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OT: Any financial advisors on the board to help with a question?

BFPSU

Well-Known Member
Aug 26, 2001
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I know what you are probably thinking, are you crazy!!!??? You are going to ask for a piece of financial advice on a message board where any loon can tell you anything. Well for many of us who have been on this board for over 10-15 years can attest, there are a lot of great people on here who have lend their expertise to almost any topic imaginable. So I say, why not find out/ask.
My basic question is paying off debt vs paying the maximum into my 401 K (it's the TSP with the Federal Government)
Here's my current situation $20,000 in CC debt ( really stupid decisions/a little bad luck). However, I secured a personal loan with my bank for loan at 9.8% to pay that off-60 month term (Approx $425 a month) starting next month. I currently put 16% of my pay into my 401 K ( I get paid 2x per week so I put in Approx-$500 per check/$1000 a month into a fund that mirrors the S&P 500). The 401k balance is a little over $300,000. I am 46 years old. My salary is approx-$85,000. I have no mortgage. However, where I live, rent is insane and budgeting a significant amount every month is difficult. I currently have 36 months left on my car loan ($10,500 at 2%) Should I reduce my TSP/401K contributions down to 5% (Agency matches up to 5%) and use that "extra money" to pay off the loan at basically 10% as fast as possible or Try and put maybe $50-75 a month extra on top of the loan and maybe get that paid off in 3.5-4.5 years. I guess I get confused over the ROI on the 401 K and compounding interest but if the S&P continues at (I hope) at about 10% per year and the loan is 10%, what's the better option? I can also make catch up contributions to my TSP after 50 years old. Oh yeah, don't yell at me too much over my finances being a wreck but I can take "some" criticism. I also know that nothing works unless you have discipline with your money which trust me, I've learned after this.
 
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If the rate you expect to earn, including any employer match and the tax tax benefit, on your 401(k) contribution is greater than 9.8%, then continue your contributions to the 401(k). If it is less, then you should temporarily suspend contributions and use the money to pay off your debt.
 
Are your investments making more than that 9.8% interest rate than the loan to pay down your debt is costing you? Unlikely. Pay off that high interest debt as quickly as you possibly can. Then focus on your 401k again. As you suggest, I'd probably keep a minimum amount of contributions to the 401k to ensure you can maximize the company match. After that, I'd focus on the debt.
 
How do you take into consideration that the 401k is in pretax dollars and the loan payment is in post tax dollars? Wouldn't there be a 28% difference in the value of the dollars used? I know that the taxes end up being paid on the 401k, but the theory is that they will be at a lower tax rate.
 
I know what you are probably thinking, are you crazy!!!??? You are going to ask for a piece of financial advice on a message board where any loon can tell you anything. Well for many of us who have been on this board for over 10-15 years can attest, there are a lot of great people on here who have lend their expertise to almost any topic imaginable. So I say, why not find out/ask.
My basic question is paying off debt vs paying the maximum into my 401 K (it's the TSP with the Federal Government)
Here's my current situation $20,000 in CC debt ( really stupid decisions/a little bad luck). However, I secured a personal loan with my bank for loan at 9.8% to pay that off-60 month term (Approx $425 a month) starting next month. I currently put 16% of my pay into my 401 K ( I get paid 2x per week so I put in Approx-$500 per check/$1000 a month into a fund that mirrors the S&P 500). The 401k balance is a little over $300,000. I am 46 years old. My salary is approx-$85,000. I have no mortgage. However, where I live, rent is insane and budgeting a significant amount every month is difficult. I currently have 36 months left on my car loan ($10,500 at 2%) Should I reduce my TSP/401K contributions down to 5% (Agency matches up to 5%) and use that "extra money" to pay off the loan at basically 10% as fast as possible or Try and put maybe $50-75 a month extra on top of the loan and maybe get that paid off in 3.5-4.5 years. I guess I get confused over the ROI on the 401 K and compounding interest but if the S&P continues at (I hope) at about 10% per year and the loan is 10%, what's the better option? I can also make catch up contributions to my TSP after 50 years old. Oh yeah, don't yell at me too much over my finances being a wreck but I can take "some" criticism. I also know that nothing works unless you have discipline with your money which trust me, I've learned after this.


