What to do: Pay down debt now or slowly
I can't make up my mind what I should do with the credit card debt.
Information:
I have some health issues that makes me unable to work more than part time. My job isn't a well paying job, but it's okay.
I'm single, any my youngest is looking to move back home. She has no income, no plan of life and no motivation.
I live in a shoebox, fine for one person, a bit small for two, but it's as cheap as it's possible to live. I own it (Thank you mum!!). There's no debt linked to the flat.
Due to my taking over the flat, I had some expenses which I didn't have the money for. Surprisingly it coincided with my 14month repeating health expense which I also didn't have saved money for. Who would have though... Comes as a shock every year.
There is a limit for silliness, mine is 40 000. I went YNAB. I've paid off 10 000.
30 000 is approximately what I have in stock funds.
When my daughter moves back home I will after a very very modest and slim raise in living expenses have 2500 free money that can be spent on debt payments.
The interests of the short term debt is around 16% -ish, today the increase of the stock funds is at 20-ish %
So do I :
A) Sell the funds and pay off the debt ?
B) Keep the debt as is, and hate it every time I pay the interest? (pain= lesson learned)
C) Ask for a tiny house loan on the flat with lower interest rates ? (Flat is estimated at 1.2 mill)
Perhaps I should add the fact that for the next 2 years my job is safe. Heath Care is free. If I get ill, I have 100% of income for a year, after that it will drop to 66% for the next 3-4 years. My car is paid off, and I commute by bus, and if car died I can live fine without it. Therefore I don't think I have a huge need for an emergency fund in the coming year.
-
How long would it take you to pay it off with the additional 2500? I think it could be done in about a year, or even less if you continue paying what you have been on it. While you may not need the emergency funds for the first year of medical leave, if you had to be off work longer, would having that money be helpful? Plus, paying it off over time will give you more flexibility if something else comes up.
-
30,000$ of debts at roughly 16% will cost you 4,800$ per year (a bit less if you do some regular payment). It is a lot of money that would evaporate. Let's say your are able to get some loan attach to your home at 8%, the cost of interest is now 2,400$ (which means 2,400$ that you did not paid in interest) , which can be used to pay your debt even quicker. Many bank will allow you to have guarantee line of credit (or loan) in these range.
I would aim for a loan as it would prevent you to borrow again.... but if you believe you can control yourself, being able to borrow on a line of credit attach to your home at a low rate will beat any other financing tool in the market.
So IMHO, option C, with calculating the amount "spared" by the lower interest rate and return the spare amount against the debt for faster reimbursement. Takes disciple thought!
-
Hi Coral Pony !
You want to have enough in savings that, should something happen, you don't have to go back into debt to deal with it. I know you mentioned needing an emergency fund is low risk in the coming years, but if you were to take A or C, what would happen if you did need more funds to cover something?
Some people can get into trouble with dealing with their debt too quickly. The debt is gone, but so is all your cash. Set aside a little emergency fund (even if you don't think you'll need it), fill up your True Expenses (sounds like you might already be there!), then make a debt plan.
-
Thank you for your input and advices. 😃
Faness said:
what would happen if you did need more funds to cover something?I would have to look hard at my budget and pinch pennies where they are hiding.
I'm budgeting my true expenses, so there is some money "floating" for those doom to happen things. Also included is monthly savings. The only thing that I haven't included there is replacement of utilities.
All (after 2K) health related costs are covered by the government. Free health care. So all doctor fees, hospitals, tests, meds, transport etc etc, all covered. No insurance needed. And 100% of salary for 12 months.
Faness said:
make a debt plan.Yes, that has been done. And now I'm checking with the wise YNABers if it is a good plan or other alternatives are better.😃
Eric Poulin said:
calculating the amount "spared" by the lower interest rate and return the spare amount against the debt for faster reimbursement.There might be some expenses related to changing the loan to a secured loan, this I haven't checked. It's not USD, and the interest would be closer to 3%. So yes, lower, much lower. But not sure it's worth it for so little money.
adriana01 said:
How long would it take you to pay it off with the additional 2500?A year. Before daughter was moving back home I was on track with 5000 a month, which I was fine with.
adriana01 said:
if you had to be off work longer, would having that money be helpful?No, not really. If it life did take a u-turn down the drain, I need flexibilities in my budget. Not monthly payments tied up in debt. That would work better than having savings. I mean, I took on debt now with savings.... (okay, I did dip a bit into those for the flat expenses).
-
Will your daughter be contributing to the household? I understand that you want to help her but she needs to have a plan, a job, and be contributing to the household both monetarily as well as effort. You're no longer Mum/Bank of Mum, you're now adult roommates. I think that boundaries need to be clearly drawn by both sides in this kind of situation so that living conditions are more tolerable for both sides. Is this going to be permanent? If not, what is the time line for moving out? What steps will need to be achieved? Who will be responsible for expenses/ portion of expenses? Who will clean? Who buys the groceries? Who cooks? What are the expectations for cleanliness of both shared space and private space? What is to be considered private space where you won't go without permission and vice versa?
You might even want to sign a contract on the terms of the agreement. I wouldn't want my adult kid who didn't have a job nor plans to get one moving in with me without it. I love my children dearly but I do not want to support them for the rest of our lives.
