersandtoes at 12:25 PM on November 1, 2015 [4 favorites]
i don't understand why people aren't, in general, suggesting you pay off the student debt. 5% is not cheap right now.
This is true, and it's also true that student loans are non-dischargeable, but student loan interest is tax-deductible up to $2500, which makes it cheaper debt than the headline APR implies.
Pay off the credit cards and car loan in full. Owning the car free and clear is a no-brainer, because owing more than the value of a steadily-depreciating asset is a shitty place to be.
owning a home will build wealth for you over your lifetime
Up to a point. Owning a home can also potentially stop you from pursuing opportunities that might build wealth elsewhere. That's part of the calculation you need to make. The other part is how much you can afford to pay for your house per month, not how much house you'd like to live in.
posted by holgate at 12:26 PM on November 1, 2015 [1 favorite]
This is true, and it's also true that student loans are non-dischargeable, but student loan interest is tax-deductible up to $2500, which makes it cheaper debt than the headline APR implies.
Pay off the credit cards and car loan in full. Owning the car free and clear is a no-brainer, because owing more than the value of a steadily-depreciating asset is a shitty place to be.
owning a home will build wealth for you over your lifetime
Up to a point. Owning a home can also potentially stop you from pursuing opportunities that might build wealth elsewhere. That's part of the calculation you need to make. The other part is how much you can afford to pay for your house per month, not how much house you'd like to live in.
posted by holgate at 12:26 PM on November 1, 2015 [1 favorite]
Pay off the credit cards and the car loan, definitely, and start directing those payments into savings.
Fund your IRAs if you haven't been [and are in the US], since those can't be funded retroactively and you'll benefit from long-term compound interest.
At that point I would probably put the balance of the money into a money market account and figure out the likely tax situation (standard withholding may not be quite enough depending on your state especially if it pushes you into a different tax bracket). Then I'd let the money "season" for a year or so while your credit scores get into the territory for the best mortgage rates and you guys start seriously looking at and budgeting for a house.
Are you going to be eligible for public service loan forgiveness or any other programs? If so, I wouldn't pay off the student loans at this point, but you could consider it.
Really, the nice thing about windfalls like this is that you get to decide how you want them to enhance your life. Some people will be thrilled to get a house that they wouldn't otherwise be able to afford, and to finish off the mortgage relatively early. Some people would prefer to save and invest it. Other people would really be happier being completely debt free and then using their earnings to get a house and investments.
I think as long as you avoid lifestyle inflation after you pay off your debts and you think seriously about how you'd like to use this money, you can't really make too many mistakes.
posted by The Elusive Architeuthis at 12:28 PM on November 1, 2015
Fund your IRAs if you haven't been [and are in the US], since those can't be funded retroactively and you'll benefit from long-term compound interest.
At that point I would probably put the balance of the money into a money market account and figure out the likely tax situation (standard withholding may not be quite enough depending on your state especially if it pushes you into a different tax bracket). Then I'd let the money "season" for a year or so while your credit scores get into the territory for the best mortgage rates and you guys start seriously looking at and budgeting for a house.
Are you going to be eligible for public service loan forgiveness or any other programs? If so, I wouldn't pay off the student loans at this point, but you could consider it.
Really, the nice thing about windfalls like this is that you get to decide how you want them to enhance your life. Some people will be thrilled to get a house that they wouldn't otherwise be able to afford, and to finish off the mortgage relatively early. Some people would prefer to save and invest it. Other people would really be happier being completely debt free and then using their earnings to get a house and investments.
I think as long as you avoid lifestyle inflation after you pay off your debts and you think seriously about how you'd like to use this money, you can't really make too many mistakes.
posted by The Elusive Architeuthis at 12:28 PM on November 1, 2015
So, I wish I had that kind of windfall, but I'm pretty good at not spending money.
If you want to be the sort of family who can afford a house, and can manage your money, it will probably require more than a one-off windfall, but a better understanding of what is realistic to afford, and the sacrifices the lifestyle you want might take.
