Strategy Needed

[Jas2be]

I am 30 year old single male that lives in MN. I am looking at my finances and wondering if I am better off investing or paying off debt.

My salary is $65k. I currently contribute 15% to a 401k and max out my Roth. My company also offers a discounted stock plan of 15% which I contribute $2k a year. I also contribute $300/month to DRIPS - MO, DUK, and PFE. I have been doing this for the last 3 years and have about $100k in assets.

I own a house, bought it 2.5 years ago. I did a piggy back loan to avoid PMI. The 30 year mortgage is at 4.875% and I have a 15 year variable that is now at 8.99% with a balance of $20k. I also have a car loan with a balance of $6k at 6.35% and student loans of $20k at 4.4%.

My new employer now picks up my education bill. I am working on an MBA and am about half way done with it. As a result of a busy schedule I have been able to cut my spending on frivolous items and can stay within a budget.

I am trying to maximize every dollar I make. What are my best options for the future? Should I reduce the 401k to the match or reduce the stock investiments to pay off the variable rate loan. SHould I stay the course?

Any thoughts would be appreciated.

[gtmeouttahere]

I'd pay off the variable.* It's fine now but it will "vary".* Use the money allocated for stocks and pay it off ASAP or take some of that $100,000 in assets to pay for it.* The chances you would make 8.99% on your return is speculative to say the least.* Basically the interest is probably cancelling out your return on investment or worse.* *Do not stop the 401k!!!*

After you complete making the payments on that $20,000 you can take whatever you have been paying into that $20,000 and invest it+the money you have been investing right now.*

You accomplish 2 things.* Get out of debt and stop paying interest and doubling your available investment money.* Just by stopping the interest on that loan you are saving 8.9%.* That's a good gain in the stock market.

BTW, where are you from in MN? I grew up there and plan on moving back in a few years. You can send me a Personal Message if you feel inclined.

[Nords]

Quote:

Originally Posted by Jas2be The 30 year mortgage is at 4.875% and I have a 15 year variable that is now at 8.99% with a balance of $20k.

Welcome to the board, Jas. You're off to a great start and doing all the right things you should be doing at this point in your life. If your boss is sending you to school then it sounds as if your likelihood of remaining employed is also pretty good too. So anything you do from this point is just tweaking a great cannonball shot.

I wouldn't drop the 401(k) or the IRA to pay off the loan but I'd turn around the drips cash to pay off that 8.99% mortgage and then that car loan. If you're living below your means now then I'd also put every subsequent pay raise or bonus toward retiring the debt with super-sized interest rates.

I'd continue to make the payments on the first mortgage & student loans but I wouldn't be rushing to pay those off... unless you'll sleep better at night. That's the essence of about 2000 other posts debating whether or not to pay off debt early or to invest the money in the stock market. Read 'em & think (hey, you're an MBA student), but you have to do what feels best to you.

About that company stock-- how long do you have to hold it? Can you buy it for a 15% discount, flip it for the instant profit, and then use the money to pay down the 8.99% & 6.35% loans? If you can't do that, I still wouldn't hold the company stock a minute longer than required. Sell it as soon as you can (or at least limit it to 10-15% of your portfolio, still exceedingly aggressive) and diversify. I wouldn't even necessarily wait for short-term cap gains to become long-term gains if it was bigger than 10-15% of the portfolio.

[maddythebeagle]

Quote:

About that company stock-- how long do you have to hold it? Can you buy it for a 15% discount, flip it for the instant profit, and then use the money to pay down the 8.99% & 6.35% loans? If you can't do that, I still wouldn't hold the company stock a minute longer than required. Sell it as soon as you can (or at least limit it to 10-15% of your portfolio, still exceedingly aggressive) and diversify. I wouldn't even necessarily wait for short-term cap gains to become long-term gains if it was bigger than 10-15% of the portfolio.

I was also thinking about the 15% discount. I have been doing some research on this for my sister's new job that is with a midwest bank and she will also get a 15% discount. Some require you to hold the stock for a year and it may be the best thing to do anyway since you will get the long term capital gains tax. Also, the cap gain tax goes to 0 in 2008.

There is some good discussions on fat wallet forums on employee stock purchase plans.

[Jas2be]

Hi,
THanks for the feedback.

I grew up on the Iron Range and moved to the Twin Cities area about 5 years ago.

I have to hold the company stock for two years before I can sell it. It is rule 144 stock. Unfortunately the quick flip is not an option. I am able to invest up to $6000 every 6 months. At this time I am only investing $1000 per 6 months.

I also have about $17,000 of risky stocks in an etrade account - XMSR. SIRI, MRVC, CMGI, GNET, SYGR. Since I bought and still hold a few of the high fligher internet stocks in the late 90's I have tax losses to offset all gains plus some. I am debating whether to liquadate that account and get rid of the variable rate loan in one shot. *


Thanks again for your opinions. I have worked hard to get where I am at. At 24 I had $40k of credit card debt and nothing to show for it. At that point I started to live below my means and paid that amount off 2 years ago. As soon as I paid that off I took on the mortgage and it has been an even tighter budget ever since. It is nice to get a second opinion.

[ESRBob]

Jas, welcome;
I like the idea of trading in some high-risk little company stocks that have few if any capgains and paying off an 9% variable rate debt in a rising interest rate environment. Your stocks are risky, your mortgage debt is a sure thing and 9% is pretty steep.

When you get back into small stocks (maybe consider your company stock as the small-stock portion of your portfolio for now, but eventually think about having 10-15% of your stock portion of the portfolio in small stocks) I would say go for a good small stock index fund as opposed to individual risky issues, unless they are companies you know really really well (my definition is you work there or are on the Board -- anything else is generally not knowing them well enough to sidestep a calamity).

I know lot of people will disagree with me on this, that they like individual stocks and feel they understand what they are going to do in the future, but my experience is to put your $ in some good low-cost funds and spend your time figuring out how to earn lots of money with that new MBA you're working on.

[Maximillion]

ESR is right, and this is the best way to go, IMO.

http://www.atozinvestments.com/excha...aded-fund.html

[newyorklady]

agree w nords and esr. get rid of that variable. good luck.

[d]

also agree ... take advantage of the tax loss (liquidate the risky stocks) and pay-off the variable rate. (unless, of course, you are 100% confident that the return on those stocks will exceed 9%.)

I'd be in absolutely no hurry to pay-off the <5% mortgage and student loans, but instead would suggest that the next time around you reconsider paying interest on a deteriorating asset (the car!)

congratulations on getting out of the CC fiasco ... I trust that experience was sufficient to cure you for good!*

while the 15% discount is attractive, you are likely aware that you need to be careful about having too much invested in your company -- after all, you're job is also invested there, so you need to consider diversification is a very broad sense.