Me? I always think about human nature more than numbers. When the money comes out of you paycheck, it is going someplace good (your 401k) if you reduce your 401k contribution, you will have more money in your 'take home pay', and many people while well intentioned, never put that 'extra' on their loan, it ends up going who knows where!! Plus the money you put into your 401k goes in pre tax, (including state, fed, ss etc) so that say $10 contribution only costs, as a guess, $7 from your take home pay (because again, it is pre tax)
So I would say, keep doing what you are doing with your 401k, and do your best with your personal loan. Two more things to consider, 1) could you refinance your car, and roll that personal 9.8% loan into it?? Even if they consider your car 'used' , used car rates are still much less than 9.8%. I don't know your car or its equity situation, and I know you may not get 2%, but on average your rate should be lower.
2) you may want to consider diversifying away from 100% allocation to the S&P. While I am not opposed to 100% in equities, there are other markets out there, small, mid cap, international etc. But we will leave that conversation to another day.

With rents insane, I'd consider buying a home.
my $0.02,
 
Me? I always think about human nature more than numbers. When the money comes out of you paycheck, it is going someplace good (your 401k) if you reduce your 401k contribution, you will have more money in your 'take home pay', and many people while well intentioned, never put that 'extra' on their loan, it ends up going who knows where!! Plus the money you put into your 401k goes in pre tax, (including state, fed, ss etc) so that say $10 contribution only costs, as a guess, $7 from your take home pay (because again, it is pre tax)
So I would say, keep doing what you are doing with your 401k, and do your best with your personal loan. Two more things to consider, 1) could you refinance your car, and roll that personal 9.8% loan into it?? Even if they consider your car 'used' , used car rates are still much less than 9.8%. I don't know your car or its equity situation, and I know you may not get 2%, but on average your rate should be lower.
2) you may want to consider diversifying away from 100% allocation to the S&P. While I am not opposed to 100% in equities, there are other markets out there, small, mid cap, international etc. But we will leave that conversation to another day.

With rents insane, I'd consider buying a home.
my $0.02,

Thanks for the response. Buying home right now isn't an option, how could I put 20% down on something when I am having trouble paying off this debt? If i had $20,000 to put down on a house, I would just pay off the debt, am I right or am I missing something? My 401K offers a few different funds. It's called the Thrift savings program and it's for employees in the Federal Government.
 
How do you take into consideration that the 401k is in pretax dollars and the loan payment is in post tax dollars? Wouldn't there be a 28% difference in the value of the dollars used? I know that the taxes end up being paid on the 401k, but the theory is that they will be at a lower tax rate.


Include the current tax benefit as part of the return on the 401(k). The present value of future taxes paid on 401(k) distributions probably is so low that it's not worth doing the exercise, unless the discount rate used is so low that it makes the entire question moot.
 
With an $85k salary, max 401k contribution is almost $15k per year. I don't see any reason to carry debt at a high 10% interest rate for an extended time. With some proper budgeting, it would seem you could pay off your debt in 2 years quite easily, 1 year if you are aggressive.

You'd likely need to list a full budget to get the best answer to your question. You likely have opportunities to pay down the debt by reducing other spend vs. cutting back on your 401k. However conventional wisdom typically states to contribute to your 401k to get your company match first, then pay down your high-interest debt before making additional contributions to max out your 401k. Credit card debt and your 10% loan certainly qualify as high interest.

I'd suggest checking out this FAQ guide from Reddit Personal Finance. It has some good general rules. Keep in mind that general rules aren't always the best for everyone, but some good stuff here.

http://www.reddit.com/r/personalfinance/wiki/commontopics
 
Thanks for the response. Buying home right now isn't an option, how could I put 20% down on something when I am having trouble paying off this debt? If i had $20,000 to put down on a house, I would just pay off the debt, am I right or am I missing something? My 401K offers a few different funds. It's called the Thrift savings program and it's for employees in the Federal Government.
does the Federal government have some kind of 100% loan program?? I don't know. I would not be scared off by the 20% thing, I'd search and see what you can find. Despite what the news says you can probably get somebody somewhere to do a deal like that.

a quick search for 'no down payment loans' yield this, plus many more..

http://www.bankrate.com/finance/mortgages/4-mortgages-that-require-little-money-down-1.aspx
 
With an $85k salary, max 401k contribution is almost $15k per year. I don't see any reason to carry debt at a high 10% interest rate for an extended time. With some proper budgeting, it would seem you could pay off your debt in 2 years quite easily, 1 year if you are aggressive.