I'd suggest going on a Dave Ramsay course (FPU - if you can handle the vague religious overtones), or a Suze Orman course, or really consistently listening to podcasts, shows, something like that, to actually get a framework of what you can afford to be spending.
For example, that you still have an 18k car loan, says it was probably a little more than you could afford. A general rule of thumb is 20% of yearly income.
The house you can realisitically afford on your current income is really only 200k pushed up to 250k with windfall. Once you get up to $6,500, you could edge up to 300k, but that is when you have that income, not now.
I would suggest paying off your credit cards immediately (don't close the accounts).
Set up a long term emergency savings account, which you might dump everything in currently, but longer term will keep 6 months of expenses (the lower you can get your monthly expenses, the lower this can be!).
Spend 6 months doing a financial course, or checking to see if there is anything you can do to improve your FICO score. Which is pretty weird, honestly. There will probably be a temporary drop after paying off everything, because it's showing erratic/unexpected behaviour. Keeping accounts open and paying balance consistently should then have you in the best position to get a mortgage.
Put 1-3% aside for 'windfall'/holiday spending. You'll feel better if you know what this went towards, rather than day to day budget fails.
Once you are doing the course, decide if you want to pay off your car payment right away.
If you can actually SAVE money towards your mortgage, then you might be in a position to buy a house. Realistically evaluate your spending over the next 6 months.
The only reason I'm suggesting house in 6-12 months, rather than paying off all debt, is because I know a lot of people who just aren't very good at savings. They'll pay off debt, but they can't really save, and so, for them, a house is an enforced savings plan.
But really considering the difference between what you want, and what you can actually afford, is the only way you'll have long term security.
posted by Elysum at 1:30 PM on November 1, 2015
If you want to be the sort of family who can afford a house, and can manage your money, it will probably require more than a one-off windfall, but a better understanding of what is realistic to afford, and the sacrifices the lifestyle you want might take.
I'd suggest going on a Dave Ramsay course (FPU - if you can handle the vague religious overtones), or a Suze Orman course, or really consistently listening to podcasts, shows, something like that, to actually get a framework of what you can afford to be spending.
For example, that you still have an 18k car loan, says it was probably a little more than you could afford. A general rule of thumb is 20% of yearly income.
The house you can realisitically afford on your current income is really only 200k pushed up to 250k with windfall. Once you get up to $6,500, you could edge up to 300k, but that is when you have that income, not now.
I would suggest paying off your credit cards immediately (don't close the accounts).
Set up a long term emergency savings account, which you might dump everything in currently, but longer term will keep 6 months of expenses (the lower you can get your monthly expenses, the lower this can be!).
Spend 6 months doing a financial course, or checking to see if there is anything you can do to improve your FICO score. Which is pretty weird, honestly. There will probably be a temporary drop after paying off everything, because it's showing erratic/unexpected behaviour. Keeping accounts open and paying balance consistently should then have you in the best position to get a mortgage.
Put 1-3% aside for 'windfall'/holiday spending. You'll feel better if you know what this went towards, rather than day to day budget fails.
Once you are doing the course, decide if you want to pay off your car payment right away.
If you can actually SAVE money towards your mortgage, then you might be in a position to buy a house. Realistically evaluate your spending over the next 6 months.
The only reason I'm suggesting house in 6-12 months, rather than paying off all debt, is because I know a lot of people who just aren't very good at savings. They'll pay off debt, but they can't really save, and so, for them, a house is an enforced savings plan.
But really considering the difference between what you want, and what you can actually afford, is the only way you'll have long term security.
posted by Elysum at 1:30 PM on November 1, 2015
Honestly, i think paying off the student loans is stupid. That is a lot of not-worrying to have that money parked somewhere. Especially with a kid. If you pay off all the debt and have like ~10k or less leftover, you'll just whittle that away.
On the other hand, just paying the loans normally(or autopaying them, as suggested) and having that money parked not even necessarily for a down payment will make your entire life feel so much easier. Now a job loss, or family emergency won't be nearly as big of a deal. What if one of you needs to be hospitalized for a couple months because of an accident or freak illness? What if a family member across the country falls ill and you have to fly out and end up spending way more time there than you intended and have to take unpaid time off(or quit!). etc etc etc.
