Pay down debt or invest?

[waverly]

We will be getting a bonus.  Should we use it to pay down debt or invest? I prefer not to get into exact numbers if possible.

Debt- CC with 13% interest, 1 CC with 0% interest.

Student loans with 4% interest. I have 7 more years on this, but the amount is not that high- just low payments, and I would love for it to just be gone especially since it isn't all that much.

Our financial advisor says we are on track for retirement.  It could always be more though.  I have a pension and a 457b.  DH has a 401K. Not eligible for a Roth.

We have an emergency fund and a kids college fund that are both on track.  We also have a car loan that I am not super interested in paying off.  It is low interest, and we could always sell the cars if we needed to. 

The smart interest rate thing to do would probably be the CC with 13% and invest the rest because I think they say around 6% is the cut off for pay off versus invest.

There is a part of me that wants to just get as far as possible on the debt though for peace of mind/ debt avoidant personality reasons.  I also wonder if we wipe out all the CC debt if that would be a perfect time to transition to a cash only system and avoid debt in the future. DH is bad with CC, and I think I could set up a system in place to make us more cash based and saving up for things based.

However, if we rack up CC again, I would feel like we wasted the money, and I should have just invested it.  I think with my method we could prevent that and DH has agreed to it initially, but it is no guarantee since we have a lot more years (hopefully) of life ahead of us, so who knows.  

Also with the money we would be saving on payments, I could add it to my retirement monthly and lower our tax burden.  The bonus is more than I can put in retirement for the year. But I can put part of it in.  Or maybe part in 2019 and part in 2020?

If you vote retirement, would you put it in a 457b or an IRA or both.  I'm listening to a lot of money podcasts, so I am mostly looking for things I haven't thought of and just trying to make good financial decisions. I can also add money to my pension, but our financial advisor was thinking we should do it more with the 457b I think so that all our eggs aren't in one basket.  Pension is one of the few in the country that are financial secure/ stable.  But again, who knows what will happen. 

[Susie]

I would:
1. pay off the credit card.
2. use a small amount for a really nice dinner or something you really want for your house - a small treat. Life isn't ALL about your bank accounts.
3. rest into retirement.

In that order.

You also need, as a very high priority, to collectively find the discipline to not run the credit cards up beyond what you can pay off monthly -- but that is true regardless of whether you get a bonus and what you do with it once you have it. Use whatever system is necessary to enforce this. You need a system that works. For me, I don't advocate for switching to a cash only system because credit cards are useful tools. But only if you are disciplined and can always pay them off.

[waverly]

Susie , I don't think DH is disciplined enough TBH. He will then put too much on that is possible to pay off monthly and then it starts the "creep" as he continually does this. I am not saying it is ALL his fault, but I will say it is probably 70% his fault and then he talks me into things.

For example, I like to discuss money and purchases and he does not. When I do ask him, should I get this or that with the budget in mind, he always says yes. He doesn't check the budget. We have a budget and have for years and we track every cent, but he doesn't try to stay in it. I just think with CC that he thinks that he has money or will pay it later. When later comes, there are more living expense charges, so the special expenses he put on there can't be paid off because we still have to pay off the living expenses. Not sure if I am explaining that well.

We have started a vacation and Christmas fund to alleviate that, but I think it is more of a mindset with him that he should be able to do what he wants and gets what he wants because he makes good money. Partially entitlement, partially impulse purchasing, partially life is far more expensive then one might think, or he doesn't want to think about it. Partially shopping feels good, so he will shop to make himself feel better maybe... My personal opinion is that more money is wasted than I would like, and I would like to have more joint decisions, which he has agreed to now finally. But he had no problem spending $$ and bringing something into the house and installing it and not discussing it with me. We talked about it and he has agreed to stop, but it is hard for me to say take it back because we missed a few communication steps in there prior to the purchase and then yes, if he installed it thinking like speakers here, then to say un-install. I once told him to take something back and he moped around all sad for days. For many years, I didn't want it to be a battle, so I said well he makes more he can spend more, but not if it keeps creeping higher KWIM? He has had a mini- awakening, so I want to capitalize on it. But will this awakening stay? Maybe if we put better habits and rules in place?

