Free Ebook.

Enter your email address:

Delivered by FeedBurner

« Three Myths About Earning More Money | Main | Great Places to Retire in the US »

August 16, 2010


Feed You can follow this conversation by subscribing to the comment feed for this post.

If I get this correctly, you had already planned on your husband being out of work until the end of the year, and in another year or so you want to work part-time to take care of your child.

My instinct is to pay down that HELOC knocking off 25% of the HELOC balance in only 4 months and if you haven't hit the contribution maximum yet, add more to your retirement funds on a pretax basis while you can.

Since you plan on working full time for only another year, I would think that you might want to add some more money to your savings as well to cushion the loss of income and the difference between your current salary and his new one when you reduce your work.

I agree with Sandy for the extra cushion in your savings.

Definitely max-out your Roth IRA contributions every year. For someone your age, this is always my first instinct. Only in a few specific cases would this not be a good suggestion.

Don't be afraid of your mortgage or HELOC. They are some of the safest forms of leverage possible. Do not pay down your mortgage instead of saving more, especially because you are upside-down already. Plowing more equity into a negative-equity asset does not make sense.

Paying off a mortgage early can eliminate one of the best tax write-offs you have. When we get to retirement and start living off our retirement savings, it can be a big help in your planning process.

I'd pay off the HELOC using all of the excess income you have, and probably even use the car fund to pay off the HELOC (unless there's a car purchase coming very-short-term.) That'll let you eliminate your worst debt in a year. Then take a couple months to partially or fully rebuild your car fund.

Then you have 3 priorities: fund retirement, pay off other debt, decrease hours. Decreasing hours can sometimes pay for itself in savings on child care, meals, driving, and so on; run the numbers.

I wouldn't do any additional pretax investing. With personal exemptions and the standard deduction, you're already probably in the 15% bracket. You're unlikely to be below that in retirement, so I'd recommend any additional retirement investment be done in Roth accounts (no future taxes) rather than 401k or traditional IRA accounts (no present taxes). Or just pay down the house and student loans for the guaranteed return.

"The HELOC is the bane of our existence"

WHY? They don't give any reason to be in any rush to pay off the HELOC. I don't understand the rush to pay it off. Is the interest rate really high or something?

Personally I'd say put $5k into a Roth for the husband first. They are probably in the 15% tax bracket which is fairly low and makes sense for a Roth IRA especially since the husbands 401k has no match. Past that they can look at paying down home debt.

HOWEVER, they are upside down on their loan. I would not throw extra principal into their mortgage or HELOC bits at a time. I would instead pile up some cash on the side. Then once they have the $20k total required to pay off the HELOC then they can consider doing so.
This way of doing it will keep their cash safe if anything goes wrong rather than sinking it to an upside down house. I'm assuming the interest on the HELOC is not very high. If it is very high then I might do things differently. But they didn't tell us the interest rate.

What is the interest rate for that HELOC? I would personally max out ROTH for both of you, increase you emergency fund a little (as you plan on going part time in the future) and then pay the HELOC off. If the HELOC is with some crazy interest, it would definitely make sense to pay it off first.

It is hard to get a picture of the situation when the interest rates and amounts of the student loans, mortgage, HELOC aren't mentioned...why do people write in for help yet leave that important information out?

Without this information, I'd say that the writer probably should focus on increasing their emergency fund to at least $50K (keep it in cash or short range CDs), and after that they should pay off the HELOC.

And unless they're in a state where they get a match on the 529 or some deal like that, they should also stop 529 contributions for a while until the market recovers and just put the college money into a separate savings account instead. In a few years when the market recovers, then you can put it all back into a 529 where it can accumulate tax-free. Right now there's no benefit for using a 529 to save for college.

I wouldn't bother with investing for retirement because there's no gain in stocks right now and their mortgages already give them a sort of a tax break. I'm more worried about their present-day needs since they have a child and need a larger emergency fund.

Sounds like they've got a lot going on trying to predict the future. A lot of unknowns, which makes it imperative to establish an emergency fund over anything else. I would go for 12-months at minimum in this economy. Also, max out the Roth IRA, which you can also count the principal as part of your emergency fund that you can withdraw tax- & penalty free if you really need to. Saving for retirement isn't too critical right now, but if you can afford to, at least save enough in the 401k for the full company match, after emergency fund and Roth have been taken care of.

New car fund? How about new USED car fund? That could save thousands$ immediately.

If you're interest rates on home mortgage, HELOC, and student loan debt is really low, you're likely to get a better return on that emergency fund at a high-yielding internet checking account, or that municipal bond fund in that Roth IRA.