I could construct a ton of these, but there's a lot of situations that caused undue hardship for my family as a kid, or for friends families that i've seen just not be a big deal for families and/or people with funds parked they can tap into.
Definitely put it somewhere gaining interest, but i'd hold onto it until i had a really good reason to spend it. Zero debt just feels like less freedom than not having the chunk of money parked. If the loans were like 30k i'd be more on team do it, but when they're that much of the money you're getting... meh. The pro-con sheet just doesn't do it for me.
posted by emptythought at 2:23 PM on November 1, 2015 [3 favorites]
On the other hand, just paying the loans normally(or autopaying them, as suggested) and having that money parked not even necessarily for a down payment will make your entire life feel so much easier. Now a job loss, or family emergency won't be nearly as big of a deal. What if one of you needs to be hospitalized for a couple months because of an accident or freak illness? What if a family member across the country falls ill and you have to fly out and end up spending way more time there than you intended and have to take unpaid time off(or quit!). etc etc etc.
I could construct a ton of these, but there's a lot of situations that caused undue hardship for my family as a kid, or for friends families that i've seen just not be a big deal for families and/or people with funds parked they can tap into.
Definitely put it somewhere gaining interest, but i'd hold onto it until i had a really good reason to spend it. Zero debt just feels like less freedom than not having the chunk of money parked. If the loans were like 30k i'd be more on team do it, but when they're that much of the money you're getting... meh. The pro-con sheet just doesn't do it for me.
posted by emptythought at 2:23 PM on November 1, 2015 [3 favorites]
First, and foremost: cash is king. A dollar more of cash is FAR more valuable than a dollar less of debt. Cash on hand gets you through hard times when being debt-free won't do a thing for you. When other people are having hard times, cash lets you buy their assets cheap.
Here's what I'd do. Pay off the credit cards -- good for cash flow, good for FICO. Pay down the car loan if it's at credit card style terms; if it's at a low rate, don't. DON'T pay off your student loans, for reasons noted above.
Try to find a house at the low end of your price range, say $300,000. With $60,000 down and typical taxes and insurance that's going to be about $2,000 a month, most of which is tax deductible -- well within a reasonable budget. That leaves $70,000 cash on hand.
posted by MattD at 3:31 PM on November 1, 2015 [2 favorites]
Here's what I'd do. Pay off the credit cards -- good for cash flow, good for FICO. Pay down the car loan if it's at credit card style terms; if it's at a low rate, don't. DON'T pay off your student loans, for reasons noted above.
Try to find a house at the low end of your price range, say $300,000. With $60,000 down and typical taxes and insurance that's going to be about $2,000 a month, most of which is tax deductible -- well within a reasonable budget. That leaves $70,000 cash on hand.
posted by MattD at 3:31 PM on November 1, 2015 [2 favorites]
I agree with the general thrust of the advice people are giving you: pay off high-interest debt (credit cards, and car loan if the interest is above like 3-5%), establish an emergency fund, and then buy a house at the low end of your spectrum.
However, I wanted to call this out:
You should really take a closer look at your finances. You're blowing a massive amount of money on interest (find a credit card payment calculator and find out just how much!) You're in a territory where a small mistake or misfortune could ruin you. Even in the best of circumstances, you're barely breaking even, let alone actually getting ahead and having something you can hold on to.
Use this pile of money as an opportunity to fix your finances and achieve your goals. Otherwise it'll just be a temporary break before you slide back into this precarious situation. With this kind of money, you can get things straightened out without even making too much of a sacrifice.
posted by !Jim at 6:47 PM on November 1, 2015 [4 favorites]
However, I wanted to call this out:
Our income is about $5,400/mo right now; we don't spend it particularly wisely, but we pay a bit more than the minimum on our accounts and live comfortably. There's usually not much left over at the end of a typical month, though.This is a huge red flag to me. You're in a fairly large amount of debt (and paying close to the minimum payment), you're not saving any money, and you're not even watching where your money is going? And all this in a city where, a regular-ish house (I assume anyway) costs $400,000?
