The Shell Game - Pay off Debts or Invest?

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The Shell Game - Pay off Debts or Invest?

Laura H.
Investor · Peculiar, MO · Member since 2016 · 83 posts · 60 votes

I'm trying to take the approach of having my money work for me instead of the other way around. The struggle, however, is balancing what looks good on paper with what I want to do; being disciplined and careful, but not resentful if I can't jump on an opportunity.

It's like Dave Ramsey and Robert Kiyosaki are having a fight in my head. You should have your money work for you. You should pay off your debts and live debt-free. You could borrow money from people to make asset purchases. Don't spend money you don't have. AHHHH!

Would love to hear some feedback/opinions on this brain dump...

Goal

To have investment income replace my W2 income. Here's where it gets all chicken-or-egg in my head: If I pay off the credit cards and student loans (even partially), I need less income to cover my expenses. But then I'll probably have to wait to invest and make the switch to FT REI. As I said, I'm not a very patient person; once I know I want something, I go after it.

Why

I want my hard work to benefit me and my family, not some shareholders. I've known that I'm not meant for the corporate hamster wheel for a decade, but have ignored that little voice in my head because I was taught that going to college and joining cubicle life is what you're *supposed* to do.

Debts

$30k in student debt at no more than 6% interest (most under 4%)

$15k in credit card debt at no more than 13.5% interest

12% of my gross income going to 401(k) with no match

Primary residence payment is 15% of gross household income

No car payments; none planned

Assets

Cashed-Out on equity of Duplex #1 to purchase Duplex #2 and to improve cash flow on #1

Purchasing and renovating Duplex #2 to increase monthly cash flow

Expect to have $15-20k in remaining funds after #2 purchase/reno

$25k in an untouchable (per hubs) "Oh Sh*t" fund

$7k in stocks that could be liquidated

Disclaimer

Credit card debt was due to two back-to-back major unplanned primary residence expenses when we were only on one income. Our monthly spending is under control and we are trying to figure out how to apply the excess we now have - bills or investments?

Questions

1. What to do with that $15-20k left over from the refi/purchase... Pay off credit cards? Apply to new asset/property? Re-invest in current properties to increase cash flow?

2. What to do with our cash flow (est. $6-700/mo)? Save for next property? Debt repayment?

3. What to do with our current monthly excess? Save for next property? Debt repayment?

Looking forward to some BPer insights!

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Brendan Woulfe
Investor · Galena, OH · Member since 2016 · 19 posts · 8 votes
9y

Pay off the credit card debt.  That's a no brainer to me.  If you can guarantee a better than 13.5% on that 15k then let me know so I can do the same.

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  • Laura H.
    OP
    Investor · Peculiar, MO · Member since 2016 · 83 posts · 60 votes
    9y

    Hey @Ralph R. - would love your feedback on this :o)

    0Reply
  • Brendan Woulfe
    Investor · Galena, OH · Member since 2016 · 19 posts · 8 votes
    9y

    Pay off the credit card debt.  That's a no brainer to me.  If you can guarantee a better than 13.5% on that 15k then let me know so I can do the same.

    7Reply
  • Mikki Kline
    Real Estate Investor · Cochran, GA · Member since 2016 · 18 posts · 6 votes
    9y

    I waited until I was consumer debt free before jumping in to REI... I used a loan from my solo 401k to knock out the last of my consumer debt, and to leverage towards buying a property and am also investing with my solo 401(k).

    The principles are similar to Ramsey from what I have heard, but I found the information in Dani Johnson's First Steps to Wealth book very valuable. It's a free eBook and I highly recommend it. 

    You are on the right track! :) 

    First Steps to Wealth eBook

    0Reply
  • Laura H.
    OP
    Investor · Peculiar, MO · Member since 2016 · 83 posts · 60 votes
    9y

    @Brendan Woulfe - With the remaining refi money? Not sure it makes sense to trade 3yrs @13% ($3k in total interest) for 30yrs @ 5% ($13k total interest). Or does it...?

