Student loans: the more you can pay at once, the better
Student loan bills reach six figures for one married couple, who wonder if they should throw as much money at the loan as possible or stick to the payment plan. Student loans are question 6 in this week's mailbag.
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We have a mortgage that is too high to refinance, but we are looking into it anyway. $281K in a 30-year fixed at 5% that we bought in late 2009. According to Zillow, our house is now worth about $259K. The house appraised for $279K when we bought it (we got a seller’s assist hence the higher mortgage). We recently did some home renovations (again, money burning a hole in the pocket plus want versus need…did we NEED to renovate half of the kitchen? no. Are we hoping that this would have added to the value and aesthetic of the home? Yes. Not sure how to find that out…) that cost about $6,000. We took a wall out between the dining room and kitchen, cut a doorway into another wall, bought a kitchen island and installed granite countertops (didn’t need to redo the cabinets or appliances).
We have approx $10,000 in savings at the credit union account we opened together (less than 1% interest rate) that is going to be minus about $3,000 after these home reno bills are paid. I have an additional $4,000 in a savings account that he has equal access to, plus a $6,000 ING savings account (about 3% interest) that he doesn’t know exists (until we do our SCFR worksheet). We don’t have any particular goals for these savings other than having an emergency fund set up. We like to travel, but when we go to pay the bills for the renovation or the travel, my husband prefers to take it out of what he has left in his checking account rather than pulling out of savings, therefore strapping himself for the month a little bit. I prefer to pull out of savings, though it really pains me to do so.
His car has 129K miles on it and he plans to keep it forever. My car has 84K miles on it, only about $700 left on the loan (will be paid off in June), and I plan to keep it as long as I can, or until we have a child. Since I am going through infertility treatments right now (about $150 a month), that means I’ll have the car a while yet (we do not plan to do IVF…if we aren’t meant to have children we are perfectly ok with that.)
As for retirement accounts, I save 5% with a company match of 4% that started in January 2012. I am currently considering changing jobs even though I have only been here a little over a year. I do not know what percentage my husband saves, but I know he does make contributions.
I try to cut my expenses as much as I can. I clip coupons and bring my coffee, breakfast and lunch to work as often as is feasible. I only shop sales and never buy clothes full price. I hardly ever buy new clothes…maybe a few new pieces each season. My credit card bill is not great, however. I have about $1,500 on it and I can never seem to keep it under control. I am trying to use it less and less but sometimes I use it to pay for things I purchase over the internet (like 5K race entries or Amazon.com/paypal purchases), and I don’t count it in my monthly budget as expenses…it just goes into my budget as a Visa payment of around $300 a month. I can definitely do better there.
Should we be saving more cash, investing our extra cash, making extra payments on our mortgage? When my husband’s money burns that hole in his pocket, where should I tell him to put it?
Given your student loan situation and your mortgage, I think the best thing for you guys to do any time you have some extra money that isn’t needed for anything urgent is to put it toward one of those debts, preferably the one with the highest interest rate. Every dollar you put toward such a move will save you three (or so) off of the last loan payment you’ll have to make.
I don’t see anything that you’re doing wrong, though. You have a solid emergency fund when you consider the whole of your cash savings. You seem to have your spending largely under control and are slowly whittling down your debts rather than watching them escalate. You’re doing the right things. It just takes time.
One thing that might be useful is to just sit down together one weekend afternoon and spread all of this out. Together, get a picture of how much you have (savings, retirement, home value, etc.), how much you’re spending each month, how much you’re bringing in each month, and how much debt you have. Talk about where you want to be in the future, and I strongly encourage you guys to really think about debt freedom (trust me, it feels fantastic). Just talk about things. You’ll feel better about everything if you get it all out there on the table together, trust me.
Q8: Is having another child hard?
My husband and I are thinking of having another child. Our first one was a real life changer and our biggest worry is that our second child will bring some disharmony into our life after we finally feel like we have a good balance. Are there any things we should be thinking about?
The biggest change our second child brought into our life was during the first year. Since our oldest was only two at the time and still needed a lot of help with basic things (diaper changes, bedtime routines, etc.), we found ourselves pairing off, with one adult handling one child and the other adult handling the other child.
That wasn’t too much different than what we did before, but with just one child, one parent found themselves free to take care of household tasks or just to relax. That vanished, particularly during the first year, and that was the biggest challenge.
Once our second child got to about nine to ten months or so, we were able to have one parent handle the routines with both of them while the other parent was able to return to housework and other tasks. (This whole pattern, of course, repeated with the third child.)
The first child was the one that caused the real life changes. The changes with the second were more subtle. The changes with the third were pretty easy.
Q9: Useful IRA tips for education
[Y]ou can pay for higher education expenses (tuition, books, fees, and even in some cases lodging) from funds in an IRA without the early withdraw penalty. If it’s a Roth IRA you dont have to pay income tax on the earnings either.
The funds can be used to pay for expenses for yourself, spouse, OR children.
You can see where this will save even more money since you wouldn’t have to pay extra income taxes. Obviously you would need to choose wise investments here, but you could go for some more conservative investments or just buy up some money market funds, but if you went ahead and invested it in a decent portfolio (mine is all ETFs) then you could actually make some money on it and cut that monthly savings requirement by a large amount.
Wish I had known this last year, so now I have to pay off the student loan I got, but at least this year will be much easier to afford.
This certainly works, and it’s one approach to saving for college.
My only hesitation is that doing this shoots your annual window for IRA savings for retirement. You’re only able to save about $5,000 a year in IRAs for retirement purposes and for many people, IRAs can be invaluable retirement savings tools. Using them for the education of your children is going to postpone your own retirement, no two ways about it.
For some, that might be an acceptable outcome, but why not use the IRA for your retirement and start a 529 for your children’s college education? I may use my IRA for education in a pinch, but I’d far rather have it as a retirement asset. The best gift I can give my children is to not be a financial burden on them when I’m old, and my IRA will help to ensure that.
Q10: To refinance or not?
I’m looking at refinancing a condo (I rent it out) using the the new HARP 2.0 program. I’m currently owe around $73K @ 7% in year 11 of a 30 yr mortgage. The loan I’ve been offered is for $78K (closing costs & anticipated spring taxes) @ 4.5% for 20 years. The loan is a $5K difference, but $2K of that will be be offset by exchanging escow accounts between the 2 lenders, which I would sink the payout back into the new loan. If I do the deal, it will save me about $135 a month on my payments. So, I figure the $3K+ on the new loan would be paid off in under 2 years by saving the $135 a month. I’m not looking to keep this property as rental income forever. I’d actually like to get it to the point where I could sell it off for what I owe on the loan, which I hope to be in about 5 yrs. Currently properties in the area go for $45K-$50K. I already pay an additional $150 a month & would continue to just pay that same amount on the new loan since I’ve already figured that amount into my budget. Does it make sense to do this deal? Should I refinance this loan at a larger amount, even though I’m itching to get out as soon as I can? I would love to get out now, but I’m so far under water, I can’t get the funds to cover the difference. What are your thoughts?
If you’re going to stay in the home, this refinancing makes sense. It lowers your interest rate, doesn’t significantly extend the length of the mortgage, and reduces your monthly payment. Those are all good things.
I don’t know how much you’ve shopped around for this deal, but depending on your credit, this is either a good offer or a great offer. You could try for a better one (and you might get one), but it won’t be significantly better, as the interest rate is pretty competitive.
There is always the option to walk away. However, when you’re in a fixed rate mortgage that low with that relatively low balance, it’s probably not a really good option.
Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.
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