You'd likely need to list a full budget to get the best answer to your question. You likely have opportunities to pay down the debt by reducing other spend vs. cutting back on your 401k. However conventional wisdom typically states to contribute to your 401k to get your company match first, then pay down your high-interest debt before making additional contributions to max out your 401k. Credit card debt and your 10% loan certainly qualify as high interest.

I'd suggest checking out this FAQ guide from Reddit Personal Finance. It has some good general rules. Keep in mind that general rules aren't always the best for everyone, but some good stuff here.

http://www.reddit.com/r/personalfinance/wiki/commontopics

Thanks. I don't have a CC debt now, it was part of the loan at 9.8%
 
To make this very simple, you should pay off the CC debt and the 9.8% personal loan you just took out with your bank as quickly as possible. Contribute the minimum you can to your 401k for the time being, enough to get the 5% match. Once that loan is paid off, then worry about getting a house. Just my 2 cents.

Don't worry about what you're earning on your 401k and whether it's greater than or less than 9.8%. In the long run, there's no way you'll do better than 9.8% each year.
 
You could also take out a loan from your TSP account (currently 2% rate) and repay your TSP with deductions from your paycheck, with whatever timeline you want. The added benefit is that the interest is also deposited in to your TSP account.
 
To make this very simple, you should pay off the CC debt and the 9.8% personal loan you just took out with your bank as quickly as possible. Contribute the minimum you can to your 401k for the time being, enough to get the 5% match. Once that loan is paid off, then worry about getting a house. Just my 2 cents.

Don't worry about what you're earning on your 401k and whether it's greater than or less than 9.8%. In the long run, there's no way you'll do better than 9.8% each year.
So it's better to take the "risk" that my 401K wouldn't make 15-20% per year these next two years and just fire away at the loan.
 
You could also take out a loan from your TSP account (currently 2% rate) and repay your TSP with deductions from your paycheck, with whatever timeline you want. The added benefit is that the interest is also deposited in to your TSP account.
I can't-took out a loan from my 401 K that I am currently paying off-real estate that went south. Will be done with that loan in 3 years thank goodness.
 
I can't-took out a loan from my 401 K that I am currently paying off-real estate that went south. Will be done with that loan in 3 years thank goodness.

If the current loan was for the purchase of a primary residence, you can take out another general purpose loan with the stipulation that it needs to be paid off in 5 years.
 
I know what you are probably thinking, are you crazy!!!??? You are going to ask for a piece of financial advice on a message board where any loon can tell you anything. Well for many of us who have been on this board for over 10-15 years can attest, there are a lot of great people on here who have lend their expertise to almost any topic imaginable. So I say, why not find out/ask.
My basic question is paying off debt vs paying the maximum into my 401 K (it's the TSP with the Federal Government)
Here's my current situation $20,000 in CC debt ( really stupid decisions/a little bad luck). However, I secured a personal loan with my bank for loan at 9.8% to pay that off-60 month term (Approx $425 a month) starting next month. I currently put 16% of my pay into my 401 K ( I get paid 2x per week so I put in Approx-$500 per check/$1000 a month into a fund that mirrors the S&P 500). The 401k balance is a little over $300,000. I am 46 years old. My salary is approx-$85,000. I have no mortgage. However, where I live, rent is insane and budgeting a significant amount every month is difficult. I currently have 36 months left on my car loan ($10,500 at 2%) Should I reduce my TSP/401K contributions down to 5% (Agency matches up to 5%) and use that "extra money" to pay off the loan at basically 10% as fast as possible or Try and put maybe $50-75 a month extra on top of the loan and maybe get that paid off in 3.5-4.5 years. I guess I get confused over the ROI on the 401 K and compounding interest but if the S&P continues at (I hope) at about 10% per year and the loan is 10%, what's the better option? I can also make catch up contributions to my TSP after 50 years old. Oh yeah, don't yell at me too much over my finances being a wreck but I can take "some" criticism. I also know that nothing works unless you have discipline with your money which trust me, I've learned after this.

