liquidity, liquidity
September 10, 2008 1:47 PM Subscribe
Should use my mutual funds to pay off my credit card debt?
Credit card debt is about $4K with an APR of 15%. Right now I can afford to pay a max of $300 a month--$200 more comfortably--toward my debt, and there are no bonuses or foreseeable windfalls in my future. I have about $22K in mutual funds: enough to have as an emergency/rainy day fund left over. Mutual funds are doing okay now, but obviously not making more than I'm paying in interest on the card.
Does it make sense to liquidate $4K to pay off the debt, or let it ride and chip away at it over time? Or should maybe I go halves--liquidate $2K now and chip away at the rest over time?
I have never had a head for numbers and can't figure out how to think about this.
Just as an insight into my spending habits: I usually am able to pay off my balance--I just use the card for the miles--but I had some medical expenses that I put on the card that have just accumulated a lot of interest, and I'd like it to go away.
My credit is excellent, so I don't feel a compelling reason to keep this debt around just to improve my score. (I have a student loan that I pay on time every month.) I also have a Roth IRA and 401k, so this is not my only cushion for the future. I am at least 30 years away from retirement.
Any insights appreciated. Thanks.
Credit card debt is about $4K with an APR of 15%. Right now I can afford to pay a max of $300 a month--$200 more comfortably--toward my debt, and there are no bonuses or foreseeable windfalls in my future. I have about $22K in mutual funds: enough to have as an emergency/rainy day fund left over. Mutual funds are doing okay now, but obviously not making more than I'm paying in interest on the card.
Does it make sense to liquidate $4K to pay off the debt, or let it ride and chip away at it over time? Or should maybe I go halves--liquidate $2K now and chip away at the rest over time?
I have never had a head for numbers and can't figure out how to think about this.
Just as an insight into my spending habits: I usually am able to pay off my balance--I just use the card for the miles--but I had some medical expenses that I put on the card that have just accumulated a lot of interest, and I'd like it to go away.
My credit is excellent, so I don't feel a compelling reason to keep this debt around just to improve my score. (I have a student loan that I pay on time every month.) I also have a Roth IRA and 401k, so this is not my only cushion for the future. I am at least 30 years away from retirement.
Any insights appreciated. Thanks.
Since you mention having a Roth and a 401K, I assume the 22K in mutual funds is not in a tax-sheltered account, so there is no penalty for cashing some of it in.
In that case, I would go ahead and pay off the card with $4K of it. But.
(a) make a pact with yourself that you will not run the card debt up again. Cut the cards up if necessary, but whatever you do, pay as you go. If you charge anything, pay the bill immediately.
(b) make another pact to contribute that $300 a month back into your savings -- preferably to the 401K. This will remove $3600 a year from your taxable income, and will rebuild the $4k you cashed in in about 13 months.
The mutual fund is unlikely to earn you much in the coming year, so since you're saving 15% interest on the debt, this is like being able to invest that money at 15%.
posted by beagle at 1:59 PM on September 10, 2008
In that case, I would go ahead and pay off the card with $4K of it. But.
(a) make a pact with yourself that you will not run the card debt up again. Cut the cards up if necessary, but whatever you do, pay as you go. If you charge anything, pay the bill immediately.
(b) make another pact to contribute that $300 a month back into your savings -- preferably to the 401K. This will remove $3600 a year from your taxable income, and will rebuild the $4k you cashed in in about 13 months.
The mutual fund is unlikely to earn you much in the coming year, so since you're saving 15% interest on the debt, this is like being able to invest that money at 15%.
posted by beagle at 1:59 PM on September 10, 2008
Unless you have a risk-free mutual fund that consistently beats 15%, pay off the card.
posted by crapmatic at 2:00 PM on September 10, 2008
posted by crapmatic at 2:00 PM on September 10, 2008
Here's a simple question that someone once posed about these situations:
"Would you borrow on your credit card to fund/buy stocks/deposit to IRAs?"
posted by chrisfromthelc at 2:07 PM on September 10, 2008 [2 favorites]
"Would you borrow on your credit card to fund/buy stocks/deposit to IRAs?"
posted by chrisfromthelc at 2:07 PM on September 10, 2008 [2 favorites]
If the mutual funds aren't an IRA or 401k, then the best ROI will come from paying off the credit card debt-- that's a guaranteed 15% return, an easy decision in any market.
The only reason not to would be if you are the sort of person who tends to rely on credit and max out your debt, which it doesn't sound like you are.
So I agree with monju, no brainer here.
posted by justkevin at 2:21 PM on September 10, 2008
The only reason not to would be if you are the sort of person who tends to rely on credit and max out your debt, which it doesn't sound like you are.
So I agree with monju, no brainer here.
posted by justkevin at 2:21 PM on September 10, 2008
BUT, do take that 200/month, and put it into savings to make up the savings you just depleted.
posted by theora55 at 2:38 PM on September 10, 2008
posted by theora55 at 2:38 PM on September 10, 2008
Mutual funds are doing okay now, but obviously not making more than I'm paying in interest on the card.