    @Mikki Kline - Thanks for the suggestion and the encouragement!

    0Reply
  • Brock Y.
    Investor · Lake Villa, IL · Member since 2014 · 90 posts · 48 votes
    9y

    @Laura H.

    Here's my thoughts. 

    1. I would balance transfer cc debt to a cc with a 0% offer for 12 or 18 months. Put only as much on it as you know you can pay off in the time period. Rinse and repeat as needed. No need in paying interest on credit cards when so many 0-2% balance transfers are available. That way you do not have to worry about using all your cash upfront on debt and can use some towards investments. 

    2. With no match on 401K I would run the numbers and see if that 12% of your income can get better returns if used in other means (paying off debt or RE investing).

    2Reply
  • Laura H.
    OP
    Investor · Peculiar, MO · Member since 2016 · 83 posts · 60 votes
    9y

    You know, @Brock Y., I've done that balance transfer game before but hadn't even thought of it in this case... It all depends on the upfront fees and how fast you can pay it off. I don't know why it didn't occur to me this time around. Definitely something to look into - thanks!!

    0Reply
  • Brendan Woulfe
    Investor · Galena, OH · Member since 2016 · 19 posts · 8 votes
    9y

    You have 7k in a personal brokerage account (I'm assuming) that you said can be liquidated.  Are you making a guaranteed 13.5% on that money?  You also said you have 25k in what I'm assuming is a savings account that earns next to nothing is interest.  I know you said that your husband wants that for oh sh*t/emergency purposes but if you use 15k from that you'd have 10k left plus a credit card with a 0 balance that could be used in case of emergencies until you build your savings reserve back up.  Or you could do a combination of savings, stocks, and balance transfer to 0% to pay it off.  You have options.  

    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y

    @Laura H.  Boy this is a loaded question.  everybody has an opinion about this and they are all different.  when I came to Alaska i had huge debt.  no transportation, 3 duffel bags of clothes and a Dog.  I had a $100 dollar bill and a temporary 21/2 month job waiting for me.  heres the clincher.  I was 52 years old.  Im not sure im the guy you should ask cos if I was so smart I wouldn't have been in those shoes.  Its a little different today  I have 8 units, 2 cars here and one in anchorage. with a loan on one of them.  boats and snow machines paid for.  Some credit card debt.  My primary is about 1/3 paid for.  Im now 62 so just 10 years later.  most of my life I've had 2 jobs. My goals are to boost my retirement. 

    heres my take.  I didn't really start investing until I was close to debt free.  that's what I did first.  we keep our bills all of them paid 3 months ahead.  Then if I need money I can skip the water bill (here its 160 a month fixed).  get your  self out of debt or close to it.  you have reserves that's good.  I agree with @Brendan Woulfe I would probably pay DOWN or pay off the credit Cards. heres why. its not the interest amount im thinking of. the total dollars of interest paid out is way more true, but whose making the payment? you or the tenant? if you wait and use your own money to pay the cards off its 3 years out of YOUR pocket. if you take the money from the rehab the renter is making those payments not you. my goal is not to go full term on any loans I have today. I will refi out and buy other property's. That's an endless supply of money tax free. theres no tax when you refi and you get equity money for another down payment. do not put it in current properties that's like hiding the money and it does you no good. you cant spend it, you cant invest it and your CoC goes down. its missed opportunity, and the buying power of those dollars goes down with time. another thing Cash flow is mis-leading. its not profit until you get your initial investment back. Its really the renter sending your own money back to you a little at a time. How long does it take him to send you 20 or 30K in the form of $200 dollars a month cash flow?? cash flow pays the bills (with your own money) appreciation and value add build wealth, (appreciation is risky though)

    Your cash flow as I said is your own money coming back to you.  I save mine for re-investing.  we live way below our means and I save every nickel I can.  Remember I have some debt, but not much.  I try  to keep it as low as possible.  you need to feel comfortable with your debt before you invest.  I probably would save that.  your younger than me and im not sure if it might be smart to work that student debt down.  those are low interest rates tho and as interest goes up I might not give them as much priority.

    your 401k.  I don't like mine its forced on me, it has a match and so I have one.  this year its netted 3%  in the last 10 years its averaged 6% minus fees.  my rentals to better than that. 
    my idea is to allow mine to build then when I severe employment I'll roll it into a self directed IRA or check book IRA, then purchase Rentals. these would be paid for. yes Im contradicting myself here and I know the cash flow would be my money coming back to me but in retirement Im going to be less concerned with whose money it is. I'll have to leave that to you.