I agree with many of the responses:
  1. Always at least contribute the % of your pay to the 401 that maximizes your company match
  2. Your debt is not only at a high interest rate, but is preventing you from (it sounds like) accumulating a "rainy day fund", which someone of your age should have has long ago.
  3. So cut your 401 contribution down to where you just maximize the match, and aggressively pay off the loan
  4. Then accumulate a "rainy day fund" of at least 6 months expenses
  5. Don't buy a new car until the above is completed. Car payments can be a killer
  6. Then continue to save until you have a down payment on a home/condo/whatever so you can get out of your high rental (as long as you are stable in the area - buying a home for 1 or 2 years is generally not a good investment and may cause more headaches than it is worth)
  7. If your goal is home ownership, I would advise putting off another new car until you are a homeowner.
  8. And then raise your 401K back up to the maximum contribution amount. You can raise it gradually if you feel the need for additional non tax deferred savings.. For example, if you recognize a future need to send a kid to college, pay for a wedding, take a big vacation that you always wanted to take,..... So that you do not get back in debt.....
I really didn't have the opportunity to aggressively save in my 401 until 8 years ago, but with the catch up contributions allowed after age 50 I really have caught up.... You already have a great nest egg started, but really need to address your non tax deferred finances.
 
This situation worries me when I see the 401k loan already in place. A poster above commented on the "human nature" of the decision to use the funds for other purposes when your 401k contribution is reduced. Overall, I would have to agree there is a risk. I would probably want to reduce my current 401k to pay down other debt. Off the top of my head I am unsure of paying down extra on your 401k loan. That may sound crazy but I have seen people's retirements set back 10 years when they lose their job and have to take a distribution on the loan. I assume the loan value is included in your $300K in the 401k as well.
 
In regards to buying a home, I am mobile with my job and will probably relocate at least once more maybe twice in the next 10 years
 
I am not borrowing from my 401 K again no matter what. I have less than $10,000 left on that
 
So it's better to take the "risk" that my 401K wouldn't make 15-20% per year these next two years and just fire away at the loan.

Yes, at least that's what I would do. That debt is a certainty. And 9.8% is a high interest rate. I'd pay off that, and then your 401k loan. Nobody knows what the market will do. Contribute the minimum to your 401k so that you get the match, and put the rest toward those loans. Do they even allow you to continue contributing to the 401K fund balance while you have a loan balance outstanding?
 
Yes I can contribute to the 401k while I contribute
 
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I know what you are probably thinking, are you crazy!!!??? You are going to ask for a piece of financial advice on a message board where any loon can tell you anything. Well for many of us who have been on this board for over 10-15 years can attest, there are a lot of great people on here who have lend their expertise to almost any topic imaginable. So I say, why not find out/ask.
My basic question is paying off debt vs paying the maximum into my 401 K (it's the TSP with the Federal Government)
Here's my current situation $20,000 in CC debt ( really stupid decisions/a little bad luck). However, I secured a personal loan with my bank for loan at 9.8% to pay that off-60 month term (Approx $425 a month) starting next month. I currently put 16% of my pay into my 401 K ( I get paid 2x per week so I put in Approx-$500 per check/$1000 a month into a fund that mirrors the S&P 500). The 401k balance is a little over $300,000. I am 46 years old. My salary is approx-$85,000. I have no mortgage. However, where I live, rent is insane and budgeting a significant amount every month is difficult. I currently have 36 months left on my car loan ($10,500 at 2%) Should I reduce my TSP/401K contributions down to 5% (Agency matches up to 5%) and use that "extra money" to pay off the loan at basically 10% as fast as possible or Try and put maybe $50-75 a month extra on top of the loan and maybe get that paid off in 3.5-4.5 years. I guess I get confused over the ROI on the 401 K and compounding interest but if the S&P continues at (I hope) at about 10% per year and the loan is 10%, what's the better option? I can also make catch up contributions to my TSP after 50 years old. Oh yeah, don't yell at me too much over my finances being a wreck but I can take "some" criticism. I also know that nothing works unless you have discipline with your money which trust me, I've learned after this.


