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Poll the room, what to do with bonus $ ?

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  • Avatar Josh0731 
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    Status: Physician
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    Joined: 01/21/2016

    This coming month I should be getting my productivity bonus (employee…).  After taxes get deducted it should be ~$60k. I’ll admit this isn’t the toughest problem someone has posted here, but there’s a lot of wise people around here, so I thought I would poll the room: what should I do with that money?

    I’ve already maxed out both of our 2016 backdoor Roth IRA contributions and my 2016 HSA contribution.  403b and 457 accounts should be maxed for the year around the same time the bonus hits.  I could hang onto some of the money to be able to make 2017 contributions immediately in January, but with almost half a year of cash drag.

    Student loan balance is currently ~$99k, overall interest rate ~2.7%, so I could take a big chunk out of this balance, certainly more of my future payments will go to principle.  I haven’t been very aggressive about paying this off this year due to buying a house (w/ 20% down).  I know some people would look at the interest rate and feel I shouldn’t worry about it that much, but I really don’t like this particular debt.

    Mortgage is brand new, so I don’t think putting the money here would make much of a difference right now, 15 yr at 3.125%

    We don’t have a lot of other debt – a $13k car note at 2%.

    We are expecting our first child right after New Year’s.  I had thought I would hang onto at least $14k to immediately max out one parent’s 2017 529 contribution.  I also thought about using $28k to max both out for the year right away – would definitely be a great start for this account, and no need to save anything for this until 2018. Also subject to half a year of cash drag.

    And then I guess the last option is to put it in a taxable investment account.  Right now I don’t have much of a taxable account.

    So my most recent thinking was to hang onto $14k for the 529 and put the rest towards student loan debt.  Any other opinions out there?

    #24098 Reply
    Avatar DarrVao777 
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    Status: Physician
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    Joined: 04/12/2016

    What a nice problem to have ☺️

    I agree with what you’ve proposed (I know your debt is at a low enough interest rate where investing it into a taxable account is also a viable alternative)

    I had a similar scenario myself, I opted for the following:

    25% towards a taxable account (invested aggressively in Stock index funds)
    25% towards my mortgage (same thing, it’s a relatively new mortgage with a low interest rate. Perhaps not the best financial decision but I personally would like to be debt free sooner rather than later)
    25% towards our child’s 529
    25% to splurge on ourselves!

    #24100 Reply
    childay childay 
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    Joined: 01/09/2016

    Buy a boat?   😉

    #24102 Reply
    Avatar AlexxT 
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    Joined: 01/13/2016
    Splash Refinancing Bonus

    You can front load your 529 plan with 5 years worth of contributions, and each spouse can contribute, so you have $14,000 x 5  x 2 = $140,000 in 529 space you can fill any time over the next 5 years.   I would also consider paying off some of that debt, but if you’d rather not, then fill the 529.   While the fees nibble away a bit at the returns, it otherwise functions like a Roth.   If you get a state tax deduction, it’s even better.   You could also just fund this year in the 529 and pay off the higher student loan or the mortgage.  Either would be ok.

    #24104 Reply
    Avatar squirrel 
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    Status: Physician
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    Pay off that car loan at least.  If you were inclined to pay off loans, it would seem to make more sense at the mortgage given it is a higher interest rate.

    May want to see what the year brings.  IF your child comes a little early and is born in 2016, could contribute to a 529 for 2016 too.

    #24105 Reply
    Avatar MaxPower 
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    Status: Physician
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    But depending on the tax rate of the OP and if they itemize deductions it’s probably less, effectively, than the quoted 3.125%.

    I would pay off the car loan to increase cash flow and for the psychological benefit of having one less loan. I would also do the 529 now–can’t you do it in your or your spouse’s name and then change the beneficiary once baby arrives? Aside from that, paying off student loans is always a positive in my book. Or if you’re unsure splitting it 50/50 towards student loans and taxable investing seems like a reasonable plan.

    #24107 Reply
    Avatar Dicast 
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    Status: Physician
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    I would pay down the student loan debt first, but I think the argument could be made for a taxable account given your low interest rates.