    Probably what it would look like for me is I would pay off the credit cards. take that payment money and add it to my student loan payments. Then save some or all of the cash flow from the rentals for investing as well as my current excess. I don't know how long or how big of payments that would put on the student loans, but those loans may hurt your DTI a little bit. as to the stocks I don't know how well they are doing but if its more than your interest on the student debt I would leave them if its less I would cash them and apply to the debt. a second job could be applied to the student loans or split 1/2 and 1/2 with investment/loans. In other words I would split my focus between debt repayment and saving for investments. I think your portfolio will grow faster and help you get rid of those loans quicker than if you pay all loans first then invest. Remember Im close to retirement age and trying to look at it from a younger perspective

      sorry this is such a long post

    RR   

    0Reply
  • Sophie Thomas
    Real Estate Agent · Reisterstown, MD · Member since 2015 · 13 posts · 2 votes
    9y
    Laura H. Hi Laura! You and I share many things: equal credit card debt and student loans, and focused on goals and impatient when it comes to achieving said goals. Here's my two sense, which actually came from a local financial planner. Pay off your credit card debt because even if you used that money instead on purchasing another deal, you will be very hard-pressed to find a rate of return equal to or better than the interest rates of a credit card company. Beyond that I believe that this life is an excellent time to practice patience and forbearance and balance. Here is where Robert kiosakis method comes in! There is good debt and bad debt 😉 good luck!!!
    1Reply
  • James Triano
    Pittsburgh, PA · Member since 2015 · 179 posts · 115 votes
    9y

    @Laura H.

    My $0.02 to your questions:

    1)  Take the $15-20k left over from the purchase and pay off your credit cards.  Even at 13.5%, you will not find a risk free real estate investment (or any investment for that matter) that will generate those returns.  Take the money, pay the cards off, and never have to think about them again.  Not to mention that since you will be buying more property, your credit score will be favorably affected by decreasing your consumer debt and showing your ability to repay.  Maybe that saves you 0.25%-0.50% but maybe it doesn't.  

    2) Take your extra cash flow and save for your next properties.  Consider this your "real estate money".  

    3) With your current monthly excess, pay down the student loans. Consider this your "personal money". Then, once complete, begin contributing this to your real estate money. Also, since your company is not offering a match, I would stop contributing to your 401k and either contribute to a traditional IRA, Roth IRA, or put it towards debt repayment. I would change my mind on this strategy if there was a match, but there isn't.

    Congratulations on making these steps to better your financial future, you're on the right track!

    0Reply
  • Sarah Ottesen
    Real Estate Investor · Strawberry Point, IA · Member since 2014 · 54 posts · 18 votes
    9y

    Dave Ramsey and Robert Kiyosaki are battling in my brain too!  This was my personal compromise for Dave and Robert:

    Go through baby steps 1-3 as Dave says:

    Step 1: Save an emergency fund of $1,000

    Step 2: Pay off all debt but your mortgage

    Step 3: Save an emergency fund of 3-6 months.

    Step 1 scares me, that is, to only have $1,000 in the emergency fund, but Dave's steps do not really make math sense, they cause you to be motivated because you want to be out of debt as soon as possible so that you can build that emergency fund back up and get some sleep at night!

    So, with the baby steps, we know what Dave would do, drain your emergency fund, stop investing in the 401k until you are debt free, possibly sell the duplexes and once you are debt free, build the emergency fund again and then save 15% toward retirement.