The 9.8% interest rate on the debt is fixed. Payoff the debt. There are no guarantees the 401k returns will be greater.
 
Look, life is short. You may think you're gonna live well into your 80's AND healthy. Odds are against that. So...

1) You now have ZERO credit card debt, right? All has been transferred to your personal loan, right? Here's what I suggest...make your payments AND add a payment to your PRINCIPAL every month, too. You effectively eliminate this debt in half the time.

2) Make the minimum 401K contribution to get your company match

3) Make an additional PRINCIPAL only payment on your car every month, too.

In 2 years, with less than 10% cc utilization, car paid off and your loan quickly approaching zero, your fico will be well into the high 700's. Sufficient to get a great rate, even two years from now.

Don't kill yourself getting rid of this debt. To make a PRINCIPAL ONLY payment, just call them up and ask for someone who is handling yourloans and you'd like to make an additional PRINCIPAL ONLY payment.

Then, get this CC. http://www.nerdwallet.com/blog/credit-cards/barclaycard-arrival-plus-world-elite-mastercard-review/

Have a two year game plan. Eliminate that loan, your car then apply for this CC and contribute minimally into your 401k. Who knows how your health or this countries financial health will be in 2017.
 
You could also take out a loan from your TSP account (currently 2% rate) and repay your TSP with deductions from your paycheck, with whatever timeline you want. The added benefit is that the interest is also deposited in to your TSP account.
the problem with these loans are, that if he separates from service , the remaining loan balance is consider
you should get a reverse mortgage
do you think they will let him do a reverse mortgage on his apt he rents?? OTHO, I thought you had to be 62 to qualify for a reverse mortgage. Or maybe this TIC and I missed it.

for me? at his age, I'd never lower my contribution to my 401k, that money over time will be the best treated money. But that's me. People say they will make double or extra principal payments, but stats show that is rarely the case, no matter how well intentioned the person is.
 
Keep up your 401K contribution. You should be able to get a loan with lower interest rate to pay off your CC debt.
 
Look, life is short. You may think you're gonna live well into your 80's AND healthy. Odds are against that. So...

1) You now have ZERO credit card debt, right? All has been transferred to your personal loan, right? Here's what I suggest...make your payments AND add a payment to your PRINCIPAL every month, too. You effectively eliminate this debt in half the time.

2) Make the minimum 401K contribution to get your company match

3) Make an additional PRINCIPAL only payment on your car every month, too.

I strongly disagree with this. Why in the world would you add additional principal payments on a 2% car loan at the same time you still have outstanding debt at 9.8%? Never, never, never should happen. If you have any extra money to throw at your debt, 100% of it should go to the higher interest loan first. No extra payments on the car until the other loan is paid off. Don't default on the car or any other loan, but don't pay any extra when there are higher interest loan on the table that will save you more money in the long run.

At the end of the day, payments against your 9.8% loan are a guaranteed 9.8% return (unless it's a variable rate). Good luck finding a guaranteed investment that matches that return. That's why you should focus on the high interest debt first. The only thing I might consider putting before that is some sort of emergency fund if you don't already have one. If you get hit with some unexpected issues (medical, legal, car trouble, lost job, etc.) you need to be able to protect yourself or you risk ending up in an even bigger debt hole that you are in now, and this could be more detrimental over the long term. That's why emergency funds are important. Beyond that, contribute to the 401k to get the free money your employer offers, then zero in on your debt, starting with the highest interest loans first while maintaining the required payments on the others.
 
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You could also take out a loan from your TSP account (currently 2% rate) and repay your TSP with deductions from your paycheck, with whatever timeline you want. The added benefit is that the interest is also deposited in to your TSP account.
I'm no financial expert, but every advice I ever read is avoid borrowing from a 401k/TSP at all costs. You are risking your retirement. You are not in a life or death situation.
 
Definitely reduce your 401k contribution to 5% and use the money to pay off your CC debt. It's a no brainer.
 