You should really take a closer look at your finances. You're blowing a massive amount of money on interest (find a credit card payment calculator and find out just how much!) You're in a territory where a small mistake or misfortune could ruin you. Even in the best of circumstances, you're barely breaking even, let alone actually getting ahead and having something you can hold on to.
Use this pile of money as an opportunity to fix your finances and achieve your goals. Otherwise it'll just be a temporary break before you slide back into this precarious situation. With this kind of money, you can get things straightened out without even making too much of a sacrifice.
posted by !Jim at 6:47 PM on November 1, 2015 [4 favorites]
Agreed that owning a house means tons of $ to pay in unforeseen repairs and maintenance. However. We chose to buy a house instead of paying off the student debt and it was absolutely the right choice. Unless the real estate market tanks (which we know it can, of course) you are paying a portion of your housing payment back to yourself, getting tax deductions you don't get with paying rent, and earning equity in your investment. Also: no one can raise your rent when you're paying a fixed rate mortgage, and the rates are still good right now.
Definitely get rid of the credit card debt and car payments, but after that, shop for a mortgage with several lenders. If it turns out you can't really afford a mortgage that will get you the home you want, then it's time to come up with a financial plan that will get you there.
Good luck and congrats!
posted by Pearl928 at 8:14 PM on November 1, 2015
Definitely get rid of the credit card debt and car payments, but after that, shop for a mortgage with several lenders. If it turns out you can't really afford a mortgage that will get you the home you want, then it's time to come up with a financial plan that will get you there.
Good luck and congrats!
posted by Pearl928 at 8:14 PM on November 1, 2015
Does this sound like a reasonable plan of action?
Based on what you've told us, not really. But I'm a frugal single dude living in a 900 sqft apartment.
What should I be doing with the money until I'm ready to spend it? It doesn't seem normal or particularly safe to have that much just lying around in a checking account that's linked to my debit card.
Open up a savings account. They're FDIC insured up to $250,000, so you'll be fine. And the rates are better than short term CDs, so don't worry about trying to find a better rate, they all suck. And you should be thankful for that, if you're in the market for a home loan.
What to prioritize?
Honestly, we don't know enough to say. Interest rates and such really matter, as well as your own preferences. For example, why is a 2 BR apt not a good solution? I paid a couple of movers a few hundred dollars to move to an apartment across town, and was done in about 2 hours. We also don't know why your credit score is so low, or how much work it'll take to fix. Nor do we know the source of this money -- lenders give special consideration to the source of your downpayment, especially gifts.
Generally speaking, I recommend a spreadsheet solver technique. Use this spreadsheet as a guide. It's designed for monthly paychecks, but works just as well for windfalls if you treat monthly minimum payments to zero.
In each row, list out all your investment opportunities (401ks, IRAs, employee stock purchase plans, whatever) and debts. Try to think as broadly as possible here. Ignore the mandatory minimum, that's for monthly payments. Minimum investments are things like 'you must have invest at least 2k with us to open an account' or the downpayment on your house. Maximums are based on legal contribution limits, or when not otherwise limited, the amount you have or the amount you owe. Rate of return is the APR for a given line. When you've filled them all out, sort by interest rate, and allocate your money to the top ones first, and as money fills up the bucket for that line, it cascades down into the next option.
For investment opportunities themselves, I'm assuming a long term average stock market return of 7 percent. You could include brokerage accounts, but someone carrying 18k in credit card debt is probably not ready for that complication. We're going to treat debts as investment opportunities that pay you back at the interest rate. I've listed on line entry for CC balances, but if you have multiple you should take a moment to research what they are their interest rate. Especially if some are very cheap for some reason.
I'm also doing something confusing / tricky here, by breaking out your retirement accounts into multiple lines. If you have an employer match, that's a different investment opportunity than a simple 401k. Retirement is important, and you cannot borrow for it. Do Baby Anon a favor and start saving now, so you don't have to go through the embarrassing measure of borrowing from them later to help pay your mortgage.