    If it were me, I would probably try to get rid of the 15k cc debt as fast a possible! I might liquidate the stocks and take the extra 8k from the "untouchable" fund.  I would pull back on the 401k, maybe to 5% or so to finish paying off the student loans.   

    Even once you are debt free (commercial debt), I don't know if I would up the 401k percentage again. If you follow Dave's investment philosophy, he states to save 15% for your retirement.  With your investments you are making in real estate + the 12% 401k, you are well above 15%!

    0Reply
  • Laura H.
    OP
    Investor · Peculiar, MO · Member since 2016 · 83 posts · 60 votes
    9y

    @Brendan Woulfe - Your assumptions are half-correct ;o) The $25k is in stocks, but they're not earning anywhere near 13% annually. What about capital gains, though? we've had these stocks for almost ten years - could the capital gains wipe out the usefulness of tapping into this money?

    @Ralph R. - I think your response was perfect! I appreciate your insight - it gets me thinking outside of my own head. Thank you!

    @Sophie Thomas - If there is one thing I wish for, it's more patience when it comes to goals. What are your thoughts on *how* to pay off the credit cards? Use the refi or stocks? Or our paycheck excess? All of the above?

    @James Triano - Our DTI would slightly improve by paying the cards off. I like the idea of separating RE money and personal money and filling the coffers for each separately. What is your thought on the pre-tax benefit of having my 401(k) withheld from each check?

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    9y

    @Laura H. If Dave Ramsey and Robert Kiyosaki are having a fight in your head, then it appears Dave had his *** kicked long ago, because you are in no way following his advice. 

    You should stop contributing to your 401K until ALL of that $15K in credit card debt is paid off. Market is at a high right now, so dollars you put in today will not return anywhere near the 13.5% you are paying on your credit cards. Second option is use your $25K fund to pay off the credit cards, because carrying $15K in CC debt is an "oh sh*t" moment in your life. Think about it this way, if you pay off the $15 and then have an emergency, you can just charge it back up again on the credit cards. I don't understand why you didn't use your emergency fund to cover the unexpected expenses in the first place. That is the point of having an emergency fund. Just pay off the debt and rebuild the emergency fund. 

    I would also advise paying off the student loans. It makes no sense to pay 4-6% interest on student loans while you have $25K sitting in the bank earning under 1%. 

    In pursuit of getting rid of your credit card and student loan debt, I would look at selling the stocks too. The stock market is doing really well right now and it is probably a good time to sell.

    What you will find happens whey you pay off this debt is that within a few months, you will have a bunch of cash built back up again. The real estate and stock markets are both hot right now, so waiting a few months, paying down debt and rebuilding cash is no big deal.

    As far as your cash-out equity, yes go ahead and put that into future properties. Get your personal debt under control though before you keep buying.

    2Reply
  • Laura H.
    OP
    Investor · Peculiar, MO · Member since 2016 · 83 posts · 60 votes
    9y

    Ha! Glad I'm not the only one, @Sarah Ottesen!

    It has to be a balance for us - we did Steps 1 and 3 before (hence "The Oh Sh*t Fund") and part of Step 2 (credit card debt only). At the time it didn't make sense for us to pay off my student loans when 1) the rate was so low and 2) the interest is tax deductible. I kind of regret that now.

    I do see what you mean about the 401(k), however - I'm definitely not getting 13% interest there. It's hard for me to let go of the mentality that saving for my 401(k) now is "more important" than paying off debt. That whole compounded interest thing. But if I pay off debt, I have more free to save, right? I think? Ha!

    0Reply
  • Laura H.
    OP
    Investor · Peculiar, MO · Member since 2016 · 83 posts · 60 votes
    9y

    @Joe Splitrock - We followed *some* of Dave's advice about 8 years ago and supplemented the rest with what we thought was best for us at the time. Yes, I realize this was dumb. I should have created more spreadsheets and made sure we stuck to our guns. But life happened and now I'm paying closer attention. Onward and upward.