I know what you are probably thinking, are you crazy!!!??? You are going to ask for a piece of financial advice on a message board where any loon can tell you anything. Well for many of us who have been on this board for over 10-15 years can attest, there are a lot of great people on here who have lend their expertise to almost any topic imaginable. So I say, why not find out/ask.
My basic question is paying off debt vs paying the maximum into my 401 K (it's the TSP with the Federal Government)
Here's my current situation $20,000 in CC debt ( really stupid decisions/a little bad luck). However, I secured a personal loan with my bank for loan at 9.8% to pay that off-60 month term (Approx $425 a month) starting next month. I currently put 16% of my pay into my 401 K ( I get paid 2x per week so I put in Approx-$500 per check/$1000 a month into a fund that mirrors the S&P 500). The 401k balance is a little over $300,000. I am 46 years old. My salary is approx-$85,000. I have no mortgage. However, where I live, rent is insane and budgeting a significant amount every month is difficult. I currently have 36 months left on my car loan ($10,500 at 2%) Should I reduce my TSP/401K contributions down to 5% (Agency matches up to 5%) and use that "extra money" to pay off the loan at basically 10% as fast as possible or Try and put maybe $50-75 a month extra on top of the loan and maybe get that paid off in 3.5-4.5 years. I guess I get confused over the ROI on the 401 K and compounding interest but if the S&P continues at (I hope) at about 10% per year and the loan is 10%, what's the better option? I can also make catch up contributions to my TSP after 50 years old. Oh yeah, don't yell at me too much over my finances being a wreck but I can take "some" criticism. I also know that nothing works unless you have discipline with your money which trust me, I've learned after this.
Second the motion to invest up to the 401K match (the match is equivalent to an automatic 100% return), then pay down the debt (which is equivalent to getting a 9.8% tax-free guaranteed return, something the S&P does not offer).
Keep your car until it breaks down, past the 36 months if possible.
Don't buy a house until you have the debt paid off and an emergency fund built up.
(Real estate agents have everybody convinced buying a house is an investment: it's not for most people, 100 years of history shows real estate on average only beats inflation by 1% a year.)
 
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I strongly disagree with this. Why in the world would you add additional principal payments on a 2% car loan at the same time you still have outstanding debt at 9.8%? Never, never, never should happen. If you have any extra money to throw at your debt, 100% of it should go to the higher interest loan first. No extra payments on the car until the other loan is paid off. Don't default on the car or any other loan, but don't pay any extra when there are higher interest loan on the table that will save you more money in the long run.

At the end of the day, payments against your 9.8% loan are a guaranteed 9.8% return (unless it's a variable rate). Good luck finding a guaranteed investment that matches that return. That's why you should focus on the high interest debt first. The only thing I might consider putting before that is some sort of emergency fund if you don't already have one. If you get hit with some unexpected issues (medical, legal, car trouble, lost job, etc.) you need to be able to protect yourself or you risk ending up in an even bigger debt hole that you are in now, and this could be more detrimental over the long term. That's why emergency funds are important. Beyond that, contribute to the 401k to get the free money your employer offers, then zero in on your debt, starting with the highest interest loans first while maintaining the required payments on the others.

Well said. All extra $ should be applied to the principal of his 9.8% loan, first.
 
I know what you are probably thinking, are you crazy!!!??? You are going to ask for a piece of financial advice on a message board where any loon can tell you anything. Well for many of us who have been on this board for over 10-15 years can attest, there are a lot of great people on here who have lend their expertise to almost any topic imaginable. So I say, why not find out/ask.
My basic question is paying off debt vs paying the maximum into my 401 K (it's the TSP with the Federal Government)
Here's my current situation $20,000 in CC debt ( really stupid decisions/a little bad luck). However, I secured a personal loan with my bank for loan at 9.8% to pay that off-60 month term (Approx $425 a month) starting next month. I currently put 16% of my pay into my 401 K ( I get paid 2x per week so I put in Approx-$500 per check/$1000 a month into a fund that mirrors the S&P 500). The 401k balance is a little over $300,000. I am 46 years old. My salary is approx-$85,000. I have no mortgage. However, where I live, rent is insane and budgeting a significant amount every month is difficult. I currently have 36 months left on my car loan ($10,500 at 2%) Should I reduce my TSP/401K contributions down to 5% (Agency matches up to 5%) and use that "extra money" to pay off the loan at basically 10% as fast as possible or Try and put maybe $50-75 a month extra on top of the loan and maybe get that paid off in 3.5-4.5 years. I guess I get confused over the ROI on the 401 K and compounding interest but if the S&P continues at (I hope) at about 10% per year and the loan is 10%, what's the better option? I can also make catch up contributions to my TSP after 50 years old. Oh yeah, don't yell at me too much over my finances being a wreck but I can take "some" criticism. I also know that nothing works unless you have discipline with your money which trust me, I've learned after this.
what many are forgetting is the 9.8% loan you have on the CC is on a declining balance, where the 401k would be on a compounding balance. That is, you don't have to make 9.8% on your 401k to come out better, it is really like an average of 8%. As mentioned, I'd recommend to you to keep you 401k contributions up, and payoff your 9.8% loan as agreed.

