What Would You Do With 10,000?

I recently saw this article on CNNmoney about what you should do with 10,000 right now.  They have this question for those of you that are loaded (What to do with 50k) and those of you that are itching to torch that emergency fund (what to do with 1k).  Some of the entries sounded a bit frivilous (at least for me) but I could see the value in a lot of them.  First, they mention that because of the tough economic times, people have a lot of cash squirreled away right now (I really don’t know if that’s accurate), but here is the list:

  1. Buy Museum Quality Art – Yes, the art market has taken a beating, and yes you’ll probably be able to get some good deals and could turn them into “investments”.  On the other hand, you’d have to take care of it and look at it all the time.  For me, I wouldn’t drop 10k here.
  2. Do Some Good – They suggest donating it to a charity as well.  I think if I had no debts and was stable in my financial situation, I’d definitely consider this.  For me personally, I’d like the money to stay in my community so I’d pick a local charity, but any charity that you identify with would be great.
  3. Invest in Stocks – They specifically  mention blue chips like Utilities and Telecom because they are necessities in this day and age.  I agree, and typically these stocks pay dividends and are reasonably priced (AT&T/Verizon are, anyway).
  4. Build a T-Bill Ladder – Also, a good idea to watch your money grow.  You simply buy 5 $2,000 dollar t-bills: one for 1 year, one for 2 years, one for 3 years, one for 4 years and one for 5 years.  Once each one matures, use your principal + interest to buy a 5 year note.  In 5 years, you’ll have a bill maturing every year.
  5. Buy a Target Date Retirement Fund – Great Idea.  Make sure to keep the fees low, and you’ll be set with cash when you’re ready to play bridge all day.
  6. Play a Hunch – This is essentially betting a portion of your portfolio (keep it small people, 5-7% max) on an area you believe will grow quickly.  Emerging foreign markets?  Basket weaving supplies?  Red (on the roulette wheel)(Just kidding).  Play the hunch with your 10k.  You could end up a winner!
  7. Pay off your kid – Also a great option.  Offer to get your kid set up in an apartment (preferably as far from you as possible) and pay the security deposit and some rent.  Slip the youngster the rest in c-notes and tell him not to spend it all in 1 place.  Use the remaining money to build a man cave.
  8. Grab some tax credits – Great Idea.  Lower your energy bills by replacing windows, adding more insulation, installing a programmable thermostat.  These will help  you use less energy, live greener and save some good money in the winter!
  9. Buy Growth Stocks – Good option.
  10. Put it in your IRA – If you’re married, you’ll have enough to max out your spouse’s IRA as well.

Unfortunately for me, I’d probably use the money to pay down debt.  I may take a bit out (500-1000) and use it to go on vacation, but I may not.  However, if I didn’t have to do that, I’d probably go for the energy tax credits first.  There’s always more you can to to conserve energy (or generate it) in your own home.

What’s the Best on this list?  The Worst?
What would you do with the money?

September 2010 Monthly Review

Student Loans:

I just wish these loans would go away.  I don’t want them anymore and I don’t want to deal with them anymore, so I’m trying to pay them down as quick as I can.

Nelnet Student Loan $ 397 ($1,350)  While I have not sent this yet, this is what I’m expecting to send in a few days.  Unfortunately I couldn’t squeeze an extra $400 out of last months budget (I should have worked an extra 30 hours), but I’ll be able to take care of this by the month’s end, and then it’s on to the next one!

Direct Loan  $6,439 ($253).  I’ve been paying my new payment ($77) to this, and my parents help me out with this as well.  I recently figured out that if you’re going to make 2 payments to a student loan, it’s best to do them one right after the other.  The reason for this is that they clear out the interest then apply the remaining to principal (I have a full post on the topic here).  If your next payment is a day or two away, you will be paying more of the money to principal than to interest.  I’ll start snowballing this next month, with a goal of having it gone by Christmas.

Great Lakes Loan $ 12,635 ($150)  When I originally checked on this in mint, it said I owed more than I did last month.  I didn’t think that could be true (and would be hugely demoralizing if it was) so I went to the borrowers website.   It had the true amount, but I’m beginning to notice mint does not always play nicely with debt.  That’s a good enough reason for me to get out of debt!

Truck Debt:

This is for my vehicle.  I had already started trying to become debt free when I bought this, so I was quite torn as to wether or not to take on new debt while I was trying to eliminate other debt.  If you want to read more about it, check herehere and here.  Despite most of the advice I heard, I went ahead and took out a loan on this.   I made the right move.

