2024-10-23
Every month, we give advice on money matters. People ask us questions about how to spend, save, or invest, and sometimes they're unsure about what to do when facing big financial decisions.
A reader from Hawai'i, 42 years old and working two jobs, is unsure whether to use their savings to pay off a $25,000 personal loan. They've worked hard over the past year, cutting down expenses, and managed to reduce the loan from $35,000 to $24,800.
The loan has a 5.75% interest rate, and the reader has to pay a minimum of $738 each month. With a monthly income of $1,500 from both jobs and only $200 left after their usual spending, paying off this loan is a big part of their budget.
They're thinking of using the $5,000 in their savings account plus $20,000 from their life insurance mutual fund to clear the debt. This would leave them with no loan but also no savings at all.
Now, we have to think if this is a good idea.
By continuing to pay the loan from income as they've been doing, they could be free of debt in about three years. But, if they pay off the loan with their savings and life insurance, they could save that monthly loan payment towards rebuilding their savings.
However, this is risky because if an emergency comes up within the next six months, they might not have the money to cover it and could end up in debt again.
Check Out: Innovative Policy Permits $1,000 Emergency Withdrawals from Retirement Plans Without Penalties
Alternatively, if their life insurance policy lets them take out money without a penalty, using it to cut down the loan could be smart. They'd keep their emergency fund of $5,000, and this could be especially good if they don't have any dependents that would need the $20,000 from the life policy.
We need to also think about why the loan was taken in the first place and try to avoid needing another loan in the future.
If they keep paying $800 a month towards the loan, the debt will be gone in under three years, costing them a bit over $2,100 in interest. However, their $5,000 savings could grow too, especially if it's in a high-interest account, and their life insurance investment could also be making money.
We just want the reader to know their options so they can make the best choice.
Another question people often have is about investing. Specifically, if it's smart to have your money in different investment accounts like a 401(k) from work, personal IRA, and maybe other accounts too, or if it's better to keep everything in just one like a 403(b) from work.
Employer-sponsored retirement plans like 401(k)s and 403(b)s are excellent because they help you save money before tax and sometimes your employer adds money too, which is like free money.
But, these plans often don't let you pick the very best investments. They have limited options and might have higher costs than if you had an account that you controlled yourself.
You can't usually choose where to invest with these employer plans, so you might end up paying more in fees.
Employer retirement plans are good, especially because they encourage people to save for retirement, but you might want to think about only putting enough in to get your employer's match and tax benefits. Then you could put extra savings in an IRA, where you have more control.
Traditional IRAs use pre-tax dollars, helping you save on taxes now, and Roth IRAs use money after tax, which could be helpful if you need to take out money before retirement.
After maxing out an IRA, you could also look into a regular investment account for additional savings.
It's worth taking some time to look at all the options and making the best decision for your financial future.
-
Previous Article: The Best (and Worst) Spots for Your Emergency Fund
Should You Use Your Emergency Fund to Pay Off a Loan?
Every month, we give advice on money matters. People ask us questions about how to spend, save, or invest, and sometimes they're unsure about what to do when facing big financial decisions.
A reader from Hawai'i, 42 years old and working two jobs, is unsure whether to use their savings to pay off a $25,000 personal loan. They've worked hard over the past year, cutting down expenses, and managed to reduce the loan from $35,000 to $24,800.
The loan has a 5.75% interest rate, and the reader has to pay a minimum of $738 each month. With a monthly income of $1,500 from both jobs and only $200 left after their usual spending, paying off this loan is a big part of their budget.
They're thinking of using the $5,000 in their savings account plus $20,000 from their life insurance mutual fund to clear the debt. This would leave them with no loan but also no savings at all.
Now, we have to think if this is a good idea.
By continuing to pay the loan from income as they've been doing, they could be free of debt in about three years. But, if they pay off the loan with their savings and life insurance, they could save that monthly loan payment towards rebuilding their savings.
However, this is risky because if an emergency comes up within the next six months, they might not have the money to cover it and could end up in debt again.
Check Out: Innovative Policy Permits $1,000 Emergency Withdrawals from Retirement Plans Without Penalties
Alternatively, if their life insurance policy lets them take out money without a penalty, using it to cut down the loan could be smart. They'd keep their emergency fund of $5,000, and this could be especially good if they don't have any dependents that would need the $20,000 from the life policy.
We need to also think about why the loan was taken in the first place and try to avoid needing another loan in the future.
If they keep paying $800 a month towards the loan, the debt will be gone in under three years, costing them a bit over $2,100 in interest. However, their $5,000 savings could grow too, especially if it's in a high-interest account, and their life insurance investment could also be making money.
We just want the reader to know their options so they can make the best choice.
Another question people often have is about investing. Specifically, if it's smart to have your money in different investment accounts like a 401(k) from work, personal IRA, and maybe other accounts too, or if it's better to keep everything in just one like a 403(b) from work.
Employer-sponsored retirement plans like 401(k)s and 403(b)s are excellent because they help you save money before tax and sometimes your employer adds money too, which is like free money.
But, these plans often don't let you pick the very best investments. They have limited options and might have higher costs than if you had an account that you controlled yourself.
You can't usually choose where to invest with these employer plans, so you might end up paying more in fees.
Employer retirement plans are good, especially because they encourage people to save for retirement, but you might want to think about only putting enough in to get your employer's match and tax benefits. Then you could put extra savings in an IRA, where you have more control.
Traditional IRAs use pre-tax dollars, helping you save on taxes now, and Roth IRAs use money after tax, which could be helpful if you need to take out money before retirement.
After maxing out an IRA, you could also look into a regular investment account for additional savings.
It's worth taking some time to look at all the options and making the best decision for your financial future.
-
Previous Article: The Best (and Worst) Spots for Your Emergency Fund
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