Do the math. You mentioned you may take an extra $75 per month and put it on your loan (you have this money because you reduced you 401k contribution). So now you base payment is $425 for 60 months. You add or your $75, to make it $500 and you pay the loan off in approximately 48 months instead of 60. Ok $500 per month 48 months total payback is $24,000, on a $20,000 loan or $4000 in interest.

now take that $75 and compound it over the same time at 8% (almost 2 % lower than your rate,and a reasonable ror for the S & P 500 over time) $75 @ 8% for 48 months grows into $4254!! Your $250 bucks ahead maintaining your current 401k. Heaven forbid the S&P does better than that, which it could. It also may not. So what? at your age of 46 yrs old, and plenty of time until retirement, the S&P goes down, you get to buy more shares at a cheaper price!!!!
I'd really take a look at this. That's it!!!
 
what many are forgetting is the 9.8% loan you have on the CC is on a declining balance, where the 401k would be on a compounding balance. That is, you don't have to make 9.8% on your 401k to come out better, it is really like an average of 8%. As mentioned, I'd recommend to you to keep you 401k contributions up, and payoff your 9.8% loan as agreed.

Do the math. You mentioned you may take an extra $75 per month and put it on your loan (you have this money because you reduced you 401k contribution). So now you base payment is $425 for 60 months. You add or your $75, to make it $500 and you pay the loan off in approximately 48 months instead of 60. Ok $500 per month 48 months total payback is $24,000, on a $20,000 loan or $4000 in interest.

now take that $75 and compound it over the same time at 8% (almost 2 % lower than your rate,and a reasonable ror for the S & P 500 over time) $75 @ 8% for 48 months grows into $4254!! Your $250 bucks ahead maintaining your current 401k. Heaven forbid the S&P does better than that, which it could. It also may not. So what? at your age of 46 yrs old, and plenty of time until retirement, the S&P goes down, you get to buy more shares at a cheaper price!!!!
I'd really take a look at this. That's it!!!

What you are really saying is the equivalent of "You should borrow at 9.8% (8% if we buy your logic) to invest in the market".
It might work, but it's a bit like buying on margin.
As the average S&P annual return with dividend reinvestments since 1950 is about 11% and since 1900 9.6%, it might be viewed as making a sure tax-free 9% vs. making an expected tax-deferred 10%.
 
the problem with these loans are, that if he separates from service , the remaining loan balance is consider

do you think they will let him do a reverse mortgage on his apt he rents?? OTHO, I thought you had to be 62 to qualify for a reverse mortgage. Or maybe this TIC and I missed it.

for me? at his age, I'd never lower my contribution to my 401k, that money over time will be the best treated money. But that's me. People say they will make double or extra principal payments, but stats show that is rarely the case, no matter how well intentioned the person is.

LOL my reverse mortgage posts were obviously a joke. i find those commercials with Fred Thompson (?) to be hilarious, completely lacking information, and they pretend like it will solve everybody's financial woes, yet nobody knows what it is.
 
