What to do with the Money from the Tax cuts.

[pritchke]

I would pay of debt or save.

Although I would say that this is not the idea behind the tax cuts. The idea is to spend, buy stuff you don't need. By spending it may increase the economy and make good old W look good. I would put mine to pay off the last of my student loans. One month left and I will be done. If I paid of my loans at the rate given I would have paid over $100,000 but I have been paying them off ASAP, one month I put down $10,000 but I have mostly been putting $1000/mth. The only problem I have had to sacrifice the purchase of a house and car but I think the overall benefit is greater (and these things are more wants than needs). I have probably saved more than $40,000 by getting rid of it ASAP. I didn't do the swicth thing mainly because you have to really watch what is going on (may increase interest at a later time and not phone to tell you.)

Enjoy your tax cuts guys!!!

[Timber Loftis]

It is interesting that the cuts were enacted so we'd spend, and we're all here trying to figure out how to save. Because the only people likely to *spend* the tax cut (if you don't count paying bills -- i.e. consumer spending only) are those who are too poor to do otherwise, the impact on the economy is likely to be very minor. IMO.

[Bungleau]

TL, over the course of time, stock returns have averaged 10% over every ten year period since the 1920s, no matter how you slice 'em. 10% is a reasonable long-term rate. It is not reasonable for short term, especially today.

There are two schools of thought for paying off debt: One goes by ascending loan amounts, and the other goes by descending interest rates.

Personally, I belong to the descending interest rate club. Pay off the highest rate first, and work your way down. That 1% student loan? It would be out there for a long time in my book...

I do have one exception, and that ties into the logic behind the ascending loan ammount approach. See, every time you pay something off, you get a psychological boost. So pay off the smallest debt first, get the boost, and then add that money (what you were paying) to the payment for the next smallest. Dave Ramsey refers to it as a debt snowball, and as you keep going, it keeps getting bigger and bigger, taking out debt in larger and larger chunks.

My exception is that if I have a debt close to being paid off, I will pay it off, even if it's not next on the list. I'll take the short-term ego-stroking of knocking another one off.

Apparently, many people can't handle the apparently slow turnaround for the descending rate club, and they tend to give up before they hammer it out. For those folks, the ascending amount club is better.

As for keeping your emergency fund on a 5k credit card limit, my only concern would be that when you need it, you may not be in a good position to take on another 5k of debt. I believe it's easier to have the money sitting around and draw on it (and then replenish it) when needed.

Whew! Weighty stuff, but important, in a lot of ways. Neither of my parents is comfortably set for retirement, and I really want to be... long before I get to retirement, too.

Originally posted by pritchke: I would pay of debt or save. Although I would say that this is not the idea behind the tax cuts. The idea is to spend, buy stuff you don't need. By spending it may increase the economy and make good old W look good. I would put mine to pay off the last of my student loans. One month left and I will be done. If I paid of my loans at the rate given I would have paid over $100,000 but I have been paying them off ASAP, one month I put down $10,000 but I have mostly been putting $1000/mth. The only problem I have had to sacrifice the purchase of a house and car but I think the overall benefit is greater (and these things are more wants than needs). I have probably saved more than $40,000 by getting rid of it ASAP. I didn't do the swicth thing mainly because you have to really watch what is going on (may increase interest at a later time and not phone to tell you.) Enjoy your tax cuts guys!!!

Pritchke, investing your money also stimulates the economy. You don't have to blow the cash to kick things up. The companies you invest in, can use the capital to expand their businesses.

Bungleau [img]smile.gif[/img] I have been trying to convince Mysticelt about why I am paying my Car off ASAP...I can do that in a couple of months then turn that cash toward my higher interest rate credit card.....she keeps telling me to do the card first [img]smile.gif[/img] But I can free up roughly $400 a month on the car in a couple of months then put that toward the higher rate card and make much more visible headway ....yeah over the long haul Ill probably blow a couple hundred in interest payments...but I like that short term gain [img]smile.gif[/img]

Originally posted by Timber Loftis: It is interesting that the cuts were enacted so we'd spend, and we're all here trying to figure out how to save. Because the only people likely to *spend* the tax cut (if you don't count paying bills -- i.e. consumer spending only) are those who are too poor to do otherwise, the impact on the economy is likely to be very minor. IMO.