Once you've established that 12-month emergency fund and Roth IRA, then begin to pay down the non-deductible debt like student loans, and then HELOC (especially if it's an adjustable rate + prime). Get to 75% fair market equity, stop, and then decide if you really want to live there any longer. You can set your selling price at lower than comps if you need to leave the area quickly for a better job opportunity.

Take the used car fund and your emergency fund and pay off the HELOC. Leave the HELOC open in case you need to draw on it again in case of an emergency. You should be able to put away $2K a month to rebuild the emergency fund. After that is built back up, pay off the remaining school debt. Once those are taken care of, you can save for a car. If you cut expenses to the bone, you can move through each of these rather quickly.

As others have pointed out, you don't say what the interest rates are on your mortgage or HELOC, so it is hard to say. It sounds like you are in good shape for being in your 20's. One advantage that you have as far as saving for retirement goes is that you have time on your side. The earlier you put money away, the more time it has to grow and compound. Given the choice, I would look at maxing out the Roth IRA's since it maximizes the time it has to grow. Also, if you are planning to go part-time, it makes sense to max out your retirement now, since once you go part time, you might not be able to fund it as heavily.

Finally, if you are dead set on paying down your mortgage, you might want to look into refinancing into a shorter term loan (15 or 20 years). Shorter term loans usually have a lower interest rate than a 30 year loan, and you pay off the loan sooner.

Knowing what I know I would take the new car money and pay the HELOC. Then I would pay the HELOC aggressively. I would not touch the emergency fund. But use this calculator to estimate what you'll need to save for retirement. ( It can help ease your concern about whether you're saving enough. My priorities would be:

1. emergency fund - sounds like you're ok with that
2. retirement (what I need to save to get my number with a balanced portfolio - it makes me feel safer to take more control over retirement and not rely on social security;
3. HELOC (I would take the car fund and make a BIG dent - you have money sitting and earning nothing while you leave a HELOC costing interest open)
4. 529 (there are calculators to guestimate how much you should save for this too)
5. Your student loans (once you're on track with the rest of it, it's ok to pay off the loans early - even with the low rate - there are a lot of risks with student loans - they're almost impossible to get rid of even if you file bankruptcy (I wrote a post about this and why I'm paying mine off early)
6. Your mortgage (it's a secured loan, but the interest is generally tax deductible - and it's bankruptable if all goes wrong - between this and the student loans, I don't have too much of a preference).
7. car (assuming you have one that's generally ok - and I wouldn't buy a new car - that's just me)

I would deploy all extra money in that order. Once I hit my calculated retirement contribution (monthly or annually) I would move on to the next. I would take the car fund and immediately put it as a lump sum towards the HELOC. Then I would use all extra cash flow to attack the HELOC. Then when that's gone - I would move on to make sure I'm making the calculated 529 contributions and attack your student loans (if the rate is incredibly low, I may start saving for a car - depends on youru car needs and the student loans).

In the end, remember it is "personal" finance. You sound like you're doing well. Do what makes you sleep at night. Good luck.

Do in the following order:

1. Put at least six month's worth of expenses in your emergency fund.
2. Max out you Roth's
3. Pay of HELOC

You're doing remarkably well for people who are so young--keep up the good work!

A HELOC is great for short-term emergency expenses or possibly to help finance a used car, etc. (again, hopefully short-term) given that the rates are (usually) very low and interest is (usually) tax deductible.

However, I would not hold on to HELOC debt for too long because (and you probably already know):

1. It is a secured loan...your house is the collateral.
2. If you want to refinance, this can cause delays or fees to close out.
3. Doesn't look great on your credit report.
4. Sometimes can seem too enticing to use it as a 'credit card'.
5. Most important: They are usually variable...meaning the rate can go up and up. Also, the lender can possibly call in the loan or close it altogether (this has happened to many people in this last economic crisis).

Anyway, I agree w/JimL (above).

one simple criteria to deicde the order to pay off debts - first pay the debt which keeps you awake at night.

Personally speaking, if the interest rates are comparable, I will pay off the secured loans first (which in your case is the HELOC).

Keep the emergency funds untouched and maybe add to it till you have at least a years worth stashed away.

Half of Car funds can be used to improve on the emergency fund.

Have you put across anything for your childs higher education?

The comments to this entry are closed.

Start a Blog


  • Any information shared on Free Money Finance does not constitute financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. All posts are © 2005-2012, Free Money Finance.