Paying off debt, buying a house, building credit, and other adulting questions -- advice sought, obviously

In My Humble Opinion
162

Are you calculating that right? You don’t pay the highest bracket percentage on all of your income, just your income that falls into that bracket. So for a couple filing jointly it’s approximately 10% of your first $20,000, 12% of your next $60k, 22% of the next $90k, 24% of the next $155k, etc, up to 37% of everything about $630k.

If you and your partner are earning $150,000 combined, adding $125,000 in student loan “income” will make your total income tax bill around $55,000, up from about $25,000 before the loan forgiveness. None of that takes into account things like personal deductions, child credit, etc.

Maybe there are other calculations I’m not taking into account, and never trust my math.

If you’re lucky, the Biden tax break for student loan forgiveness will be extended past 2025.

163

I did not know this!

So the new estimate would be $42,200.

Thank you.

164

@Spice_Weasel, you should consider talking with an accountant or tax advisor about your options. There may be more details that you’re unaware of that could cost you a lot of money down the road.

165

For getting out of the debt hole, it’s probably critically important to make sure the technique will work on the personality type which is likely to get into debt in the first place. Someone who is carrying a dozen balances is likely not someone who is making logical financial choices. For long-term success, it may work out better if the credit repair technique is based on a method the person will stick with rather than a method which is the most financially optimal. Doing things like knocking off small loans and consolidating loans may provide the psychological boosts the person needs in order to stick with the program. Even if there are other methods which are more financially optimal, if the person finds them too hard, too complicated, or doesn’t get enjoyment from them, they might just give up and go back to their old ways.

166

Exactly this. Traditional economics assume people make rational choices, but experiments have shown that this isn’t true.
I’ve just heard of some research that shows that some people don’t even look at interest rates, not even if they are right there on the page. Neither complete nor published yet, so don’t ask me for a cite.

167

Long-since overtaken by events (congrats!!) but assuming one does not have the cash to pay it off, refinancing would let the borrower get a lower rate (and thus, less money wasted on interest). A 20,000 car loan at 10% for 5 years will cost 5496 in interest, with a 424.94 payment. That same loan at 5% would be 377.42 a month and 2645 in interest. If you keep paying the 424.94 payment on the 5% loan, you’re done in 52 months versus 60, and you’ve spent a total of 2286 in interest.

So - if one looks at the options there, refinancing is a no-lose situation. You’re saving interest money no matter what, and you may be freeing up some cash flow (difference between 424.94 and 377.42) to throw at other debt.

All that said, if the borrower has the cash - AND the self discipline to keep making that payment to savings, that’s the clear winner - because at the end of the 5 years, you’ve got the car, and a chunk of cash in savings. Or if you throw it at other debt, then you’ve got that much less debt in 5 years.

168

Something else occurred to me, when balancing debt reduction vs retirement savings: Does your workplace offer any kind of matching on a retirement account?

If so, it’s fairly standard advice to put aside enough of your own money to maximize that matching - because you’re essentially getting free money that way.

Let’s say your employer matches half of your contributions, up to 6% of your salary. You put aside 6%, but you get an extra 3%. That is, arguably, a 50% rate of return on your money plus whatever growth happens.

For giggles (and because I’m avoiding work) I played around with a very, very simplistic model, assuming 100,000 in debt, at 8% interest, where you’re paying 1,000 a month (12,000 a year). That gets paid down to zero somewhere around 18 years.

Change your payment amount to 9,000 a year and you’re still reducing debt but it’s more like 28 years before it’s paid off.

Use that 3,000, with a 50% employer match to make it 4,500 a year, and assuming 6% in returns, means that after 10 years, your debt is 85,500 (vs 42,000 if you pay ALL toward debt), while you’ve now got 62,800 saved - so your net worth is about - 22,000 (versus -42000 if all goes toward debt). At 18 years, you’d have paid off the old debt if you don’t save in that matched 401(k); if you pay less on debt but go for the 401(k), you owe nearly 76,000 but you have over 100,000 in the 401(k) - so your net worth is higher. In fact, it’s higher every year from the beginning.

Assuming you start saving the whole 12,000 (Plus the1,500 matching) as soon as the debt is paid off - you’re better off starting the 401(k) savings sooner, even though the 12,000 savings starts 10 years earlier with the all-debt approach.

Some broad assumptions there:

  • You’re paying at least the interest on the debt (if your debt is increasing, this falls apart).
  • Those interest rates and returns are of course pulled out of thin air; while 6% isn’t an insane assumption given recent decades, there’s no guarantee.
  • There is in fact decent matching. Without the matching, I’m pretty sure the numbers tip the other way.
  • In each case, when the debt is paid, you put the whole 12,000 into the 401(k) and you still get that same 1,500 matching - so your yearly savings is 13,500. You still never catch up with the plan that has you saving the 3,000 + matching from the beginning.
169

I mean, that’s still math. It’s just that you’re now dealing with ranges and probabilities, so it’s HARDER math.

170

My employer matches at 0.5%

Since I work part time I guess that comes out to about $90 a month max. It’s not nothing, but it’s almost nothing.

Lately we are scrounging just to max out the Roths, but once we have extra for retirement we probably will take advantage of that.

171

I’ve been meaning to ask some financial questions on the board, as well. Don’t know if I should start a new thread or piggyback on this one.

172

Depending on your tax situation I’d be inclined to take some of the money you’re putting into the Roth, and put enough of it into the 401(k) to get the matching. You won’t have the advantages of a Roth (unless your employer offers a Roth 401k option as mine does) - even 90 bucks a month will add up.

173

I appreciate your thoughtful responses. You’re probably right. I will discuss it with my husband. It would be a 403b as I work for a nonprofit.

174

Don’t most rotating credit type arrangements have fees, as well as interest? It seems to me that for a lot of people the problem with 10 accounts might just be that if you have a bad month and forget to pay your bills (or can’t) you get hit with fees from each account. And then they charge you interest on those fees. Paying off accounts completely as quickly as possible ends that cycle.