Invest or pay CC debt?

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humbledinvestor
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Invest or pay CC debt?

Post by humbledinvestor »

For the first time in my life I am faced with credit card debt due to divorce. My APR is 15.25% and the balance is 27k. Will probably stop at 32k since the final paperwork is being done this week. While I plan to make more than the minimum payments monthly to wipe it out in a year or so. Is it better to invest in VTI for example or pay it off?
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TomatoTomahto
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Re: Invest or pay CC debt?

Post by TomatoTomahto »

Do you expect VTI to return better than 15.25%? Me neither. Pay off the CC debt.

Sorry your marriage didn’t work out.
I get the FI part but not the RE part of FIRE.
GoldenFinch
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Re: Invest or pay CC debt?

Post by GoldenFinch »

Pay off the debt first.
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humbledinvestor
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Re: Invest or pay CC debt?

Post by humbledinvestor »

Thanks.

So it's more fear making me want to pay it off slowly. I have always had a healthy emergency fund, taxable savings and equity in the home. The home is sold and I don't plan to buy for a while. The proceeds have not been invested though. The money I can use to pay off this debt is not from the proceeds but what's left over off the emergency fund. Hence some reluctance. From a pure math perspective, makes sense to pay off the card.
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TomatoTomahto
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Re: Invest or pay CC debt?

Post by TomatoTomahto »

humbledinvestor wrote: Mon Nov 09, 2020 6:48 am Thanks.

So it's more fear making me want to pay it off slowly. I have always had a healthy emergency fund, taxable savings and equity in the home. The home is sold and I don't plan to buy for a while. The proceeds have not been invested though. The money I can use to pay off this debt is not from the proceeds but what's left over off the emergency fund. Hence some reluctance. From a pure math perspective, makes sense to pay off the card.
You should keep some cash available, as an emergency fund, but you were asking about VTI. I would not hold emergency funds in VTI.
I get the FI part but not the RE part of FIRE.
GoldenFinch
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Re: Invest or pay CC debt?

Post by GoldenFinch »

The math is 27,000 x 15.25% = 4,117.5. You are paying almost 80 a week to keep the debt. Calculate exactly what your emergency fund should be and throw everything over that amount at the CC debt, then continue investing.
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wander
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Re: Invest or pay CC debt?

Post by wander »

It's an easy choice.
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avenger
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Re: Invest or pay CC debt?

Post by avenger »

Not only do you need to pay off the credit card debt, you need to spend a lot of time reading here for a total mindset change. Good luck.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [VTI, VXUS, VWITX, SV fund]
260chrisb
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Re: Invest or pay CC debt?

Post by 260chrisb »

humbledinvestor wrote: Mon Nov 09, 2020 6:48 am Thanks.

So it's more fear making me want to pay it off slowly. I have always had a healthy emergency fund, taxable savings and equity in the home. The home is sold and I don't plan to buy for a while. The proceeds have not been invested though. The money I can use to pay off this debt is not from the proceeds but what's left over off the emergency fund. Hence some reluctance. From a pure math perspective, makes sense to pay off the card.
You kind of answered your own question here as you of course would pay it off before you invest but what fear is associated with paying off a credit card? Fear of not paying high interest? Fear of the card holder going out of business? Fear of you not being in unsecured debt? Have no fear; you'll be okay without CC debt.
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FiveK
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Re: Invest or pay CC debt?

Post by FiveK »

humbledinvestor wrote: Mon Nov 09, 2020 6:48 am I have always had a healthy emergency fund....
One can make the case that a 15% interest debt is an emergency and well worth the use of your emergency fund to make it go away.
MikeG62
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Re: Invest or pay CC debt?

Post by MikeG62 »

GoldenFinch wrote: Mon Nov 09, 2020 6:47 am Pay off the debt first.
^This
Real Knowledge Comes Only From Experience
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galawdawg
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Re: Invest or pay CC debt?

Post by galawdawg »

I'd strongly recommend that you use the proceeds from the sale of your marital home to pay off this credit card immediately. You won't find any other investment where you earn that kind of "return" safely.

Then use the cashflow you were planning on using towards the credit card debt to save or invest according to your investment goals.
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humbledinvestor
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Re: Invest or pay CC debt?

Post by humbledinvestor »

Thanks for all the advice. I will pay it off once the agreement is done and I can use the money (non house proceeds).
Ostentatious
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Re: Invest or pay CC debt?

Post by Ostentatious »

Sorry to hear about your divorce. However, you’re taking that right steps in paying off your debts first and hopefully sooner or later you should be back to investing again.
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whodidntante
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Re: Invest or pay CC debt?

