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A place for Get Rich Slowly readers to ask questions
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It is currently Thu Apr 24, 2014 7:43 pm




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 Post subject: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 7:57 am 

Joined: Mon May 06, 2013 7:29 am
Posts: 18
Hello,

I am trying to find a good way out of my debt as quickly as possible, but I am struggling to see any light at the end of this long, long tunnel... It's hard to stay optimistic. Does anyone have any ideas, or could tell me if I'm doing the right or wrong thing? Experts or experienced people only please, I've done a lot of my own calculation.

So I graduated college with a degree in Mechanical Engineering. I have about $65,000 in debt, about $10,000 in savings, and about $10,650 in investments from gifts over the years, and I net about $1230 each month after taxes and retirement ($120 goes to retirement, Roth IRA). Annualized salary=$52,145 before taxes. Rent and typical bills run be about $550+250, and minimum loan payments are about $675. The rest goes to food and gas and girlfriend activities and Mint tells me my net worth is -$44,500 some.

My loans are as such:
$15,565 at 148/mo (7.49%) fix
$15,384 at 178/mo (6.15%) fix
$18,092 at 180/mo (3.29%) var
$16.230 at 172/mo (4.55%) var

My plan was to consider my current investments as my emergency fund; build my retirement @ 6% (minimum for max employer conribution); pay the minimum on my loans; and TRY to build my savings as much as possible. At the time when I can keep 5K in the bank, pay chunks of $1000 off starting with my highest interest loans. When I finally break over net worth to positive, pay off the last of my loans in a larger chunks.

I plan this way because I can't be 100% sure I will always have this job; my car is old and may need spontaneous repairs or simply die, and I plan on proposing sometime in the future, and want to set that money aside (5-6K).

However with retirement just starting and the last loans kicked in, at this rate, it suddenly got very hard to put money in the bank. It is a huge weight. I'm probably going to shut off my TV service and keep that extra $55 or so. But does anyone else have a suggestion? Is my "plan" the right idea or wrong? I may try to consolidate sometime in the future as well if I can find a fixed low rate.

Ah... I hate this feeling :tmi:


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 8:48 am 

Joined: Wed Nov 16, 2011 1:26 pm
Posts: 29
Experts or experienced people, you do realize this is a forum. :)

That aside, there is either a large amount of information missing or I am not as good at math as I thought. (M.S. in Mechanical Engineering)

You have an annualized salary of $52k which is $4,333 per month in gross pay, you net $1,230 each month. Where does the other $3,100 go? Or do you man you have $1,230 left after all bills?

You state that you have $10,000 in savings so that is a decent emergency fund all by itself. I would not feel the need to build a larger EF (or keep an additional $5,000 in checking) until I got rid of the student loans, or at least the debt with an interest rate over 5%.

I would focus on that %7.49 loan as it is costing you nearly $100 a month in interest all by itself. It is also your second lowest balance, so it should drop rather quickly.

While $65,000 is not a small amount of debt, this should not be overwhelming with a salary over $50,000 annual.


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 9:05 am 

Joined: Mon May 06, 2013 7:29 am
Posts: 18
toolcrib wrote:
Experts or experienced people, you do realize this is a forum. :)

That aside, there is either a large amount of information missing or I am not as good at math as I thought. (M.S. in Mechanical Engineering)

You have an annualized salary of $52k which is $4,333 per month in gross pay, you net $1,230 each month. Where does the other $3,100 go? Or do you man you have $1,230 left after all bills?


Another mechanical engineer! Good, you weren't detered by the long word problem I see. And yes I do realize it's a forum. I'll take what I can get. Any any all replies are always kind and I do appreciate them.

Actually I meant per paycheck. So it's actually $2400 per month (typ. 10 mo of the year, 3 for two months). Much of it goes to taxes (filled out with 0 exemptions, so I do get a notable return at the end of the year). Another so much of it goes to benefits premiums, the Roth IRA, and local taxes. (I set up a Roth because I like the idea of predictible taxation- one and done. It was almost a coin flip)


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 9:13 am 

Joined: Mon May 06, 2013 7:29 am
Posts: 18
I'm mostly confused on when and whether to pay in chunks, extra-per month, or a mix.

I was thinking maybe add the extra-per-month to my investments at a higher-than-loan interest rate, and then pay off in a chunk later, maybe like end of the year. That way I think I could maximize the earning potential of it while still dropping principle and getting the student loan interest tax return benefit.

Thoughts?


