Head back towards zero and start over?

March 14, 2008 9:29 AM

I am considering selling off most of my assets to pay some of my debts, and want some outside advice on if I should.

I'll try to be as brief as possible.

Current income is about $28K per year; there is reason to believe that will improve shortly, but nothing promised.

Assets:
I have about $28K in a brokerage account; 8 of which is in retirement funds, 11 in a handful of investments, and about 9 in cash. I also have an external savings account with about $3K in it.

Debts:
With the same bank that holds all the assets except the 3K, I've got $19K in credit card debt and $53K in student loans. The CC debt is at a fixed 4.99% APR, the students loans are mostly at 7.5% with about $500 at 11.75%. I have been paying this off most aggressively. Payments for the CC are about $400/month, for the loans about $400 on the bulk and another $150 or so on the smaller one.

I also have $2300 at 1.9%, and another $8K at 4.9%, both fixed until the balance is paid off or I miss a payment, which I'm pretty good about not doing (has happened twice in the last three years, once my complete oversight and the other a matter of a check not getting there in time). Payments on those are $40/mo and $160/month, but I usually pay about $200 on the latter.

The impetus for this is that $3K of the retirement was in a CD that matured yesterday, and I have 7 calendar days to do something with it. If I do nothing, it rolls over for 5 years @ 3.1%. Not great, but better than most options now. If I want to move it out of that bank without penalties, though, I'm pretty sure I need to do that now.

I am considering selling off all non-retirement assets, paying off the CC with the $19K balance, and divorcing that bank (to go to Schwab, most likely). The money is yielding some growth but not near the $1000 a year in finance charges I'm paying on the CC, and ridding myself of that $400/month payment would enable me to go after my other debts more quickly. If I move to Schwab I'd have most of the account privileges I do now as far as no fees, online banking, etc. I'd have $8K in retirement assets, $3K in savings, and have $10 grand of CC and the student loans to deal with still.

It seems to make sense; I guess I'm just leery of selling off everything. I'll be talking to a Schwab person on Monday to make sure I know details. What does the hive mind think?

posted by andifsohow to work & money (11 comments total)

There are two answers that come up to questions like this: the mathematically best approach, and the psychologically best approach. The answer to the first comes in the details (interest rates on debt vs investments, tax implications, etc), and is usually-but-not-always "pay the debt off ASAP."

The second is much more personal. As in, are you risk averse, or risk seeking? Is this debt making you feel (regardless of what is factually true) that you cannot live your life? If you paid it off tomorrow with your savings, will you reacquire the CC debt in a year's time?

So I, personally, hatehatehate the idea of credit card debt, and would liquidate all my savings, ebay all my possessions, and more, in order to be rid of it, even if financially there was a better answer (such as keeping retirement accounts and paying the debt more slowly, or something like that). But that is because debt like that feels like a weight over my head, and I am sure that I would not go out the next day and start racking up those charges again. If you do reacquire the debt, after liquidating your savings, what happens then?

So listen to the people who can give you the approach that is financially best, but make sure that it fits with you feel and how you actually behave -- not how you want to behave, but how you do behave in real life.

This is why, I think, so many people do well with programs like Dave Ramsey's, which are financially non-optimal but work extremely well with how people deal with incentives and motivations, and so the overall result is better than someone who starts a "perfect" approach but gets off-track partway through.
posted by Forktine at 9:41 AM on March 14, 2008

If I do nothing, it rolls over for 5 years @ 3.1%. Not great, but better than most options now.

You may not care about 1 percentage point, but I wouldn't put money into a CD unless it was very close to the best rate I could get. Rates have gone down significantly in the last few months, but as of this week Bank Deals lists 4%+ yield CDs for pretty much any length.

The CC debt is at a fixed 4.99% APR
Students loans are mostly at 7.5% with about $500 at 11.75%
$2300 at 1.9%
Another $8K at 4.9%

Are you absolutely certain that the rates for the sub-5% ones are completely fixed forever? The credit card one seems like some kind of teaser rate that would eventually go away.

I usually just go by the math. If you have a choice between investing in a CD at 3.1% or paying off a (non tax-deductible) loan at 4.99%, I would pay off the loan. If the choice is between a 4.5% CD and a 1.9% loan, I'll just pay the minimum on the loan and invest in the CD. I also always pay down the highest interest rate loans first, even if the lower interest rate loans can be paid off faster.

That's just me though, and as Forktine said there are psychological implications of what you decide. For me personally money is all about the bottom line so I just pick the choice that results in the most money in the long run.
posted by burnmp3s at 9:59 AM on March 14, 2008

The impetus for this is that $3K of the retirement was in a CD that matured yesterday, and I have 7 calendar days to do something with it. If I do nothing, it rolls over for 5 years @ 3.1%. Not great, but better than most options now. If I want to move it out of that bank without penalties, though, I'm pretty sure I need to do that now.

I think you are getting a little confused, or maybe I'm a little confused. I don't see what an expiring CD in a retirement account has to do with the rest of your finances.

