Evaluate this plan

[fpguy]

Hi everyone, just looking for a second set of eyes. Feel free to make suggestions, disagree, modify or otherwise contribute!

1. Debt

• Student Loan: Federal Subsidized - $11,300 @ 5.75%
• Student Loan: Federal Unsubsidized - $15,800 @ 5.75%

2. Credit Cards

1. Freedom
2. CSP
3. Ink Cash
4. Ink+
5. FIA Amex
6. Discover IT (double cash back year)
7. OBC (with cap)

3. Investments

• Roth IRA $5500 Total (0 contributed for 2016)
• 401k - $7900 (Employer matches 4% if I contribute 8% which I do)
• Money Market Account - $1500 cash (not invested at the moment)

4. Emergency Fund

• $12,000 sitting in checking at 1%

Summary:
$27,100 Student loan debt at 5.75% fixed
$5,500 Roth IRA
$7,900 401k
$12,000 Emergency fund
$1,500 money market account

Budget is as follows:

Rent: $625
Student Loan: $240
Groceries: $200
Restaurants: $200
Entertainment: $200
Train Pass: $80
Electric: $35
Gas: $35
Internet: $10
Cell Phone: $50
Renters Insurance: $15

Total Monthly Expenses: $1685

Net income after:
8% contribution to 401k (employer 4% match)
Health/Dental/Vision/Life Insurance
HSA
Total: $3660

$2200 left over every month

Now, I have the option to contribute another $5,500 this year to my Roth. I'm debating doing so as paying down the loan would net me a guaranteed 5.75% return on $27,100 vs a variable return on the Roth contribution. Unfortunately for me, the loan does not accept CC as a form of payment, however fortunately for me, they do accept money orders!

Assuming paying $10k a year was easily doable for me, how smart/stupid would it be to buy $10,000 worth of gift cards on a card that gives me 0% APR for 12 months, and pay that $10k back over 11 months? Obviously utilization would go up, but I have a fair amount of credit that I don't utilize as is. I keep utilization around 1% or so.

Aside from the obvious here of paying down the loan as fast as possible, any other ideas or suggestions? It's early so I might be missing some key details, feel free to ask.

 

[Matt]

Hey @fpguy what is your tax rate (fed/state/city)?

 

[incendia]

just a suggestion

you should put your emergency fund into 12 $1000 staggered CDs to get a little bit more juice from it.

this will also make it harder for you to use the funds for non emergency uses

 

[fpguy]

Hey @fpguy what is your tax rate (fed/state/city)?

Fed: 25%
State: 3.75%
City: 5%

(I just looked all of these up)

just a suggestion

you should put your emergency fund into 12 $1000 staggered CDs to get a little bit more juice from it.

this will also make it harder for you to use the funds for non emergency uses

I thought about moving the $12k into something with a bit higher interest, but I like the liquidity of the savings account at the moment. If I need all $12k tomorrow I can get to it without issue. I looked into a few different accounts like NetSpend but I'm not trying to add any additional mental overhead for a few percentage points, especially when the total dollar amount is capped.

 

[thehustla]

Why not open a Mango account and use your emergency funds for the 6% instead of 1% you're getting now.

It's 6% up to 5k but it's still better than the 1%.

 

[fpguy]

@thehustla I had looked at Mango, NetSpend and a couple of the other 5%ish checking accounts and came to the conclusion that with the fees, small dollar amount cap, restrictions etc. I would just rather not deal with the headache. I could be totally unfounded with my reasoning but I'm just letting you know why I didn't set one up.

 

[Matt]

OK here's what I would do:

Let's keep it simple in terms of 'emergency fund' (EF) for this, I'll blur lines on that occasionally,.. but it helps get to goal.

• I would take out the $10K as an interest free loan.
• I would take the $12K and the $1.5K and add it to the $10K to make my war chest. I've now got $23.5K.
• The roth can wait until 4/15/17 (if you file then) for 2016. Hold.

Pay off loan #2
I would take $15,800 out of the war chest immediately, and pay off the entire Unsubsidized loan, let's say that happens in January. Your Jan cashflow should increase by the amount of the payment saved, so you should have $2300 or so of free cashflow.

I'd then rename (temporary placeholder) the Roth as my Emergency Fund, for $5500. I would invest it no more aggressively than 30 stocks/70bonds because we are leaning on its stability in order to protect us as we take on aggressive risk elsewhere.

In Jan,
I'd have $2300 extra inflow
$7,700 in cash EF
$5500 in roth EF
$10K liability due in 11 months

I would take $5000 and put it towards loan #1, new balance $6100 ish.