That's your answer right there. No need for complex math: just compare the interest rates. (Of course you don't have a fixed, guaranteed interest rate on the mutual fund, so just estimate--the long-term average return on stocks, assuming your fund is primarily stocks, is something like 9%.) [Estimated] interest from your investment is lower than the interest on your debt, so pay it off as quickly as possible.
Converse example: I'm paying off my car, which I financed at 0.9%, as slowly as possible. I could pay it off completely right now, but since interest on my savings is higher than 0.9%, it doesn't make sense to.
Caveat: if some of your possible actions would incur significant fees, then more complex math might be necessary, but that doesn't seem to be the case here.
posted by DevilsAdvocate at 3:13 PM on September 10, 2008
That's your answer right there. No need for complex math: just compare the interest rates. (Of course you don't have a fixed, guaranteed interest rate on the mutual fund, so just estimate--the long-term average return on stocks, assuming your fund is primarily stocks, is something like 9%.) [Estimated] interest from your investment is lower than the interest on your debt, so pay it off as quickly as possible.
Converse example: I'm paying off my car, which I financed at 0.9%, as slowly as possible. I could pay it off completely right now, but since interest on my savings is higher than 0.9%, it doesn't make sense to.
Caveat: if some of your possible actions would incur significant fees, then more complex math might be necessary, but that doesn't seem to be the case here.
posted by DevilsAdvocate at 3:13 PM on September 10, 2008
As others have said, if your mutual funds are in a taxable account, not an IRA, then it is a no-brainer to sell them to pay off the credit card. Medical bills, after all, are an emergency and that is the purpose of your emergency fund. The only consideration might be if you would have to pay a large amount of capital gains taxes if you sell.
As a side note, you might consider moving your emergency fund to less volatile investments like a money market fund, short term CDs or possibly a short-term bond fund. The reason is that emergency funds need to be liquid and need to preserve value so that they are available when you need them. What if there were a stock market crash and you lost your job at the same time? This is a not unlikely scenario since companies tend to lay off in an economic downturn. You would be forced to sell your stock funds at the worst possible time, when prices are down.
posted by JackFlash at 4:45 PM on September 10, 2008
As a side note, you might consider moving your emergency fund to less volatile investments like a money market fund, short term CDs or possibly a short-term bond fund. The reason is that emergency funds need to be liquid and need to preserve value so that they are available when you need them. What if there were a stock market crash and you lost your job at the same time? This is a not unlikely scenario since companies tend to lay off in an economic downturn. You would be forced to sell your stock funds at the worst possible time, when prices are down.
posted by JackFlash at 4:45 PM on September 10, 2008
1: Pay off the CC
2: Promise yourself to never run it up again
3: Save $250/mo back into the fund (or some other rainy day savings format) moving forward
4: Read IWillTeachYouToBeRich
Good Luck
posted by milqman at 5:14 PM on September 10, 2008
2: Promise yourself to never run it up again
3: Save $250/mo back into the fund (or some other rainy day savings format) moving forward
4: Read IWillTeachYouToBeRich
Good Luck
posted by milqman at 5:14 PM on September 10, 2008
The math of this is pretty straightforward. You're paying a lot of interest, and your mutual funds won't beat 15%.
But the math has almost nothing to do with what the best decision is for you. It's about your budgeting, and behaviour.
Right now, you're able to put 200-300 towards your debt per month. If you cashed in some mutual funds to pay for the debt, do you think you'd still be able to put that kind of money in savings?
When I was in a similar position to you, I found it easier to make the little sacrifices, and smarter buying decisions when I had that small amount of credit card debt as motivation. I was able to put off big purchases, hunt for deals, and waste less money.
If I had pulled cash out of savings to pay down credit card debt, I'm not sure I'd have been able to put that money back in savings. It's easy to let your lifestyle inflate to eat up all of your money. It takes motivation and discipline.
Overall, your financial position sounds pretty good, the interest rate isn't abhorrent, and your payments will pay down a decent amount of the principal each month. So use the debt as motivation to make good spending decisions, and maybe find a bit more to put on the credit card.
posted by thenormshow at 9:45 PM on September 10, 2008
But the math has almost nothing to do with what the best decision is for you. It's about your budgeting, and behaviour.
Right now, you're able to put 200-300 towards your debt per month. If you cashed in some mutual funds to pay for the debt, do you think you'd still be able to put that kind of money in savings?
When I was in a similar position to you, I found it easier to make the little sacrifices, and smarter buying decisions when I had that small amount of credit card debt as motivation. I was able to put off big purchases, hunt for deals, and waste less money.
If I had pulled cash out of savings to pay down credit card debt, I'm not sure I'd have been able to put that money back in savings. It's easy to let your lifestyle inflate to eat up all of your money. It takes motivation and discipline.
Overall, your financial position sounds pretty good, the interest rate isn't abhorrent, and your payments will pay down a decent amount of the principal each month. So use the debt as motivation to make good spending decisions, and maybe find a bit more to put on the credit card.
posted by thenormshow at 9:45 PM on September 10, 2008
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posted by monju_bosatsu at 1:53 PM on September 10, 2008 [1 favorite]