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    • Reacting to the economy again: Cutting back on retirement savings in favor of reducing debt

    October 16, 2008 by

    As I mentioned last week, I’ve been thinking about reducing my retirement savings and using the money to pay off debt instead. We’ve decided to go ahead with the plan, and I’m very excited about it.

    It wasn’t an easy choice to make. The standard advice during tough economic times – especially for folks like us who have decades until retirement – is to keep up with retirement savings. And we are big believers in saving for retirement. We are committed to not being a burden to our children in our old age, and to retiring with enough years and money to fully enjoy ourselves.

    However, I’m confident that the choice we’ve made to reduce our retirement savings for a year is the right one for us. The money will be redirected toward paying off my student loans, which will be paid off in full in a year – leaving us with only the mortgage as our debt.

    One reason I say this is the right choice for us is the psychological benefit. I can’t tell you how excited I feel about having zero non-mortgage debt.

    Another reason this is the right choice for us is the financial freedom we’ll gain from paying off my loans. The monthly payment we make is pretty substantial, and we’ll be able to redirect all of those funds into other financial goals. Like retirement. Or saving for college. Or paying for private school, should we decide to go that route.

    A third reason to opt for paying off my loans right now is the guaranteed 4.5% rate of return. In this economic climate, that’s pretty tough to beat.

    And the fourth reason for paying off my loans is the strong likelihood that any money we invest in the market right now will lose value. And there’s a very real possibility, if not probability, that it will not have regained its value by the time my loans are paid off. As Janette mentioned on my last post, I could park the money in a money market fund until the market recovers, but by then, I will have paid off my loans and be in a position to invest more than the contributions that I won’t be making.

    There are a couple of points I want to make, though. First, we’re still saving for retirement. We’ll just be saving a little less.

    And second, this is what’s right for us. As demonstrated by the comments of Mercedes, Janette and Tony’s Mom on my last post, it’s not the right decision for everyone. The retirement vs. pay off debt debate is one that’s frequently addressed in the personal finance blogosphere, and for good reason. The decision on how to prioritize is an individual one.

    I know one thing, though: I can’t wait to be debt-free!

    Image credit: Yahoo! Finance.

    Filed Under: debt, economy, money management, retirement

    The Economy: How are you responding?

    October 10, 2008 by

    I haven’t talked about it much, but that doesn’t mean I’m unaware of the current financial crisis our country is going through. I was initially planning to write about how I’m ignoring the meltdown and plugging along because I have faith that eventually things will turn around. But then I realized that it’s not quite true.

    I do have faith that things will eventually get better. That much is true. But it does appear that in the short term, things are going to stay bad and probably even get worse.

    What isn’t true about my original statement is that I’m ignoring what’s happening in the economy. For one thing, I’ve already reacted by spreading my money around. Instead of keeping almost all of our funds at one bank, we’ve transferred enough money to cover a couple of months’ expenses to two other banks. I hate the added complication to keeping track of our money, but the peace of mind is worth it.

    Another thing I’m thinking of doing is stopping some (not all) of my monthly retirement contributions and using that money to pay off my student loans instead. It would accelerate the payoff date to sometime next year, which is tantalizingly soon. It would mean a guaranteed return of 4.5% after taxes. But it would also mean risking a (small) percentage of my retirement savings if the market turns around in the next year (although I could cut the payments and increase my contribution whenever I want to).

    I’m also keeping a close eye on mortgage rates again. With the Fed rate cut earlier this week, I’m hoping that rates will go down enough to make refinancing worthwhile. We’ve been in our house for long enough and have a low enough rate that rates would have to get absurdly low for us to benefit while still making the regular monthly payment. But if we are able to refinance to a lower interest rate and continue making the same payment that we’re currently making, then we would be able pay off the mortgage faster and save tens of thousands of dollars in interest over the life of the loan.

    Are you doing anything to respond to current economic conditions, and if so, what?

    Image credit: Yahoo! Finance.

    Filed Under: debt, economy, money management, retirement

    We’ve paid off the car – now what?

    May 8, 2008 by

    As I mentioned yesterday, we were able to pay off our car loan less than two months after we bought the car. One reason we were able to achieve this is because we were setting a substantial amount aside in savings each month specifically for the car purchase. But now that the car is paid off, I thought I’d mention some of our other financial goals and how we’re going to get there.

    The first thing we are going to do is continue saving for a new car. That might sound strange, considering that we just bought one. But we’ve decided that we never want to take out a car loan again. Every car we buy from now on will be paid for with cash. Our next car purchase should be in about five years, and we’ll probably spend about the same amount of money. Saving $325 per month for the next five years will give us $19,500 plus interest. We should be able to pay the remaining cost of the car with the trade-in value of our current car and additional savings. I’m not contributing more to the car fund because . . .

    I am also significantly increasing the extra amount that we pay on my student loans each month. At this rate, my loans should be completely paid off in less than two years.

    Finally, I am increasing the amount we put into “regular” savings each month. In addition to what I have budgeted, I’ll be snowflaking all extra income into our savings. This savings is money that will pay for our vacation in Las Vegas in the fall (we’re going for a relative’s wedding), as well as any other unexpected expenses that arise. Once we’ve saved a substantial amount, I’ll use the money to make a large principal payment on my student loans, and then we’ll start over with the savings. (Note: This isn’t our emergency fund, which will remain untouched.) While I could put this money toward my student loans to begin with, I like having the extra cushion in my savings account. (Especially since we have talked about installing a new air conditioning system, which would run about $3500.)