Finally I also added in buying a house. Unfortunately, the long term return on home ownership is approximately breakeven after inflation. The mortgage interest deduction is often cited as a game changer, (even in this thread!), but if you paid 20 percent down on a 300k house, and got a rate of competitive loan at 4%, you're still over three thousand dollars away from the exceeding standard deduction for married filling jointly.
Unfortunately, Google Sheets doesn't have a solver function. But a greedy algorithm here works fine: sort by rate of return, allocate the max to those, and you're done. I've already done that based on my assumptions, but you'll want to redo the calculations based on your actual data.
Pretending my data is correct:
1. Employer match retirement first
2. Pay off Credit cards
3. Max out retirement accounts
4. Pay off student loans
5. Pay off your car loan
6. Leave 1,500 in your savings account as an emergency fund
In the second tab I ran the numbers pretending the house buy was mandatory. In this case, the money never fills up 4, so it never flows into flows into 5 or 6 either. So just 1-3 and half of 4. This puts you in a home without credit card repayments, and student loan payments that could be substantially smaller. But it also leaves you without an emergency fund, which is a bad place to be as an owner.
posted by pwnguin at 9:21 PM on November 1, 2015
Based on what you've told us, not really. But I'm a frugal single dude living in a 900 sqft apartment.
What should I be doing with the money until I'm ready to spend it? It doesn't seem normal or particularly safe to have that much just lying around in a checking account that's linked to my debit card.
Open up a savings account. They're FDIC insured up to $250,000, so you'll be fine. And the rates are better than short term CDs, so don't worry about trying to find a better rate, they all suck. And you should be thankful for that, if you're in the market for a home loan.
What to prioritize?
Honestly, we don't know enough to say. Interest rates and such really matter, as well as your own preferences. For example, why is a 2 BR apt not a good solution? I paid a couple of movers a few hundred dollars to move to an apartment across town, and was done in about 2 hours. We also don't know why your credit score is so low, or how much work it'll take to fix. Nor do we know the source of this money -- lenders give special consideration to the source of your downpayment, especially gifts.
Generally speaking, I recommend a spreadsheet solver technique. Use this spreadsheet as a guide. It's designed for monthly paychecks, but works just as well for windfalls if you treat monthly minimum payments to zero.
In each row, list out all your investment opportunities (401ks, IRAs, employee stock purchase plans, whatever) and debts. Try to think as broadly as possible here. Ignore the mandatory minimum, that's for monthly payments. Minimum investments are things like 'you must have invest at least 2k with us to open an account' or the downpayment on your house. Maximums are based on legal contribution limits, or when not otherwise limited, the amount you have or the amount you owe. Rate of return is the APR for a given line. When you've filled them all out, sort by interest rate, and allocate your money to the top ones first, and as money fills up the bucket for that line, it cascades down into the next option.
For investment opportunities themselves, I'm assuming a long term average stock market return of 7 percent. You could include brokerage accounts, but someone carrying 18k in credit card debt is probably not ready for that complication. We're going to treat debts as investment opportunities that pay you back at the interest rate. I've listed on line entry for CC balances, but if you have multiple you should take a moment to research what they are their interest rate. Especially if some are very cheap for some reason.
I'm also doing something confusing / tricky here, by breaking out your retirement accounts into multiple lines. If you have an employer match, that's a different investment opportunity than a simple 401k. Retirement is important, and you cannot borrow for it. Do Baby Anon a favor and start saving now, so you don't have to go through the embarrassing measure of borrowing from them later to help pay your mortgage.
Finally I also added in buying a house. Unfortunately, the long term return on home ownership is approximately breakeven after inflation. The mortgage interest deduction is often cited as a game changer, (even in this thread!), but if you paid 20 percent down on a 300k house, and got a rate of competitive loan at 4%, you're still over three thousand dollars away from the exceeding standard deduction for married filling jointly.
Unfortunately, Google Sheets doesn't have a solver function. But a greedy algorithm here works fine: sort by rate of return, allocate the max to those, and you're done. I've already done that based on my assumptions, but you'll want to redo the calculations based on your actual data.