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 10:46 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5217
awinn17 wrote:
I was thinking maybe add the extra-per-month to my investments at a higher-than-loan interest rate, and then pay off in a chunk later, maybe like end of the year.


Bad idea. You will not earn more than 7.49% guaranteed in any investment but you do for any SL prepayment.

Otherwise, I like what toolcrib said.

You should also reduce your withholding so that you don't get a big refund. You are giving the government an interest free loan while you pay very high interest on the loans. Reduce the withholding to what it should be and and send all the rest to the highest interest rate SL.

Also, structure your expenses so that you live on 2 paychecks a month. In the months when you get 3 send ALL of it to the student loans. You are going to be paying for several years but eventually it will be behind you. You have a highly marketable degree and, while it seems like a lot (and it is), it is only about 1 year starting salary. You are in much better shape than many other people.

Please don't tell us in a few months that you have stopped paying on the loan so you can spend thousands of dollars on a bribe...I mean engagement ring. Hopefully your bride will understand that starting a marriage on a better financial footing is far more important than carrying around a geology museum.


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 11:42 am 

Joined: Mon May 06, 2013 7:29 am
Posts: 18
DoingHomework wrote:
awinn17 wrote:
I was thinking maybe add the extra-per-month to my investments at a higher-than-loan interest rate, and then pay off in a chunk later, maybe like end of the year.


Bad idea. You will not earn more than 7.49% guaranteed in any investment but you do for any SL prepayment.
...
You should also reduce your withholding
...
Also, structure your expenses so that you live on 2 paychecks a month.
...
Please don't tell us in a few months that you have stopped paying on the loan so you can spend thousands of dollars on a bribe...I mean engagement ring. Hopefully your bride will understand that starting a marriage on a better financial footing is far more important than carrying around a geology museum.



I agree, the margin would only be 1.5% MAYBE, and with the market risk and only a handful of dollars potentially saved, not worth it. But, worth the consideration!
...
Withholding changed to "1". I'm at work. For us, it's an online thing. Changed it, might see the difference on Friday's paycheck?
...
I have setup my budget to live on 2 paychecks, yes. I like to consider the extra two as freebies and helpers, holiday money, stuff like that. I'll try to put the next one toward the high interest SL and see how it feels.
...
No promises... I've eye'd this sparkly metal thing for quite a while and she wants "big!". But maybe I can make the case that 1/2 the total payback I can save I can invest in a bigger stone later with a modest one now? I mean neither of us are rich, obviously :p

Thank you for the advice. I noticed you have over 4000 some posts- you must love this stuff. What do you do?


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 11:59 am 
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Joined: Wed Sep 23, 2009 9:01 am
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awinn17 wrote:
Thank you for the advice. I noticed you have over 4000 some posts- you must love this stuff. What do you do?


I work in research at a university. One of my degrees is in mechanical engineering.


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 12:02 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5217
awinn17 wrote:
I've eye'd this sparkly metal thing for quite a while and she wants "big!". But maybe I can make the case that 1/2 the total payback I can save I can invest in a bigger stone later with a modest one now? I mean neither of us are rich, obviously :p


Get her to read this forum. If she has any sense she will come around. There are plenty of smart women on here to help her understand that the rock will make her happy for a few months but getting rid of debt leads to a lifetime of pleasure!


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 12:38 pm 

Joined: Mon May 06, 2013 7:29 am
Posts: 18
She's actually an engineer too, got her Civil degree the same time I got my Mech (or as much as we are allowed to call ourselves engineers without a PE). So I'm sure she knows. But you know- knowing vs wanting... the whole reason for our nation's fiscal crisis :D

If she'd said shoestring was good enough it might already have been done, haha


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 12:45 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5217
awinn17 wrote:
She's actually an engineer too, got her Civil degree the same time I got my Mech (or as much as we are allowed to call ourselves engineers without a PE). So I'm sure she knows. But you know- knowing vs wanting... the whole reason for our nation's fiscal crisis :D

If she'd said shoestring was good enough it might already have been done, haha


Get her a reinforced concrete ring then!


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 12:54 pm 

Joined: Wed Nov 16, 2011 1:26 pm
Posts: 29
You mentioned the student loan interest deduction as reducing the effective interest rate. This is somewhat true, but there is a cap to the amount of student loan interest that can be deducted. I do not know the exact number, but remember it being around $2,000. The interest on your three lower interest rate loans would cover that. I should say at this point that I am not a tax professional, so please verify this before making decisions based on it.