    And correction - the $25k is in stocks. I somewhat agree with you that those funds should have gone to the emergencies we had, but our concern at the time was capital gains. It was always my husband's thinking that the $25k was ONLY to be used if one of us lost our job. I'm wondering now if we should have a "Well Darn" in addition to an "Oh Sh*t" fund.

    I think my concern with waiting to buy more is that market may change in the coming year - interest rates have already gone up and inventory is down. As I said, patience is not my strong suit. But *sigh* I should probably be more concerned about clearing the debt we have now so that we can afford more later.

    Thank you for your insight!

    0Reply
  • Sarah Ottesen
    Real Estate Investor · Strawberry Point, IA · Member since 2014 · 54 posts · 18 votes
    9y

    @Laura H. the battle is real!  HA!

    I did recently learn, one of the reason's Dave Ramsey is so against debt.  It is because of his experience.  He briefly described it in one of his youtube videos.  I am filling in quite a bit of the gaps, but it sounded like he was investing in real estate with none of his money own money.  When a bank called his loan, he had nothing to use to pay off the loan because he had everything financed at 100% (or maybe more?!)  So he went from that extreme (tons of risk) to the other extreme (no risk).  I think, if we are smart about things, we can use some of the current interest rates to our advantage and, while there is some risk, with "The Oh Sh*t Fund" in place and a focus on the cash flow or finding the deals before we purchase to make sure we have some equity in our properties, we are going to be alright...well, I hope better than alright!  We are going to be victorious!  And we, like Dave says, will be able to live and give like no one else!

    0Reply
  • Laura H.
    OP
    Investor · Peculiar, MO · Member since 2016 · 83 posts · 60 votes
    9y

    Ah, that makes sense, @Sarah Ottesen. Good thing banks don't loan 100% of the value anymore, eh? (Or at least none of the ones I've talked to recently do...)

    I think I'm going to sit down tonight with my hubs, some 'nog, and a spreadsheet and figure out how we can get this stuff paid off ASAP. I'll let you all know what we figure out.

    Thank you, everyone, for your responses!

    1Reply
  • Brendan Woulfe
    Investor · Galena, OH · Member since 2016 · 19 posts · 8 votes
    9y

    @Laura H., a couple things.

    1) If you have realized gains on those investments then you're going to pay a capital gains tax when you sell.  So yeah, the tax man will come calling but if you time your sell you can pay those taxes in tax year 2016.  I don't carry credit card debt but if I did I would make it a point to pay that off before even thinking about investing, but that's me.

    2) Your oh sh*t fund isn't exactly what I would consider an oh sh*t fund.  I want my emergency fund more liquid than what stocks can offer.  What happens if you need that money when the markets are closed?  If you need to get to it quickly you might not be in a position to do so.  

    3) Others have stated using the money that you're currently putting into your 401k and putting it towards your credit card debt.  That sounds like a good plan as well.  You have some options here.  Balance transfer, selling stocks, rerouting your 401k money etc.  I'm sure there are others that we haven't hit on yet too. 

    Good luck!

    0Reply
  • Joshua Harden
    Waipahu, HI · Member since 2016 · 1 post · 2 votes
    9y
    Something
    2Reply
  • James Triano
    Pittsburgh, PA · Member since 2015 · 179 posts · 115 votes
    9y

    @Laura H.

    While your DTI would only improve slightly, your credit score is adversely affected by "high balances on revolving consumer credit" as well. I've seen my credit score shoot up as I paid off balances on credit cards a few years ago.

    The pre-tax benefit is nice from your 401k. However, you can get the exact same benefit by contributing to a Traditional IRA and will have many, many more investment choices. Of course, there is a $5,500 maximum annual contribution to an IRA (either Traditional or Roth). Personally, I contribute only that minimum to my 401k to get the full employer match and then max out my Roth IRA. My theory is that, while I am younger (and likely earning less than I will in the future) I should just suck it up and pay the taxes on my earnings and contribute it to a Roth IRA where it will grow and pay out tax-free when I retire. As I age, I would transition my contributions to a Traditional IRA because I would need the tax breaks on my income.