Post by whodidntante »

Folks around here get excited about paying off debt and you even got some finger wagging. But if you are eligible for a 401k match, I would contribute enough to get that 50-100% return and current year tax savings even while carrying 15% debt. But if I did have 15% debt, I would prioritize paying it over an emergency fund; the emergency already happened.
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humbledinvestor
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Re: Invest or pay CC debt?

Post by humbledinvestor »

That's a good way of looking at it: the emergency already happened. Despite the legal bills, I have still been able to save in my 401k to get the company match. Time to rebuild from here.
aristotelian
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Re: Invest or pay CC debt?

Post by aristotelian »

Pay down the debt for 15% guaranteed return and peace of mind. Credit card debt is almost always the #1 financial priority in any situation.
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humbledinvestor
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Re: Invest or pay CC debt?

Post by humbledinvestor »

aristotelian wrote: Mon Nov 09, 2020 8:21 am Pay down the debt for 15% guaranteed return and peace of mind. Credit card debt is almost always the #1 financial priority in any situation.
Agreed, it's the worst. I have had credit cards since 95' and never had any debt on them until the divorce hit.
aschafer1984
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Re: Invest or pay CC debt?

Post by aschafer1984 »

Out of curiosity, what is the reason that some posters here are advocating growing any sort of emergency fund before having this debt 100% paid off? I can't think of too many true emergencies where cash is the only available tender option. Even if that were the case, many CCs allow for cash advances though the limits (at least in my case) are typically less than the CC total credit limit. Am I missing something here?
deltaneutral83
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Re: Invest or pay CC debt?

Post by deltaneutral83 »

aschafer1984 wrote: Mon Nov 09, 2020 8:52 am Out of curiosity, what is the reason that some posters here are advocating growing any sort of emergency fund before having this debt 100% paid off? I can't think of too many true emergencies where cash is the only available tender option. Even if that were the case, many CCs allow for cash advances though the limits (at least in my case) are typically less than the CC total credit limit. Am I missing something here?
There are quite a few people who have had success building wealth by utilizing debt (in this case another alternative mentioned is hoarding cash I guess?). What we all know statistically is that very people can do that, and this is high interest credit card debt, not even low interest mortgage debt. It appears form time to time that those who are mathematically and behaviorally inclined to use debt successfully think their anecdotal experiences extend to the masses, which they do not, even if this is BH. Yes, I have no doubt that there are some very intelligent capable people on this board that can go fetch 16+% on investments with incredible consistency. Given the OP's situation (racking up credit card debt, devastating personal situation), does it sound like OP should engage in this strategy(?), my response would be categorically "no."

Quite honestly, I can't think of a bigger emergency (at least mathematically) than a 16+% guaranteed rate working against you. I wouldn't even be considering letting this continue at half the rate. I'd probably stick to the 401k match as others have suggested and I am a good little BH too and like math, but we also can't analyze this situation without the emotional factors involved. Knocking out high interest credit card debt by any and all means possible is rarely a bad idea.
CoAndy
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Re: Invest or pay CC debt?

Post by CoAndy »

I would invest up to the company match in your 401(k), and then attack the cc debt until it is wiped out. Good luck.
CurlyDave
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Re: Invest or pay CC debt?

Post by CurlyDave »

humbledinvestor wrote: Mon Nov 09, 2020 8:13 am That's a good way of looking at it: the emergency already happened. Despite the legal bills, I have still been able to save in my 401k to get the company match. Time to rebuild from here.
Well, one emergency already happened. But the probabilities of other emergencies have not decreased, and may have even increased.

Possibility of injury in some kind of accident (car or other) is most likely up due to some understandable distraction. Same for job loss, distraction probably reduces performance.

And, don't think that you can always re-borrow the money on the CC. Your credit rating will probably drop due to income decline and higher credit utilization. This may lead to a reduction in credit limit on the card.

If you really are going to be able to pay off the card in one year, the total interest charge will only be half of the amount previously calculated.

Personally, I wouldn't make any decisions right now and would give it a few months for the dust to settle. Think of a few more months worth of interest as just another cost of divorce.
ChinchillaWhiplash
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Re: Invest or pay CC debt?

Post by ChinchillaWhiplash »

You need an emergency fund. At least have a month’s worth or 2 to cover expenses if needed. Then tackle the CC aggressively until it is gone.
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humbledinvestor
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Re: Invest or pay CC debt?

Post by humbledinvestor »

Good point CurlyDave. As someone who has never had debt (except mortgages), I don't like having this debt and want to attack it, at the same time what if something else comes up? This has been an insane year for many, including me.
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galawdawg
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Re: Invest or pay CC debt?