Pretending my data is correct:
1. Employer match retirement first
2. Pay off Credit cards
3. Max out retirement accounts
4. Pay off student loans
5. Pay off your car loan
6. Leave 1,500 in your savings account as an emergency fund
In the second tab I ran the numbers pretending the house buy was mandatory. In this case, the money never fills up 4, so it never flows into flows into 5 or 6 either. So just 1-3 and half of 4. This puts you in a home without credit card repayments, and student loan payments that could be substantially smaller. But it also leaves you without an emergency fund, which is a bad place to be as an owner.
posted by pwnguin at 9:21 PM on November 1, 2015
First, and foremost: cash is king. A dollar more of cash is FAR more valuable than a dollar less of debt.
This is completely dependent on the interest rates on the cash and the debt. $10,000 in the bank earning 0.5% a year is worth a heck of a lot less than $10,000 less of debt charging 20% interest.
posted by Justinian at 3:13 AM on November 2, 2015 [4 favorites]
This is completely dependent on the interest rates on the cash and the debt. $10,000 in the bank earning 0.5% a year is worth a heck of a lot less than $10,000 less of debt charging 20% interest.
posted by Justinian at 3:13 AM on November 2, 2015 [4 favorites]
thanks holgate - i didn't realise there was a tax break.
with annual income of 65,000 you can do the maths. interest on 100,000 at 5% is 5000, but that's cut off at 2,500. so you're reducing your tax burden by 25% of 2,500 = 625. that means the effective interest is 4375 or about 4.4%.
it's still crazy. wish i could get someone to pay me 4.4% right now. look, mefites, cash is worth so much more than debt. borrow from me at 4.4% and you'll have CASH! CASH! CASH! please?
posted by andrewcooke at 3:48 AM on November 2, 2015
with annual income of 65,000 you can do the maths. interest on 100,000 at 5% is 5000, but that's cut off at 2,500. so you're reducing your tax burden by 25% of 2,500 = 625. that means the effective interest is 4375 or about 4.4%.
it's still crazy. wish i could get someone to pay me 4.4% right now. look, mefites, cash is worth so much more than debt. borrow from me at 4.4% and you'll have CASH! CASH! CASH! please?
posted by andrewcooke at 3:48 AM on November 2, 2015
See if you can find a fee-based financial adviser to help you--this is a great thread but you really want someone to talk to over time about stuff like this! Just someone who will talk to you for two hours a year about stuff like this and charge you $300-$500. They can also do helpful things like making sure you're right that there won't be a large tax bill at the end of the year (you could be wrong, withholdings are only tax estimates and can be wrong for various reasons).
It sounds to me like you can probably afford to make a downpayment on a house, or at least start a savings account with 80% of a downpayment in it and save the rest over the next year, and to cut up your credit cards and never use them again, and to start a small emergency fund, and to make a very nice payment on your loans. But you really want someone to go over these numbers with you in detail.
(Full disclosure: I started to write out some screed about how your finances don't add up and you are stealing from your future self with your credit cards and you should divide up the money exactly as I say and then... I looked at my numbers and saw you did have almost enough for a downpayment. Also it sounds like you know you need to get off the Credit Crack.)
If it were me, I'd put it all toward my loans before taking on any more debt, because paying off the student loans early is giving yourself a 5.5% guaranteed return--anybody would invest in that financial product if the public had access to it. But I understand wanting a house and your plan doesn't sound like the most cockamamie financial idea I've ever heard.
posted by _Silky_ at 8:11 AM on November 2, 2015 [1 favorite]
It sounds to me like you can probably afford to make a downpayment on a house, or at least start a savings account with 80% of a downpayment in it and save the rest over the next year, and to cut up your credit cards and never use them again, and to start a small emergency fund, and to make a very nice payment on your loans. But you really want someone to go over these numbers with you in detail.
(Full disclosure: I started to write out some screed about how your finances don't add up and you are stealing from your future self with your credit cards and you should divide up the money exactly as I say and then... I looked at my numbers and saw you did have almost enough for a downpayment. Also it sounds like you know you need to get off the Credit Crack.)