[madisen]

Sept 10, 2019 12:55:37 GMT -5 Susie said:

You also need, as a very high priority, to collectively find the discipline to not run the credit cards up beyond what you can pay off monthly -- but that is true regardless of whether you get a bonus and what you do with it once you have it. Use whatever system is necessary to enforce this. You need a system that works. For me, I don't advocate for switching to a cash only system because credit cards are useful tools. But only if you are disciplined and can always pay them off.

I've started budgeting with YNAB and love it more than the googlesheet I was manually working off previously.

[waverly]

Thanks madisen. Tracking and budgeting doesn't seem to help him or I should say it helps a little, but not as much as we need.

This is sort of what I was thinking rule wise to help. He has agreed to some, and some we still need to talk about.
1. Emergency fund- now fully funded
2. Christmas and vacation fund. Vacation money can go to pay pal if we are renting a house for vacation. Not funded yet, and need to do that in Oct and Nov and Dec.
3. We already pay utilities out of bank account. Start using ATM/ Debit card for other purchases for vendors we have not had issues with.
4. Only use a credit card for riskier vendors/ online shopping and have a monthly limit for "shopping" such as $300 maybe? Pay in full monthly.
5. See if there is an app for our debit card to make it more secure. Another credit union I was looking into had one, so maybe our current one does. Discuss this some more and see if we want to stay or switch credit unions.
6. Discuss all purchases over $$ amount.
7. No assigning other credit cards to vendors. For example, he switched our CC on Amazon.

Disputes on debit/ credit card are more difficult than credit cards, but the amount is far lower than the interest charged. And maybe I just take this on for him since this is one of his stumbling blocks.

[k3am]

Pay off your credit card debt. You're not going to find an investment option that has a guaranteed yield of >13%, especially in this environment. Why would you pay 13% interest to at best a small yield on an investment?

I like Susie's strategy.

We use CC's religiously. And I'm a big advocate. But if he's buying things you can't afford, he literally can not afford to have a credit card. You will have a hard time digging yourself out the proverbial hole if he keeps making the hole deeper.

Can you look into a prepaid credit card? I have a client who does this (is a prepaid credit card company), and costs are going to vary depending on how you use them, but they still would probably beat 13% interest. Not sure if it would be helpful in your situation, but it may. I can't advise on customer service there, but it comes with a Visa logo on it, so that should have you covered for fraud prevention.

[waverly]

k3am, would you also pay of the 0% card. I am leaning towards that, but I just curious your thoughts.

In terms of a pre-paid CC is the advantage just not linked to a bank account for fraud purposes? I did find out the debit card is on our app. Not as cool as the other credit unions app, but I could make it a point to review it 1-2 times a day to check for fraud and report immediately. There are also some fraud settings on there, I think.

[imojoebunny]

Why do you think you would run the credit cards back up? I would pay off the credit cards first, since the 0% only last so long, and then it is a lot, then pay off or toward the student loans, then use the monthly payments you are currently making toward those, to save and invest for longer term or bigger things, like your next car, roof, and other larger items, that are bound to come along be they wants or needs, and use that money for those things, and stop using the credit card, if that is an issue. Congrats on your bonus!

[k3am]

0%, less inclined to pay off immediately. But your 0% offer is going to end eventually. At what point do you have to have it paid off? Do you have the reserves to pay it off before the 0% offer expires or will that eventually be at 13+% also?

RE prepaid CC, you're basically forcing him into using a cash/envelope system but giving him the ability to put it on a card. If the money's not there, he can't spend it.

[waverly]

imojoebunny , when I first moved in with DH (not married yet) he had a lot of money in CC debt. He consolidated the debt and did the snowball method. It took him about 2 years, and he did really well. He was making strides to make it better without me, but when I moved in just the extra income was helpful to him to finish it off.

We were debt free yay- got married, and then he went for his MBA- cue student loan debt. No more CC debt.

Then moved in our house and decorated and put on a new roof and honestly I think that was a lot of it, but there are incidentals and overspending. I will say to him house stuff should now be a heloc or pulling out equity if it is above a certain amount. I was just worried since he did it once, and then twice that maybe it would be like this forever. I don't want CC debt in retirement. I am worried it is a pattern.

[waverly]

k3am, I have to check on when the 0% ends- I think spring. We technically have reserves for it, but I would like to use that as extra cushion in our emergency fund or for the vacation/ Christmas fund.