I would not touch the retirement assets except to (probably) move them to Schwaab. For some reason you seem to have all your assets (and debts) consolidated in one bank, and there's really no reason to do that (unless you live in some weird country where there is a reason for doing this).

So yeah, re-invest the 3K in something with a better yield, maybe at Schwaab, or wherever. I assume you are pretty young, so I would probably invest it in a low-cost index fund like something from Vanguard, and not think about it for 40-50 years.

As for retiring some debt, here are some things to think about:

1. what are the tax consequences of selling stock for you right now? probably not much of a capital gains hit, so that's probably not an issue.

2. do these (non-retirement) stocks yield dividends? what's the yield? stocks are cheap right now and there are so really attractive dividend-yielding stocks - it might make more sense to just collect the dividend.

3. how did you acquire so much debt? how do you know you won't just do it again?
posted by thomas144 at 10:06 AM on March 14, 2008

Good advice so far. I'm reasonably confident I won't respend the CC space, it has been quite a burden and I haven't been adding on to it. It's mostly felt like a game of balance, but I kinda want out of the game. Psychologically, I do think I'm best served getting rid of the debt, but I don't want to take a bath doing it.

burnmp3s, yes, I'm certain. As long as payments are made on time and I don't violate the user agreement, all of those %s are fixed until the balance is paid off. Of course, if I put anything else on those cards, it gets placed at the back of the line at high-teens %s which won't be addressed until everything under them is paid.
posted by andifsohow at 10:07 AM on March 14, 2008

I would not touch the retirement assets except to (probably) move them to Schwaab.

I wouldn't spend the money - it's a matter of a window before it gets automatically reinvested in a CD which I would pay penalties to withdraw.

1) Tax consequences - it's a good time to do it, as I have a negative tax liability for the past few years because of school and some other matters. They're all long-term assets, and while I of course am paying tax on them in the strict sense I wouldn't owe the money.

2) Sort of, but not a lot of them. I have ~75% of the other retirement money in a dividend yield fund. The main problem with most of the assets is severe lack of diversification, they are in 3 funds.

3) I don't really know, honestly. There were a couple of major sums that unfortunately had to be done, the rest was minor spending mostly and I think APRs that were killing me until I got them down to where they are. I don't think I've spent $1000 on credit in the last calendar year and have moved all my recurring payments to my checking account. I'm also older and wiser and have seen what CC debt is doing to me, so I'm not too worried about spending it all again. I mean, I'm still gonna have $50K plus of debt to deal with if I make this switch, and being debt free will remain a priority for me.
posted by andifsohow at 10:16 AM on March 14, 2008

My inclination is that you should probably pay off the debt to the extent that you can, without touching the retirement funds. As far as diversification is concerned, if you put that 8K of retirement money into an indexed stock fund, something like this Vanguard fund, which I don't know much about (not one I own) but presumably is a low-cost indexed fund - basically you are just putting the money into the stock market for the LONG haul, you will have plenty of diversification (honestly, even at your young age [ I'm guessing ], $8K is not very much money to have in a retirement fund).

With the wisdom of my age (55), one thing I wish I had done is invested more in mutual funds than in individual stocks. Even though my 401k (which is in individual stocks) has done well over the long haul, it would have done better over the long haul in mutual funds. I know this just comparing my retirement assets vs. my wife's retirement assets.
posted by thomas144 at 10:28 AM on March 14, 2008

I think your plan sounds great!

One thing to keep in mind -- after you have paid off the credit cards, DON'T close them. Closing credit card accounts actually hurts your credit score, but many people are given bad advice to close them.

The best thing you could do for your credit after paying off the balances is set up a small monthly bill to auto-bill to each card, then set up the cards to be auto-paid from your checking out, then sock drawer the cards. That way you will keep these cards active in your credit history and continue to add to your good payment history, and you'll have low (under 10%) utilization because you're not otherwise using them.
posted by Jacqueline at 12:13 PM on March 14, 2008

checking out --> checking account
posted by Jacqueline at 12:16 PM on March 14, 2008

As long as payments are made on time and I don't violate the user agreement, all of those %s are fixed until the balance is paid off.

Beware of the "universal default" clause in most credit card agreements. If you miss a payment on any bill -- phone, electric, student loan, etc. -- the credit card company can raise your rates even if you always pay your credit card on time.
posted by JackFlash at 1:32 PM on March 14, 2008

Is there any reason why you don't just pay off the 11.75% interest rate loan right away? The loan amount is small so it's not a huge deal, but generally, it's better to pay off the higher-interest loans first, and that seems to be your highest by far.

One of the exceptions for paying off the higher-interest loan first is if there are tax considerations. So even though your student loan interest rates are higher than your credit card rate, it may make sense to pay off the credit card first if you can deduct the interest you pay on the student loans from your taxes. I have no way of determining whether that's what you should do, so you might want to figure out what sort of tax breaks you get from your student loan interest payment and decide accordingly.
posted by EatenByAGrue at 4:44 PM on March 14, 2008

Another reason to consider paying the cards off before student loan is, IIRC, installment debt like a student loan is better for your credit score than revolving debt like a credit card.
posted by Jacqueline at 7:17 PM on March 14, 2008