Ford Credit: $ 18,841 ($281): It’s interesting to watch the amount of money that gets applied to principal each month.  It seems to be very heavily dependent on what day I make my payment in the month.  It’s due on the 15th, and sometimes I pay it the first week of the month, sometimes the second.  I applied $7 more to principal last month than I did this month because of it.   Kind of a lot when you’re thinking about it.

Total Debt Level: $38,042 ($2,499) I was kind of shocked to see that I made this much progress, but I’m no where near out of the woods.   It does look like I’ll reach my goal of having my total debt level under 37,500! (actually, if I didnt make that by the end of the month, I’d consider myself a huge failure.

Last month I went on a small vacation at the beginning of the month, so I didn’t get to pay down as much as I would have liked to.  This month was nice because I got a lot of hours at my second job and I was fairly tight with my spending.  The month after this should be pretty good too as my second job has gotten rather busy and I’ll probably be spending more time there (read the entire weekends) for a bit until  a project wraps up.  On the upside, my snowball is gaining traction and will soon move on to a new target!

How are you doing towards paying off your debt?

Reader Question: Nelnet Student Loans

I just recieved this question from Tim who writes over at The Econ Man:

Hello. I just ran across your blog and in reading this post, thought that maybe you would be able to help with a question I had about paying off loans early, and specifically nelnet loans. With nelnet, I’ve never seen the option to apply extra payments “towards principle.” I contacted them and they told me if I wanted to apply the extra toward the principle, I would have to mail in a check with those special instructions. I’m just not sure what happens if I pay extra without specifically telling them to apply it toward the principle. Do you know? I see that you’re paying off a nelnet loan and you don’t owe payments until April 2012. What happens when you finish paying off your loan? Is the loan paid off immediately, or does the original loan amortization schedule still play out?Have you paid any other nelnet loans in full? this simple thing really confuses me and it’s prevented me from paying extra on any of my nelnet loans.

Thanks,

Tim

As Tim mentions in the article, I do have a student loan from nelnet, and it’s currently my debt repayment target, because it’s the next lowest balance.   (I paid off my credit cards first, even though some of them had higher balances than this loan).  I mentioned last time that I made my first snowball payment to them (the amount was around $1,000) and then noted that I don’t have a payment due until April of 2012.  That means that they have tentatively applied my extra payments as “prepayments” of the balance due, and not applied the extra payment to the principal.  They pitch this as something helpful, but in reality it’s not.  Sure, if I lost my jobs I wouldnt have to pay them until April 2012, but I’d lose so much progress that I’ve made.

Nelnet actually does apply your prepayments to the principal, as you can see in the table below.  Most of the student loans that I have work in the following way:  You’ll pay them some amount (be it your regular payment or otherwise) and they will take that amount and pay off the interest that is currently owed on the note and will apply the rest to principal.

To explain an example from the table, my  normal payment is $50.  On June 7, 2010, I paid them $50, and there was $18.31 worth of interest on the note at that time.  Subtract the $18.31 from my $50 payment, and you’re left with $31.69, which they then applied to principal.  Similarly with my snowball payment of $1,000 on August 2, there was 15.17 worth of interest on the loan, and once that was paid, they put the rest towards principal.

08/02/2010EDPay$1,000.00$0.00$15.17$984.83
07/06/2010EDPay$40.00$0.00$16.42$23.58
06/07/2010EDPay$50.00$0.00$18.31$31.69
05/06/2010EDPay$50.00$0.00$17.35$32.65
04/06/2010EDPay$60.00$0.00$15.83$44.17

The way they (can) make back the interest that they lost is by telling you that you don’t  need to make a payment until April, 2012.  If you do this, all the interest that you didn’t have to pay now will accrue back onto the note if you don’t make a payment.  However, if you kept making payments, you’d pay off the note early.

Once you get close to having the balance almost paid for, you can request what they call a payoff quote (to find this for nelnet, click on “My Account” and above the payment info should be a link).  A payoff quote is basically a quote that says the current principal balance, the interest accrued currently, and estimated interest for the period that the quote is good for.  For example, nelnet will give you a payoff quote that is good for 10 days.  If you send them the money in the next ten days, your loan is paid in full.  Mine looks like this:

Current PrincipalOutstanding Interest10 Days InterestTotal Payoff Through 9/13/2010
$2,033.40$12.11$3.79$2,049.30*

So if I paid Nelnet $2,049.30 before September 13, my loan would be paid off (unfortunately I don’t have the resources at this time to do that).  Once this is done, the amortization schedule does not continue to play out.  You’ve excised the company from your life (if you only have 1 loan through them, like me) and you don’t owe them another red cent.  You can safely completely forget they ever even existed and move on to your next debt.