[ribollita]

Pay off the cards and then backdoor Roths for each of you then rest to existing accounts.

[waverly]

How does this sound for limiting CC to riskier websites:
Amazon, Uber, Spot Hero or other parking apps, Ticketmaster, gas station pumps, rental car reservations (maybe not the actual rental but the reservation where they hold the money), Online shopping like pet supplies, nordstrom, zappos (with a min monthly or he has to take it back- he agreed to this).

[lolalolalola]

Could you be disciplined to transfer money to the cc either as soon as you make purchases, or at a minimum on a weekly basis? That way you're still operating on a cash basis but get the benefits from your cc.

Another option is to stop making online purchases unless it's necessary (like uber, ticketmaster, etc.).  I find I spend way more online because they are impuse buys vs having to drive to the store to buy an item.

[waverly]

lolalolalola , Yes I think we will definitely buy online less. We haven't gotten anything from Amazon all month and honestly it feels wonderful. Our pet store is far away and not great, so we might still do that. DH has plenty of shoes and clothes so he really doesn't need anything there, and for pharmacy type stuff I just put on the sheet that we would get that in person. I get he likes to get it bulk, but I don't really have room to store 10 face washes for 2 years anyway type thing.

Some of this was time starvation with him traveling all the time, and me in charge of Everything.  But the kids are older and I can leave 1 at home while I shop or 1 parent with a kid.  Our weekends have eased up because we have time to do more during the week, and our kids help out a lot more with dishes and setting/ clearing the table.  So the time starvation for 2 working parents with very very dependent on us young children and demanding jobs has eased considerably.  I don't feel like we have to throw money at problems so much anymore since we have the time and bandwidth to deal with things better now. Maybe that will change when DH goes back to traveling, but for now it is good.

[mbcdefg]

I’d pay off the CC first, then look at your other options. Consider it a fresh start to help you launch a new credit card mindset.

For me, I’m a lot less likely to put something on a credit card if I’m at $0 than if I have a balance ... having a balance just makes me think, “eh, what’s $x more.” Especially with smaller purchases - which of course add up.

[waverly]

mbcdefg , right, it's a mental thing.

As far as paying it off weekly that is certainly something that can be done, but then I think I would need to think of it in terms of X per week like if we are thinking 600 max per month than $150 per week. I think the more we look at it the less the slide, but I think I need to be the one in charge of doing it. I think DH likes to hoard the cash and that keeps the credit amount growing up. We have an emergency fund, and need to learn to stay within our means so that means just pay the bill don't hoard and pay later.

[covergirl82]

I agree with others on paying of the CCs first (starting with the one with 13% interest). When it comes to "extra" money, debt reduction should come before investment.

We also charge most purchases to a CC, but pay it off every month. If sticking to a budget is a challenge, you could set the CC limit so that you can pay it off each month. You have a back-up card (that YH doesn't have access to) for big purchases or emergencies.

I wonder if there are some CC that send out spending alerts? Like you can set up a per-week spending amount, and you get an alert if you're within $50 of that limit.

[waverly]

covergirl82, good idea on the alerts. I set up alerts on our debit card, and I should on the credit too.

Part of the problem is that I didn't have the time or effort in me to monitor his spending or our spending super closely and then have fights with him about it. If I mention anything it is 99% of the time all reasonable and rational purchases, and he can rationalize it.

Or it's a fight, but fighting was getting me no where. Sticking my head in the sand also got me no where, so...

[Poppy]

My worry is that if you don't invest the [extra, after paying off the credit cards] money, especially somewhere it's hard to access like retirement accounts (for example if you stuck it into savings or your Christmas/travel fund), he will know that you have this reserve and will be less worried about running up a credit card bill.

I think the student loans are a good option for this reason, too.

Good luck! There is so much psychology involved with personal finance. I hope you guys figure out something that works for you.

[waverly]

Poppy , I am not sure if he thinks like that since now that we have the emergency fund he likes it so much he doesn't really want to touch it. And the Christmas and vacation funds are to show him to save up and only spend that amount not more. But we shall see. It is new, so something to try.

In terms of bonus, I am thinking 1/2 to CC
1/4 to student loan
and 1/4 maybe invest...

He will bring the other half to the CC debt from savings, and an expense re-reimbursement from work.