Hello and seeking advice/opinion

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Hello and seeking advice/opinion

Postby Bubba_Bucks » Tue Apr 17, 2007 11:54 am

new to these forums, but looking forward to learning a lot.

My wife and I decided to go the "no credit- cash only" way of life last July. We had been doing ok financially before, but made the mistake of taking out a home equity line of credit to do some home improvements, and spent too much of it on other things. Looking at the debt inspired me to try and do something more formal than we had been doing before, which was nothing but paying whatever bills showed up in the mail. Anyway, my brother-in-law gave me his Dave Ramsey CD's, and I saw the light. More or less. Because we already had good savings habits, just bad debt habits I don't follow Dave exactly as prescribed. Which now brings me to my actual question.

I have a home equity line of credit that I owe about $70k on. I am planning on liquidating my ameritrade brokerage account and using tax refund to drop this to about $40k. it is not locked in, so moves with prime. Probably around %8 today. My mortage is ~180k at %5.5 but will swictch to ARM in about 7 years, but am hoping to have that paid down substantially by then, so don't really want to mess with it. We have a 401k, two roth IRAs, and 529's for each of our 3 children that we are continuing to contribute to, although not max on any at this point. Currently, we have tightened our belts such that we will probably be able to pay it off in about 3 years, however it will not be a fun 3 years, and vacations will be to state parks etc.

According to Dave's approach, I should stop contributing to savings and pay of the equity loan quicker. However, I am not so sure about that. Opinions? What other information/details should I take into account? I guess my biggest downfall, is I am too lazy to do any laborious math calculations as to what makes the most sense.


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Postby tinyhands » Tue Apr 17, 2007 1:51 pm

No math here.
First of all, don't leave yourself without an emergency fund. You said "liquidating my Ameritrade account" which implies liquidating the entirety of it. I don't know what your household budget looks like (do you?) so I can't tell you the magic number, and truth be told there isn't one. 3-6 months is a fair estimate, so hang on to around that much.

Second, switching from investing to paying off debt is going to be approximately a wash in the long term. In other words, what you're paying down in debt is about what you'd be making had you invested it. If your HELOC is tax deductable, it might be slightly favorable to keep investing, from a mathematical perspective, and pay it off in 3 years instead of sooner.

Contrary to the Ramsey philosophy, I believe completely cutting off your savings is a last resort. I suspect that a good tactic for you is to make a modest cutback in your savings rate (along with the adjustments to your spending that you're already making) and shoot to pay it off in closer to 2 years. There's something magic (in my mind, anyway) about that 2 year goal being easier to visualize, and it may help you retain a bit of sanity.

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Postby JerichoHill » Tue Apr 17, 2007 2:12 pm

It sounds like you'd feel better to get part of your HELOC out of the way, so okay fine, close your brokerage account, but it doesn't sound like to me you're desperate, and therefore you don't need to do the Dave Ramsey stop saving while paying down debt thing. If you can save, do it.

Hey, state parks can be fun. Roadtrips allow you to see alot of different places.

(I would advise not stopping your pretax, roth, and 529s if you dont absolutely need to.
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