If it were me, I'd put it all toward my loans before taking on any more debt, because paying off the student loans early is giving yourself a 5.5% guaranteed return--anybody would invest in that financial product if the public had access to it. But I understand wanting a house and your plan doesn't sound like the most cockamamie financial idea I've ever heard.
posted by _Silky_ at 8:11 AM on November 2, 2015 [1 favorite]
Anonymous your plan sounds just about right to me. I would be careful to not get into too big of a house but otherwise you have it right. Credit card debt is a killer but the others are all too necessary to have a few things living in the middle class. You will have a lot of people say clear out all your debt, but that type of behavior generally leads to low or no savings just due to the difficulties of sticking to savings when you are living paycheck to paycheck as most of us do. Psychology is a factor as much as math. Interest is low now so it pays to get a mortgage at these low rates and put your capital into some diversified investments including the stock market which will pay more than your after tax mortgage cost. It also gives you a reasonably liquid reserve for emergencies. When investing just make sure to keep the cost of investing low and diversify.
posted by caddis at 8:47 AM on November 2, 2015
posted by caddis at 8:47 AM on November 2, 2015
This is completely dependent on the interest rates on the cash and the debt. $10,000 in the bank earning 0.5% a year is worth a heck of a lot less than $10,000 less of debt charging 20% interest.
Well, yeah, but I'd agree with MattD up to a point -- and with emptythought more broadly -- that liquidity has advantages that offset some of the cost of manageable, predictable long-term debt. That's the whole point of how mortgages are structured, especially in the US. It's not simply a question of running two calculations and picking the one that produces the best result. The peace of mind that comes from having cold hard cash available for emergencies has its own value, and that value is very much subjective.
posted by holgate at 11:18 AM on November 2, 2015
Well, yeah, but I'd agree with MattD up to a point -- and with emptythought more broadly -- that liquidity has advantages that offset some of the cost of manageable, predictable long-term debt. That's the whole point of how mortgages are structured, especially in the US. It's not simply a question of running two calculations and picking the one that produces the best result. The peace of mind that comes from having cold hard cash available for emergencies has its own value, and that value is very much subjective.
posted by holgate at 11:18 AM on November 2, 2015
I just want to apologize for my snarky tone above.
My main message was: you'll be best served financially by paying off your debt and establishing an emergency fund. Debt acts like an anchor; even though it's not above the surface of the water, it will slow your ship down. Once you have resolved your existing non-house debt, you will be in a better financial position to consider taking on house payments. Even the house payments will signify additional debt though- don't trick yourself.
posted by samthemander at 12:03 PM on November 2, 2015
My main message was: you'll be best served financially by paying off your debt and establishing an emergency fund. Debt acts like an anchor; even though it's not above the surface of the water, it will slow your ship down. Once you have resolved your existing non-house debt, you will be in a better financial position to consider taking on house payments. Even the house payments will signify additional debt though- don't trick yourself.
posted by samthemander at 12:03 PM on November 2, 2015
This thread is closed to new comments.
2. Open a money market account at Vanguard (my personal favorite in terms of very low cost and good service, other low cost options are available). They will give you a check book so you can withdraw money from this account. Place it somewhere you won't be tempted to use it.
3. Set up an automatic transfer so that the money are currently spending on monthly payments into your Vanguard account so you are replenishing your savings for what you spent to pay off your debt. When your income goes up, add another $1000 to that automatic transfer.
4. Take $30,000 and put it in a different fund within your Vanguard account that will be your emergency buffer - not to be spent unless it is really an emergency - something you couldn't plan for and can't avoid. I would suggest the short-term investment grade bond fund.
5. Figure out how you can actually afford to spend on your new house month to month (including taxes, maintenance & repairs, increased commute cost, insurance). Then see how much you can afford for the downpayment plus closing costs plus moving costs plus new furniture etc. Put those two numbers together and make sure you don't spend more than that on your house. Be SMART. Make sure you still leave a buffer to continue to add your saving as well as paying for your house.
It is so tempting to just jump into new debt - this is a chance to do things differently and lay a more secure financial foundation for your family.
posted by metahawk at 10:21 PM on October 31, 2015 [37 favorites]