    Once my student loans are gone, we’ll be debt-free except for our mortgage. I’m really looking forward to celebrating that milestone!

    Filed Under: cars, debt, financial planning

    Our car loan is officially paid off – in less than two months!

    May 8, 2008 by

    I am thrilled to report that our car loan is officially paid off. We took out the loan in the middle of March, so we’ve paid it off in less than two months!

    How did we do it? The most important thing we did was buy a car that we could easily afford. We also negotiated a great price. And, we saved up for the purchase. All of this meant that the loan wasn’t a very big loan. And it helped to have good credit, so that we could get a loan with a great rate.

    As for paying off the loan itself, we basically snowflaked all available funds toward the loan. The funds included the amount we had been saving monthly for the car purchase, the amount that I normally would have transferred into our savings account, our tax refund, our tax rebate, and some additional small amounts of income that trickled in during the last two months.

    Considering we took 4 1/2 years to pay off our last car loan, I’m extremely pleased that we were pretty much able to meet my 2008 financial goal of paying cash for a new car.

    What’s our next financial goal? Stay tuned . . . I’ll share that with you soon.

    Filed Under: cars, debt

    Our car buying experience – Part Two: Financing and the Trade-in

    April 10, 2008 by

    Read Part One: The Negotiations and Part Three: 5 Lessons Learned.

    Financing
    As soon as we got serious about buying a new car, I started looking into financing options. I checked the rates at all of our banks, including credit unions, as well as Nissan’s rates. Nissan offered 3.99% with a $1,000 rebate or a $1,250 rebate with no dealer financing. When I went through USAA’s car buying service, I discovered that they had an online auto loan application with 4.99% financing, so I applied online and was approved within minutes. I simply printed out an electronic check to take to the dealership. (Note: The 4.99% rate was for online applications only, and required automatic payments set up with a bank account.)

    When we got to the dealership, I intended to put down a hefty down payment of over $10,000 on my credit card (which I pay off in full each month) – but I was told that they only will charge a maximum of $5,000 to a credit card. The money for the down payment was sitting in our liquid CD account, which is generally highly accessible. However, it takes a day or two for funds to be transferred into a different account. I considered giving the dealership a check and asking them not to cash it for a couple of days, but rather than risk bouncing the check, I opted to finance a greater amount than I had originally intended. Once the loan was completed, I set up an electronic principal payment that brought the loan amount down to the amount I wanted it to be in the first place.

    Setting up our financing through USAA was super easy, and gave us a net gain over dealership financing because of the additional $250 rebate. The dealership, knowing that a check from USAA would never bounce, had no problems with the set up. In fact, the only hiccup occurred because we registered the car in both our names, but the loan was in my name only. Marc had to sign a release before the loan could be finalized.

    The Trade-in
    We had a 1997 Honda Accord EX sedan to trade in. I looked up the trade-in value at Kelly Blue Book and Edmunds.com, and also spoke to a friend’s husband who’s knowledgeable about used cars. Edmunds’ low value was about $2600. KBB’s low value was about $3500. My friend’s husband said we could expect to get about $4000 to $5000 in a private party sale, and about 30% less than that from a dealer.

    The first time I mentioned the trade-in to the salesman was the morning of the day that we were going in to buy the car. All of the negotiations were done at that point, and I made a final call to confirm that the car was actually at the dealership before we drove out there. I decided to mention at the end that we’d be bringing in the Honda, and I could detect a bit of perturbation in the salesman’s voice when I did.

    But when we arrived at the dealership, everything went fine. We test drove the new car, agreed that we wanted to buy it, and the salesman went over the Honda, then left us in his office while he took the papers over to the appraiser. Based on the numbers I’d collected, I was prepared to negotiate for $3000. It was still a shock, though, when the salesman came back with an offer of $2300. Marc and I looked at each other and prepared to leave – we’d agreed before arriving at the dealership that if the trade-in value wasn’t acceptable, we’d walk away. After all, the new car wasn’t an urgent purchase. The salesman tried to guilt us into taking the offer by telling us that he’d gone out of his way to bring the car in (repeating his story that it was highly unusual for them to get the car on the lot before the paperwork has been completed) and complaining that we hadn’t mentioned the trade-in to him before (as if that should have any impact on the purchase price of the new car).

    Finally, the salesman ran to get his boss, who was probably the sales manager but also was apparently at least somewhat responsible for selling the used cars, since he talked to us about what he personally was going to do with the Honda – something about selling it at auction. He told us in his most sincere manner that the most he could get for the Honda at auction was $2700, so he would give us $2700 and hope to break even on it. Marc and I discussed the offer for a minute and agreed to take the offer. (Read this if you’re wondering why we didn’t just sell the car ourselves – and read Patrick’s post, too.)

    Some thoughts on financing
    As you might recall, one of my goals this year was to pay cash for a new car. Obviously, that didn’t happen. But we should have the car paid off in June, which is pretty darn close to my original goal. (We took the loan out in March and will have it paid off in less than three months.)

    Filed Under: cars, debt
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