    The mortgage is probably less interest than the student loans after the mortgage interest tax deduction.

    Front loading the 529 sounds like a great idea but if you are starting at age 0 you have a crazy amount of time to get that account well funded.  You can probably get them close to goal with about $500 per month depending on what you have in store for this yet to go to school child. Also, if you lose your job, the 529 account will wait for your next payment indefinitely…the loan companies don’t really want to wait.

    Tomorrow my wife finally starts her attending job after 7 years of training.  I’ve saved about 30k extra as an additional to normal emergency fund so that we can suffer any hiccups or heaven forbid she hates the job after a few weeks…but if it all goes smoothly, as planned, I will dump the extra fund onto our student loans (interest rate 3.5% (mine) to 5.5% (hers)), keep funding the 529 at $500 a month and hopefully be posting about having no student loans in about a year.

    Get outside of your bubble.

    #24108 Reply
    DMFA DMFA 
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    I think you’re stuck between the numbers game and psychology of debt – with those low interest rates that debt *might* not be hurting you as much as you *might* gain from putting it away.  If your interest rates were worse, it’d be obvious.

    I hate debt so I’d probably kill off as much as I could straight up, probably all the car and some of the student loans, then front-load a 529…but the best mathematical answer may not be the “best” overall answer.

    Oh, and take an awesome baby-moon vacation.  You’re never going to get that time back.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #24115 Reply
    hatton1 hatton1 
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    Status: Physician
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    1. Pay off the car loan.  This is the last time you borrow for a car.
    2. Put half the remainder toward the student loans.
    3. Start a taxable account. It will be handy one day.
    4. next year start the baby’s 529.
    #24116 Reply
    Avatar MichaelB 
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    Status: Physician
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    Joined: 02/15/2016

    1)Make sure you have an emergency fund in cash of 3-6 months expenses, and maybe fund toward the high end of that with a new baby on the way. Once baby and mom are home safely, you could use some of the extra to pay down debt further.

    2)Pay off the car immediately and never borrow for a car again. If you have a need for a car in the near future, put some cash away for that.

    3)Pay off some of the student loan.

    4)Start a 529.

    5)Open a taxable account.

    I think you actually may be able to do all of these to some extent. You may not be able to put a whole lot into the 529 and taxable account, but taking the first step will make it much easier to add to those in the future. Good luck to you!

     

    #24125 Reply
    Avatar jhwkr542 
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    Joined: 02/15/2016

    Pay off the car. Put some towards student loans.

    #24137 Reply
    Avatar Kamban 
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    Status: Physician
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    Joined: 08/01/2016

    1. Pay off car loans.

    2. Keep aside $14K for 529. Can be in money market account.

    3. Use the rest to reduce student loan

    #24141 Reply
    Vagabond MD Vagabond MD 
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    Status: Physician
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    Joined: 01/21/2016

    I would work on reducing debt. The sooner you do that, the sooner you will be in a position to regularly fund 529s, car purchases with cash, etc.

    And speaking of cash, why are you hating on it? It’s good to keep some around.

    #24154 Reply
    Avatar G 
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    Status: Physician, Small Business Owner
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    Joined: 01/08/2016

    What hatton said, plus a bottle of single malt scotch.

    1. Pay off the car loan.  This is the last time you borrow for a car.
    2. Put half the remainder toward the student loans.
    3. Start a taxable account. It will be handy one day.
    4. next year start the baby’s 529.
    Click to expand…

    5. two bottles of 20-30 year old single malt scotch…one for now and one for when baby turns 21.

    #24156 Reply
    Liked by Josh0731
    Avatar Josh0731 
    Participant
    Status: Physician
    Posts: 98
    Joined: 01/21/2016

    Thank you to all the responses, I enjoyed reading them, and its interesting to see everyone’s small differences.

    Truthfully I was a little surprised how many people prioritized the car loan.  I almost didn’t mention it in my original post.  The interest portion of that payment is the smallest interest payment in my monthly budget by far.  But I’ll give it some thought.

    Vagabond, good point about cash.

    And I may have to carve out a scotch allocation  😉

    #24177 Reply

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