In regards to tax withholding, I have my state and federal exemptions set at 2 and have always got a modest federal return while owing the state a bit less. This year my net was a $64 dollar return.

As a suggestion for motivation, I found that a spreadsheet detailing how much I prepaid and how that affected the total interest I would pay and how much sooner I would be done with that loan to be very motivational. The knocking out of small loans early and rolling the minimum into the next loan will not start as quickly when your smallest loan is over 23% of the total loan amount. I adapted my spreadsheet from a mortgage on I found online.

The following advice may not be approved by all on this forum:
I would tend to put more toward reducing debt than saving for a replacement car. This is based on a few assumptions so may not apply. Assumption 1, the timing of replacing your current car is based solely on its longevity and not the simple desire to drive something different. Assumption 2, you have good credit and interest rates remain low. To save for a replacement in cash now results in you paying 7.49% on that money while it sits in a savings account earning around 1%. Putting the money that would have been saved toward your debt results in less unsecured debt when you need to buy a car, and the rate for a car loan should be lower than 7.49% .

For myself, saving for something means that when I have saved enough I will buy it regardless of need. This method will require you to increase your debt that you have been working hard to reduce in order to purchase a different car, and if you are motivated by seeing the total debt you carry decrease you will probably want to put this off as long as you can.

The downside of saving up to make a lump sum payment against debt is the possibility that seeing a large sum of money just sitting there will tempt you to spend it on something other than your debt. It will be a lot harder to argue against a larger diamond when you have the cash on hand.


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 1:36 pm 

Joined: Mon Feb 04, 2008 7:35 am
Posts: 1140
Location: Maryland
As far as the student loan interest deduction, it's salary based. I found out when I graduated that I could deduct my student loan interest, so I was all set on paying them off (My loans were not as high as yours). I was paying and paying, and then I found out the following year that my salary exceeded the point where I could no longer get a deduction (I'm also an enginerd), and I was sad. HA!!HA!! I ended up just paying them off so I wouldn't get that bill in the mail anymore.

As far as the ring...I like the idea of getting something reasonable now and stepping up later in life. It's not a bad plan, and your future wife may not want to replace it later.
I'm KIND of in that boat now. I have a serious bf, and he wants to propose, and he thinks that the ring on my finger reflects his finances. Well, he has debt, and I told him that I don't care that much about having a gargantuan ring. I ride a motorcycle, and run and do a ton of work with my hands, so I don't need something that will bust through lab gloves or whatever. So...we'll see what he springs for. I told him, regardless, if he can't pay it off before we're married, I'll be paying it too, so he has to decide. He's stubborn and thinks the world is thinking about him and his finances when they look at my ring. ugh...time will tell. I'm too old to be showing off and caring what anyone thinks. I've gone this long without a ring, is it really going to make a difference in my life? I do not know.


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 1:40 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1573
My wife keeps her ring(s) in a safe deposit box at the bank. We bought some fake stuff for her to wear in public because she doesn't want to run to the bank every time we go to some social event. If I'd know she was gonna do that, I would've bought her fake stuff to put in the safe deposit box too.


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 3:01 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5217
VinTek wrote:
My wife keeps her ring(s) in a safe deposit box at the bank. We bought some fake stuff for her to wear in public because she doesn't want to run to the bank every time we go to some social event. If I'd know she was gonna do that, I would've bought her fake stuff to put in the safe deposit box too.


So here's what you do my friend:

1. Go get the stuff from the safe deposit box
2. Find fake duplicates that look the same
3. Buy the fakes and put them back in the safe deposit box
4. Sell the real stuff
5. But index funds with the proceeds
6. Keep your mouth shut

Wait a minute, the earnings on that index fund probably will not cover the divorce attorney...

(My wife has plenty of real stuff that she keeps stored. I used to buy her stuff before I realized she didn't need it and we started collecting money instead.)


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 Post subject: Re: Help me be optimistic! Toss me some ideas!
PostPosted: Mon May 06, 2013 7:19 pm 

Joined: Sat Jul 11, 2009 10:59 am
Posts: 255
If your girlfriend is an engineer, she might appreciate synthetic diamonds. Same chemical structure, a fraction of the cost. Can she even wear good rings at work? My sister is an engineer, and she isn't permitted to wear her engagement ring.

I don't even wear my engagement ring anymore. My husband and I have matching wedding rings, and we prefer the simplicity of just those bands. I'd feel bad if my ring had been crazy expensive and is now just sitting in a box.


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