What you are really saying is the equivalent of "You should borrow at 9.8% (8% if we buy your logic) to invest in the market".
It might work, but it's a bit like buying on margin.
As the average S&P annual return with dividend reinvestments since 1950 is about 11% and since 1900 9.6%, it might be viewed as making a sure tax-free 9% vs. making an expected tax-deferred 10%.
No what I am really saying, is 2 things.
1) while many people have good intentions , when the extra money shows up on the pay check, more likely than not it doesn't go to extra payments, it goes somewhere else. That's been my experience (oh I pay cash, and pay myself back!! it rarely happens)
2) the 9.8% interest charged on the loan is on a declining balance, every time you make a payment, you pay back principal and interest, so the balance owed declines each time. So you don't need a 9.8% return to make up the money

no I am not telling somebody to take out a 9.8% loan and invest it in stocks. He has already made the loan. He asked which way would be better for. As I mentioned, I always factor in human nature of things. What I know if he keeps the loan, in 5 yrs he will have it paid off, and a lot more in a tax deferred 401k balance. If he reduces his contribution to 401k, we don't know if he will follow through on the extra payments, but we do know his 401k balance would not be as great!!

I don't see how you can say your 9% is tax free, as you paid tax on the money you make your payments with. Whereas your 401k contribution you pay no state, local, federal, ss, med-care tax on any of the money. it is easy to see a $10 contribution to your 401k only 'costs' your take home paycheck $6-$7 dollars.

both you and he are free to do as you want.
 
No what I am really saying, is 2 things.
1) while many people have good intentions , when the extra money shows up on the pay check, more likely than not it doesn't go to extra payments, it goes somewhere else. That's been my experience (oh I pay cash, and pay myself back!! it rarely happens)
2) the 9.8% interest charged on the loan is on a declining balance, every time you make a payment, you pay back principal and interest, so the balance owed declines each time. So you don't need a 9.8% return to make up the money

no I am not telling somebody to take out a 9.8% loan and invest it in stocks. He has already made the loan. He asked which way would be better for. As I mentioned, I always factor in human nature of things. What I know if he keeps the loan, in 5 yrs he will have it paid off, and a lot more in a tax deferred 401k balance. If he reduces his contribution to 401k, we don't know if he will follow through on the extra payments, but we do know his 401k balance would not be as great!!

I don't see how you and say your 9% is tax free, as you paid tax on the money you make your payments with. Whereas your 401k contribution you pay no state, local, federal, ss, med-care tax on any of the money. it easy to see a $10 contribution to your 401k only 'costs' your take home paycheck $6-$7 dollars.

both he and you are free to do as you want.
get the
No what I am really saying, is 2 things.
1) while many people have good intentions , when the extra money shows up on the pay check, more likely than not it doesn't go to extra payments, it goes somewhere else. That's been my experience (oh I pay cash, and pay myself back!! it rarely happens)
2) the 9.8% interest charged on the loan is on a declining balance, every time you make a payment, you pay back principal and interest, so the balance owed declines each time. So you don't need a 9.8% return to make up the money

no I am not telling somebody to take out a 9.8% loan and invest it in stocks. He has already made the loan. He asked which way would be better for. As I mentioned, I always factor in human nature of things. What I know if he keeps the loan, in 5 yrs he will have it paid off, and a lot more in a tax deferred 401k balance. If he reduces his contribution to 401k, we don't know if he will follow through on the extra payments, but we do know his 401k balance would not be as great!!

I don't see how you can say your 9% is tax free, as you paid tax on the money you make your payments with. Whereas your 401k contribution you pay no state, local, federal, ss, med-care tax on any of the money. it is easy to see a $10 contribution to your 401k only 'costs' your take home paycheck $6-$7 dollars.

both you and he are free to do as you want.
I agree with some of what you are saying.
1. I admit you are right about intentions - for example, some people use a mortgage or automatic 401K deduction as a forced savings plan.
2. The balance may be declining but you are still paying the same rate of interest.
3. I didn't mean he would take out a loan, but forgoing paying off debt to buy stocks is simply equivalent.
4. You are right about the 401K contribution - you do get an immediate tax break and money grows tax-deferred.
5. Paying off the loan is effectively a tax-free investment since you would have to earn the same rate after taxes to get the same financial benefit of the loan payment.
So on second thought I think it is a much closer call than I suggested, though I still would lean to the guaranteed result of paying off the debt.
 
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