Post by galawdawg »

humbledinvestor wrote: Mon Nov 09, 2020 10:25 am Good point CurlyDave. As someone who has never had debt (except mortgages), I don't like having this debt and want to attack it, at the same time what if something else comes up? This has been an insane year for many, including me.
What are you doing with the proceeds from the sale of the marital home? You posted previously that you were looking for a place to invest it for 4-5 years and were considering investing it in a balanced fund. Why wouldn't you use those funds to payoff your high interest credit card debt?

viewtopic.php?f=1&t=318795
fyre4ce
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Re: Invest or pay CC debt?

Post by fyre4ce »

humbledinvestor wrote: Mon Nov 09, 2020 10:25 am Good point CurlyDave. As someone who has never had debt (except mortgages), I don't like having this debt and want to attack it, at the same time what if something else comes up? This has been an insane year for many, including me.
If some huge emergency comes up, like the mafia is going to murder you unless you come up with $X,XXX on short notice, I'm sure you can find plenty of ways to borrow money at or below 15%. Pay off the debt first.

The only higher financial priorities are making sure you have enough minimum liquidity so you're not bouncing checks (probably a few thousand dollars in your checking account), and getting an employer match on your 401k/403b. All other assets should be put toward this credit card debt; nowhere else can you get a higher "return".
vas
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Re: Invest or pay CC debt?

Post by vas »

deltaneutral83 wrote: Mon Nov 09, 2020 9:11 am I have no doubt that there are some very intelligent capable people on this board that can go fetch 16+% on investments with incredible consistency.
These people should post more
There is nothing you can't prove if your outlook is sufficiently limited
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SmileyFace
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Re: Invest or pay CC debt?

Post by SmileyFace »

Sorry to hear about your marriage.
Not only would I stop investing - I would scrape by like a pauper until that debt is fully cleared. I would also be scouring the internet for 0% balance transfer options to try to get it moved to another card that won't charge interest.
I would hate to be paying such high-interest.
vas
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Re: Invest or pay CC debt?

Post by vas »

Sorry you are going through this experience. It can be very challenging to make sound decisions when so many aspects of your life are unstable. Assuming your job is stable for now, I'd recommend continuing with any contributions to retirement accounts, put a few thousand in a savings account to give yourself a little flexibility, tighten the belt hard, and pay off the card. Then just keep at it, build up some cash reserves. Call it what you want: emergency fund, house down payment, whatever. Don't even think about investing until you have reestablished stable footing. Good luck.
There is nothing you can't prove if your outlook is sufficiently limited
deltaneutral83
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Re: Invest or pay CC debt?

Post by deltaneutral83 »

vas wrote: Mon Nov 09, 2020 10:58 am
deltaneutral83 wrote: Mon Nov 09, 2020 9:11 am I have no doubt that there are some very intelligent capable people on this board that can go fetch 16+% on investments with incredible consistency.
These people should post more
I'm just covering my base in that there are some entrepreneurial folks around here with 8 figure net worth's that have been not only mathematically sophisticated but also behaviorally sound enough to handle using debt to create wealth (although much lower interest bearing debt than OP I imagine). The problem is that this notion shouldn't be projected onto probably 98% of people and probably 99.9% of people with 15%+ consumer debt. To me, it is a huge red flag behaviorally for this scenario (should I pay off 15% debt or invest or keep some cash(?) etc. etc.) to have even been presented. Having cash in the bank while debt accrues at 15% is an illusion of safety IMO. It changes nothing on the balance sheet. What's ignored is the fire that usually gets lit when you have $600 in your checking account by way of cutting expenses to "ramen and tap water" or whatever until that high interest bearing consumer debt get's knocked out. That doesn't quite make it into most people's sophisticated math equations regarding debt, even those who make 15+% which on real estate, buying small businesses, etc etc is completely possible. Many on here have done this no doubt, but that can't be expected of nearly all others % wise. Just my $0.02
campy2010
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Re: Invest or pay CC debt?

Post by campy2010 »

If your credit score is good then keep an eye out for 0% balance transfers. If you find one, take it. That will at least give you some buffer time at 0%.
fyre4ce
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Re: Invest or pay CC debt?

Post by fyre4ce »

CurlyDave wrote: Mon Nov 09, 2020 10:21 am
humbledinvestor wrote: Mon Nov 09, 2020 8:13 am That's a good way of looking at it: the emergency already happened. Despite the legal bills, I have still been able to save in my 401k to get the company match. Time to rebuild from here.
Well, one emergency already happened. But the probabilities of other emergencies have not decreased, and may have even increased.