In Feb,
I'd have $2300 extra inflow
$5,000 in cash EF
$5,500 in roth EF?
$10K due in 10 months (a ticking bomb)

Extra payment of $3000 to loan #1, new balance, sub $3000

In March
$2300 extra inflow
$4,300 cash EF
$5,500 roth EF?
9 months to due date

If the Roth was stable/close to the $5,500, I'd pay off the final student loan amount in full.

April 1st (fool on me) my firm reorganizes, and I lose my job. Worst case, no severance.

I'd have:

• $3,600 in cash EF, which would support the first 3 months of trying to get a new job.
• $5,500 in Roth EF
• $7,900 in 401K (plus 3 months of contributions)

Now, it is bad advice to say take money from the 401(k), because it has a penalty of 10%, but if you really needed the money, you could take some as a last ditch resort. If the account was up to $11K by the time I needed to tap it, that would only be $1100 (assuming little to no earnings tax).

$1100 sounds like a hugely punitive amount, but it is important to remember that the interest on $27100 is about that (after tax bennies) per year so you are taking the chance to totally remove $1100 from annual expenses in exchange for the risk that you might need to draw on the 401(k) in a black swan event. That is a good risk/reward balance for me. Guarantee to pay out $1100 vs worst case you have to.

The big problem here though is the ticking bomb.. when that $10K starts accruing interest there will be trouble. This is where you might want to lean on MS while unemployed to help pay the bills, and also keep an eye on things like balance transfers (3% fee on $10K for a year isn't a killer). It's also possible that (if you were still unemployed a year from now) that you could use MS to float a revolving balance until income arrived.

The biggest risk
The worst case risk would be something that not only cost your job today, but prevented another, such as disability. If that occurred, this strategy would be very risky.. but again, that depends on what you do. If you are a coder, you could lose the ability to walk, but still work effectively, if you are a dentist, not so much. So the type of employment, and risk of total disability is an important consideration.

If you feel that this is a risk that is too high, then you could take a similar approach, but slow down the payments to loan #1. This is a risk tolerance question now.

For example, a safer variation might be:

• $10K loan from credit card
• Pay $15.8K immediately (you have plenty of EF at the moment)
• Pay $1K into Loan 1 per month, retain balance of $1.3 to replenish EF and prepare to pay the loan on month 11.

It's all about risk and reward.

 

[Annie H.]

The biggest risk
The worst case risk would be something that not only cost your job today, but prevented another, such as disability. If that occurred, this strategy would be very risky.. but again, that depends on what you do. If you are a coder, you could lose the ability to walk, but still work effectively, if you are a dentist, not so much. So the type of employment, and risk of total disability is an important consideration.

Why not mitigate the risk by purchasing disability insurance. I'm not big on life insurance, don't qualify for and mostly don't believe in L-T care insurance. I'm sure I'm one of the lucky ones (if you don't count the conditions that enabled me to collect disability insurance but I went on full disability in late 40s and collected over $500K by the age of 65, SO collected nearly $200K. Neither of us could have easily survived without this income.

 

[Matt]

Why not mitigate the risk by purchasing disability insurance. I'm not big on life insurance, don't qualify for and mostly don't believe in L-T care insurance. I'm sure I'm one of the lucky ones (if you don't count the conditions that enabled me to collect disability insurance but I went on full disability in late 40s and collected over $500K by the age of 65, SO collected nearly $200K. Neither of us could have easily survived without this income.

That's an arbitrage question.

Do disability insurance premiums + pita factor + probability of claim successful + could you have just worked anyway = more than dropping the risk level down a bit

 

[fpguy]

I would take out the $10K as an interest free loan.

To confirm, that 10k would be through the purchase of my preferred flavor of GC? Otherwise I am not certain where this interest free loan would come from

If you are a coder, you could lose the ability to walk, but still work effectively, if you are a dentist, not so much.

Perhaps theoretically yes, but I'm certain that if I lost the ability to walk, the last thing on my mind would be how to find another job. (That sounds super depressing)

If you feel that this is a risk that is too high, then you could take a similar approach, but slow down the payments to loan #1. This is a risk tolerance question now.

I think I am going to go with something more along these lines, although your suggestion makes perfect sense to me. I would just rather pay down the loan slightly slower and bear much less risk. I hadn't thought about using the Roth as part of my EF. I kind of wrote off that money as "invested forever" which isn't necessarily a bad thing in my mind, although when looking at that as part of the EF the options to quickly pay back the loan are becoming more clear.