-
Technicolor Cheetah said:
I love my children dearly but I do not want to support them for the rest of our lives.Nor do I. Alas she's only 19 and doesn't have a clue. I hope to nudge her into getting a job. I will provide the roof and the food, that's it. She will in return do the chores as long as she doesn't work/studies, and the cooking. As she never really moved out, just away, all this is kinda agreed and found a middle ground on. I do hope she will find a vacancy in a study program in August, but time will tell. Free education, so no expenses there, alas she still be living at home tho.
In my country parents are required to support and help their children until they finish 12 years of school or they reach the age of 21 I think. Not many drops out of schools so not sure.
-
Technicolor Cheetah said:
I love my children dearly but I do not want to support them for the rest of our lives.Too many parents I know are supporting children all the way into their 40s. Guess what, now that mum is at retirement age and can't retire because Jr. keeps needing rent money or car insurance money, etc. It's sad. I'm sure that wasn't her intention or idea of golden years. To be fair, I've not met Jr, just getting mum's side of the story in this example.
-
I do agree that children needs to leave the comfort of their nest. But I don't think that is a danger at the moment. She is 19 and clueless of what to do with her life. Jobs without any education is very few and far apartm typical jobs is working in a store. That is not a job for her. Cleaning jobs are difficult to get as well. So it may take a year, until she can apply to a study program.
So for the next year, money is tight, debt payback is slowed down. OR I can speed up payment, free up cash flow, start saving those 2K a month instead of using them for payback.
12 months... larger cashflow, lower interests expenses, lower investment portfolio ? Or tight cash flow.
-
Coral Pony Why can't she work at a store until she gets into a study program? No, it's not a career but it would help keep a roof over her head. I did menial work when I was young and would again if I had to. When I was out of school, living with my parents was not an option so I did what it took.
Ben Khaki Storm
At some point, it goes from helping to enabling. My SIL's mother enabled my SIL and my brother the last 20 years or more. She only stopped in the last year or so, maybe she realized they would never change. She's got to be over 70. My brother and SIL have lived beyond their means for over 20 years. They've run through inheritances from SIL's grandmother, and her aunts who died with no living children. My brother's family is always eating out according to my mom, my SIL has made little effort to learn to cook and she's over 50, my brother cooks but if he's working, he's often working overtime. SIL's mom was daycare and bank, for too many years, I think. My brother works hard when he's working but they live well outside their means. They've always got a new scheme and a hand out.
After my dad died, my brother had the temerity to ask my mom for Dad's truck. Fully loaded almost new Ford 250, I think it was upwards of $50K new. No, not sell it to him, give it to him. Oh, and also the $100K trailer my mom and dad used it to tow. After all Mom wasn't using them. Last year, after their relationship with SIL's mom soured, she moved out, they were scrambling because oh, god, they couldn't afford the mortgage that SIL's mom had paid the majority of. They didn't want to have to live in an 800 sf apartment instead of the 5 bedroom, 2100 s.f. house with 2 master bedroom, media room, shop, pool, etc etc. that SIL's mom paid for. They asked my mother to buy the house for them and they'd "pay her back."
I told her it was her money, but they've lived beyond their means for decades. Why did she think they'd stop now? Why shouldn't they downsize into a smaller house or apartment their income can afford? I told her, yes, you can afford to but ask yourself if it's a good idea. Ask yourself if you think they'd ever stop asking for more. I told her ask her friends and other family. Unsurprisingly they also said don't do it.
At some point it stops being a hand up and becomes enabling. Some people are addicted to other people's money and living beyond their means. Like many addicts, most don't want to give that up and they'll suck their families dry. But it's also on their families who've enabled them for years.
-
Technicolor Cheetah Agreed. I only have 1 side of the story.
-
-
Technicolor Cheetah said:
why can't she work at a store until she gets into a study program?Ehm, because she would totally suck at it, she's very introverted and not a sales person at all. Also shop work is hard to get if you're not a student or have prior work experience. There are very few low entry jobs and those have a high number of applications. I'm not saying she can't get a job. I'm saying it will be hard and not something I'm counting on. She gets a roof over her head and food on the table at the age of 19, while she figure out what she want to do with her life. That's it. Struggle to see how that is enabling her, but I guess we have to agree disagree. I assume culture plays a role here.
Anyway - this is besides the point. I have in the next year an extra expense that reduces my free cash flow. This free cash flow I had intended to spend towards paying off old short term solution, whilst replacing them with long term strategy. Now I won't empty all my saving, but a huge chunk of it.
If I do this, then I can put those 2500 a month towards saving, and after 18 months I will have my savings back. Provided life doesn't throw one of those screw-balls it's known for. Then it will take a bit longer. Remember I still save 500 per month regardless.
On the other side there's human nature aka me, and will I then feel less eager to save than to pay down debt? If so then it's not wise to make it painless.
I have decided against getting a house loan for this. The amount it so small, I don't think it's worth it. And getting a loan for such a small amount would like having to be a "flexi loan" where you can basically loan us much you want, and pay back as little as you want. Not a good solution for me I think.