But we are all talking about investing in the market in some manner, not just sticking the cash in a mattress somewhere...(did anyone ever really do that?)
So we are giving companies a jolt..and this jolt can..and hopefully will get the supply side going....making jobs and encouraging people to spend....

We shall see [img]smile.gif[/img]

As for cash reserves, I think having a couple of months survival funds in the bank (ie low interest rate savings account or possibly a money market fund) is a good idea...the trick is to be disciplined enough to leave it there and not mess with it [img]smile.gif[/img]

Here's a question...My company allows us to hold up to 400 hours of vacation PTO time...I try to keep a 160 hour minimum reserve of hours for emergencies and in case I should be the victim of downsizing...I figure this is a decent "savings vehicle" since it allows flexibility for illness and minor catastrophes and as long as I don't use it..the value of the time goes up, since I am lucky to receive annual pay raises..so the hours would be paid out at my current level of income and not the level at which they were earned..Anyway, question is...your opinions on the strategy?

[ 06-02-2003, 04:26 PM: Message edited by: MagiK ]

[Timber Loftis]

Originally posted by MagiK: But we are all talking about investing in the market in some manner, not just sticking the cash in a mattress somewhere...(did anyone ever really do that?) So we are giving companies a jolt..and this jolt can..and hopefully will get the supply side going....making jobs and encouraging people to spend....

The problem isn't with the supply side, MagiK. We have merchandise sitting on the shelf aplenty. The problem is with the demand side. Oh well, I hope I am wrong.

Your savings vehicle seems smart, btw. I'd use it, except I am at my first job ever where there is NO VACATION WHATSOEVER.

[Bungleau]

Originally posted by MagiK: Bungleau [img]smile.gif[/img] I have been trying to convince Mysticelt about why I am paying my Car off ASAP...I can do that in a couple of months then turn that cash toward my higher interest rate credit card.....she keeps telling me to do the card first [img]smile.gif[/img] But I can free up roughly $400 a month on the car in a couple of months then put that toward the higher rate card and make much more visible headway ....yeah over the long haul Ill probably blow a couple hundred in interest payments...but I like that short term gain [img]smile.gif[/img]

Beat her with math, MagiK [img]smile.gif[/img] (did I say that? naw, must be someone else...)

If you can pay the car off in two months, you're talking about two months worth of interest on the debt it would have paid. Hmmmm... I'm not sure what that means. Let's try an example.

Say the car has an $800 balance at 6%. Say you've got a credit card with $4000 balance at 18%.

If you pay the car off last, you will pay less interest. That's just mathematics; it costs less. If you pay the car off first, you'll pay more in interest; but how much?

Assume $700 of the car balance could have gone to the credit card. You are then paying 18% interest on that $700, which is 1-1/2% per month. That's $10.50 in the first month and $5.25 in the second, for a total of $15.75.

But you're paying off the car earlier, which is saving the interest there. At 6%, that's 1/2% per month, which is $3.50 in the first month and $1.75 in the second month for a grand total of $5.25.

Net difference in interest is $10.50, which, compared to the debt size of $800, is not a whole lot.

I'd pay the car off quick to get the mental boost from it, especially if it's going to let you knock the other one(s) out more quickly. If you were talking about ten months, I'd go with Mysticelt and pay the higher rate off first.

If she still gives you grief, offer to give up something worth $10.50 over the next two months to get it paid off. [img]smile.gif[/img] That way, you're "paying" for the choice.

Note that the numbers above are examples, and real actuarials can poke holes in them. The logic behind it, however, is still sound and works just fine.

Originally posted by Timber Loftis: Your savings vehicle seems smart, btw. I'd use it, except I am at my first job ever where there is NO VACATION WHATSOEVER.

Say what???? no vacation time? Jeez they better pay you a lot cause your gonna burn out real quick like....not to mention you are bound to become sick at some point....no one is perfectly healthy all the time.....man that really blows...I get 8.03 hours accumulated every 2 weeks.