I think my plan moving forward will be some variation of as follows:

Withdraw $5,000 from EF
Take out $10,000 loan from CC
Pay $15,000 towards loan (Both subbed and unsubbed are the same interest rate so I believe paying off one first won't really help, although I can see it being useful should I decide to go back to school.)

That would leave the loan at $12,100 which seems much more reasonable to me. I could then refill my EF while still paying large chunks towards the loan. I was thinking it would be around 3 years before I could pay it all off but honestly, I think 1 1/2 years is much more feasible, if not shorter. I could probably do my plan twice, once I have built back up a little more reserve cash.

 

[fpguy]

Why not mitigate the risk by purchasing disability insurance. I'm not big on life insurance, don't qualify for and mostly don't believe in L-T care insurance. I'm sure I'm one of the lucky ones (if you don't count the conditions that enabled me to collect disability insurance but I went on full disability in late 40s and collected over $500K by the age of 65, SO collected nearly $200K. Neither of us could have easily survived without this income.

I'm glad that worked out for you, sounds like it could have been a very difficult situation. I actually already receive LTD insurance through my employer which seems like a decent insurance policy should the rest of my meniscus decide it doesn't want to cooperate. (Soccer and tennis already had its way with my knees haha)

 

[Annie H.]

That's an arbitrage question.

Do disability insurance premiums + pita factor + probability of claim successful + could you have just worked anyway = more than dropping the risk level down a bit

Well... if I could have worked anyway--certainly no capability of working full-time I wouldn't have been awarded disability! They followed me, examined me, etc. for 18 years. Resorted to lawyer a couple times, SO had lawyer from the beginning. Yep, total PITA but if you honestly cannot work-- in any profession (I think that may be where your problem is, thinking one can always work at something!--Stephn Hawking I ain't)

 

[Annie H.]

I'm glad that worked out for you, sounds like it could have been a very difficult situation. I actually already receive LTD insurance through my employer which seems like a decent insurance policy should the rest of my meniscus decide it doesn't want to cooperate. (Soccer and tennis already had its way with my knees haha)

Just so you know for the future, employer paid LTD is a very different product than private. Also-- they're getting closer to meniscus transplants but protect what you have! I'm still waiting for the magic "raygun" surgery for my C-spine-- they're getting close on that also but I don't think in time to replace mine! Good luck.

 

[Matt]

To confirm, that 10k would be through the purchase of my preferred flavor of GC? Otherwise I am not certain where this interest free loan would come from

Yep - free money however you create it. MO or Serve.

I think I am going to go with something more along these lines, although your suggestion makes perfect sense to me. I would just rather pay down the loan slightly slower and bear much less risk.

Cool - good luck!

 

[Matt]

Well... if I could have worked anyway--certainly no capability of working full-time I wouldn't have been awarded disability! They followed me, examined me, etc. for 18 years. Resorted to lawyer a couple times, SO had lawyer from the beginning. Yep, total PITA but if you honestly cannot work-- in any profession (I think that may be where your problem is, thinking one can always work at something!--Stephn Hawking I ain't)

My attitude is that money can be made. Disability insurance claims aren't inline with that attitude, the essence of own occ and any occ.

 

[fpguy]

Small update in case anyone was looking at this:

Student loan is paid off in full
Currently owe $5000 to 0% APR card due in 12 months (easily can pay this down)

CCs I've received + initial bonus

Chase
Freedom 1/09 - $150
Ink Cash 7/15 - $150
CSP 11/15 - 55k
Ink+ 11/15 65k
SW Plus 2/16 - 50k
SW Premier 3/16 -50k (Companion pass done)
Hyatt - 3/16 2 free nights
IHG - 4/16 - 80k + $50 credit
BA - 5/16 - 50k

Amex
FIA Amex 12/15 - $50
SPG Personal 2/16 30k
BCP 3/16 $450
PRG 3/16 50k
SPG Bus 4/16 - 35k
Platinum Personal 5/16 -100k

BOA
Alaska 25k + $100 credit

Barclay
Arrival+ 12/15 40k

Capital One
Spark Business 3/16 - $500

Citi
Access More 3/16 - $650
Prestige 5/16 - 50k

Discover
Discover IT 2/16 - $100

Wells Fargo
Visa Signature 12/16

You guys are all awesome. Paid off $28k of student loans, and have enough points to travel for like 3 years . Total points balance across all cards is a little over a million. My only regret is that I didn't find out about this sooner.

 

[Matt]

Warms the cockles of my heart @fpguy if you need any help in the future with investing/next steps, drop me a line and i'll be happy to discuss, no charge.