    My goal is generate as much tax-free income as possible when I retire and a 401k puts a drain on that as I'll be paying taxes on distributions during retirement. 

    0Reply
  • Laura H.
    OP
    Investor · Peculiar, MO · Member since 2016 · 83 posts · 60 votes
    9y

    @James Triano - Our credit scores are already around 800 and we're using less than 20% of our available revolving credit. My concern is more about the monthly payments sucking up what we could be saving toward another property. More on that in a minute...

    That's a good point about the 401(k) versus a Roth IRA. Who knows what'll happen with taxes by the time I retire - it might be a good idea to make sure any retirement income I have is mine and not the government's.

    0Reply
  • Laura H.
    OP
    Investor · Peculiar, MO · Member since 2016 · 83 posts · 60 votes
    9y

    So here's what we came up with last night:

    We can use some available cash and $5k of the "Oh Sh*t Fund" to pay off half of the $15k balance. That will still leave us with $20k in reserves in case it all hits the fan. For the other half of the credit card balance, we'll cash out the $7k in stocks. Boom. No more credit card debt.

    I've temporarily stopped contributions to my 401(k) so we can throw as much "personal" money at the student loan debt as possible. We can snowball the CC minimum payments we were making into this to make it go even further. We'll start with the one with the highest interest rate (also the one I hate the most and with the lowest balance, so win-win) and keep going until they're all paid off. Should take two years or less.

    The excess rental income and refi leftovers will be treated separately (as it always should have been) and go toward a new purchase. If there's some magical deal I just can't pass up, we'll have the funds to do something about it. This gives me the security I need to keep paying down the debt.

    Thank you, everyone for your feedback - it really helped!

    5Reply
  • Charlotte Edwards
    Beloit, WI · Member since 2016 · 100 posts · 40 votes
    9y

    We followed Dave Ramsey's plan mostly. Our first year of marriage hubby was insistent on paying off my student loans, so I took on extra tutoring and we lived on just his salary. We ate out a handful of times in that whole year. We didn't travel or do anything. But the last payment posted the day our son was born...five days after our anniversary.

    In the last eight years we've saved and saved; still living off of one salary (since my job opportunities are limited and uncertain). Now we're ready to try REI, so I'd suggest paying off the CC and SL before investing in more real estate. You'll feel so free knowing that you don't have those payments looming over you each month.

    Whatever you decide, just make a plan and follow through. I think that's a huge part of progress. This internal fight you have isn't helping (I have similar ones in my mind on health and wellness, so I can totally relate to what you're going through!).

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Laura H., good to see you're about to take @Joshua Harden's wise advice! All the best...

    0Reply
  • Jana CainPro Member
    Enrolled Agent · Richmond, CA · Member since 2016 · 225 posts · 148 votes
    9y

    @Laura H. Here's another vote for dumping the credit cards! I'm an avid Dave Ramsey follower, and am currently very "normal", but am aspiring to be "weird". But I also want to jump into real estate! I was really on board with DR's program for a while, and then it all came to screeching halt over the summer when I learned about a potential real estate opportunity on the horizon (it was a "we think this will happen in 6-12 months, stay tuned!" letter). So I did a total 180 and paused on DR to focus on stockpiling cash to be prepared should this real estate deal materialize. Now that I'm more or less set to pull the trigger if/when this real estate deal happens, I'm back to focusing on my debts, smallest to largest. I can guarantee that if I had an assurance of $15k-$20k coming to me, above and beyond a fully funded/$25k emergency fund, I would absolutely, without hesitation, get rid of the credit card debt. 

    I also second the other poster's mention of compartmentalizing your savings. I do the same, as I much prefer to see I have x for car emergency, y for truly dire straights, z for medical, etc. It's really helped me by effectively creating smaller, more attainable savings goals (this was one area where I willfully went against DR's plan, as there was no way I was going to carry just $1k in emergency savings, when I have a giant pile of student loans).

    Good luck to you!

    1Reply
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