Possibility of injury in some kind of accident (car or other) is most likely up due to some understandable distraction. Same for job loss, distraction probably reduces performance.

And, don't think that you can always re-borrow the money on the CC. Your credit rating will probably drop due to income decline and higher credit utilization. This may lead to a reduction in credit limit on the card.

If you really are going to be able to pay off the card in one year, the total interest charge will only be half of the amount previously calculated.

Personally, I wouldn't make any decisions right now and would give it a few months for the dust to settle. Think of a few more months worth of interest as just another cost of divorce.
I don't think I agree. If the OP is worried about liquidity, I'd suggest he consider all the possible ways he could get money in a (new) emergency, including 0% CC promotions, withdrawing contributions from a Roth IRA, state unemployment benefits, car title loans, unsecured personal loans, payout of accrued vacation from an employer, 401k loans, family and friends, etc. I'd venture a guess that at least some of these would be available. I wouldn't recommend paying a guaranteed 15% annual interest rate on a CC to preserve liquidity for only a possible, unknown future emergency, if any of these sources of emergency funds would be available.
wfrobinette
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Re: Invest or pay CC debt?

Post by wfrobinette »

campy2010 wrote: Mon Nov 09, 2020 11:19 am If your credit score is good then keep an eye out for 0% balance transfers. If you find one, take it. That will at least give you some buffer time at 0%.
Good Luck on that. Most cards have stopped 0% transfers and some have stopped transfers altogether.
Hyperchicken
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Re: Invest or pay CC debt?

Post by Hyperchicken »

Chase Slate has 0% fee and 0% APR for 15 months balance transfer offer.

Even the more common 3% fee and 0% APR for 12 months deal would be a good option, if OP cannot pay off the balance quickly enough.
Topic Author
humbledinvestor
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Re: Invest or pay CC debt?

Post by humbledinvestor »

galawdawg wrote: Mon Nov 09, 2020 10:45 am
humbledinvestor wrote: Mon Nov 09, 2020 10:25 am Good point CurlyDave. As someone who has never had debt (except mortgages), I don't like having this debt and want to attack it, at the same time what if something else comes up? This has been an insane year for many, including me.
What are you doing with the proceeds from the sale of the marital home? You posted previously that you were looking for a place to invest it for 4-5 years and were considering investing it in a balanced fund. Why wouldn't you use those funds to payoff your high interest credit card debt?

viewtopic.php?f=1&t=318795
I may do that too.
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humbledinvestor
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Re: Invest or pay CC debt?

Post by humbledinvestor »

vas wrote: Mon Nov 09, 2020 11:06 am Sorry you are going through this experience. It can be very challenging to make sound decisions when so many aspects of your life are unstable. Assuming your job is stable for now, I'd recommend continuing with any contributions to retirement accounts, put a few thousand in a savings account to give yourself a little flexibility, tighten the belt hard, and pay off the card. Then just keep at it, build up some cash reserves. Call it what you want: emergency fund, house down payment, whatever. Don't even think about investing until you have reestablished stable footing. Good luck.
Thanks. Yes very tough to make sound and smart decisions during this time and during the entire process.
neverpanic
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Re: Invest or pay CC debt?

Post by neverpanic »

I hate to pile on, especially when someone is going through something tough AND is going to be saddled with a monthly reminder of what a crappy deal they landed, but as most others have stated, your case is a no-brainer.

For those of us who chase a little performance here and there and/or have FOMO, it is often very tempting to try to grab ahold of the bulls and go along for the ride. But what you're staring at is an automatic 15% return. If any of us knew the market would guarantee us that every year, the majority of people would likely have all their money in that vehicle and would never change course. A good many of us would be happy to lock in half that for the next 40 years.

Get rid of the debt, get that chapter of your life in the rear-view as best you can, then you can enjoy what your future is holding for you.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
Lalamimi
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Re: Invest or pay CC debt?

Post by Lalamimi »

pay it off and cut it up.
Topic Author
humbledinvestor
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Re: Invest or pay CC debt?

Post by humbledinvestor »

Lalamimi wrote: Mon Nov 09, 2020 5:04 pm pay it off and cut it up.
Update:
Paying it off. The last bill for November will go to a 0% card which I will also pay in full (this week all the money gets divided).

Not cutting it up though. Pre-divorce I paid in full, the card was used for points (groceries, gas etc). During divorce I could not touch some of the money that was marital hence the cards. Again I have never had credit card debt since I first got one in 95. Divorce is what led to the debt.
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