As far as paying any Nelnet loans off previously, I have not.  I will soon though, and I’ll let you know exactly how it goes if you like.

In my opinion, handling prepayment needs extra discretion and a clever planning. You can dig up some useful information about payment schedules of different student loans at Loans-advisor.com

August 2010 Monthly Review

This was an interesting month for me budget wise.  I spent much more than I normally because of my recent vacation and I think this will cause me to have spent more than I took in this month for the first time since December, 2009.  I was able to trim back quite a few categories last month and this month to make up for it, but I still blew my budget on some of the categories, mostly because I was on vacation.  Hey, during restaurant week, you’ve got to take advantage of the deals, right?!  (I spent almost half of my entire monthly food budget and 150% of my dining out budget on 1 meal while on vacation.  It was TOTALLY worth it, the food was great and the company was fantastic!)  Other categories I went over budget in this month were:

Student Loans:

This is by far my largest liability at this point — It’s unsecured and it’s just lame run of the mill debt.  I’ve got 3 loans from 3 different banks (way to go, feds!).  These loans came from 6 years of school, so I got out pretty good.

Nelnet Student Loan $ 2,018 ($1023) This normal payment is $50, which I have been paying.  This is my next target, as you can see.  I just checked the website on this balance.  It says I don’t need to make a payment until April 2012.  Along with this, I got an offer to enroll in an auto debit for a .25% interest rate deduction.  I’ll be forgoing that in an effort to keep the pressure on to repay in 2 more months!

Direct Loan  $6,692 ($250).  The payment for this loan just got dropped to $77 per month.  Not sure why, but I’m not complaining.  This is next on the hit list.  On a side note the subtraction on this was extremely hard for some reason this month.  I had to google the answer

Great Lakes Loan $ 12,709 ($150) Just paid the standard payment of $150, but because of interest, the amount it went down was much less than that.  Seeing how much of my payment isnt applied to the loan balance really, really bothers me.  My snowball will soon roll up on this too!

Truck Debt:

This is for my vehicle.  I had already started trying to become debt free when I bought this, so I was quite torn as to wether or not to take on new debt while I was trying to eliminate other debt.  If you want to read more about it, check herehere and here.  Despite most of the advice I heard, I went ahead and took out a loan on this.   I made the right move.  Either way, here is the status.

Ford Credit: $ 19,122 ($288): I usually pay extra on this loan, but I’ve gotten so far ahead that I decided to make a smaller payment and put the extra cash to my small student loan so I can get rid of it!  Apparently, I’ve paid $255 so far this year to service this note.  It will be nice when all that cash is back in my bank account.

Total Debt Level: $ 40,541 ($688)

This isn’t quite as much as I have been paying down, but I was able to have some fun this month.  It looks like I could have paid off my student debt with the money I spent on vacation and the lost wages from time off work.  While debt freedom is something that’s at the top of my  list, it’s important to ease off the gas once in a while and enjoy what you’ve accomplished thus far and re-focus your scope, so to speak.

How much debt did you pay down (or money did you save) last month?

July 2010 Monthly Review

This is my spending for the month of July.  Due to my volunteering, I was able to save quite a bit of money on food (they fed me almost every meal I ate for 1.5 weeks) on that category, but apparently to make it up to myself, I gave up those saving elsewhere.  Still came in under budget though.

Student Loans:

This is by far my largest liability at this point — It’s unsecured and it’s just lame run of the mill debt.  I’ve got 3 loans from 3 different banks (way to go, feds!).  These loans came from 6 years of school, so I got out pretty good.

Nelnet Student Loan $ 2,018 ($1023) This normal payment is $50, which I have been paying.  This is my next target, as you can see.  Hopefully this will be gone in 3 months

Direct Loan $ 6,942 ($157).  The regular payment on this is 92, and I paid that, but my parents send some money occasionally to this loan.  It’s a really, really big help.  This loan started out at 12k I believe.

Great Lakes Loan $ 12,859 ($85) Just paid the standard payment of $150, but because of interest, the amount it went down was much less than that.  Seeing how much of my payment isnt applied to the loan balance really, really bothers me.  My snowball will soon roll up on this too!

Truck Debt:

This is for my vehicle.  I had already started trying to become debt free when I bought this, so I was quite torn as to wether or not to take on new debt while I was trying to eliminate other debt.  If you want to read more about it, check herehere and here.  Despite most of the advice I heard, I went ahead and took out a loan on this.  I’m still thinking I made the right move.  Either way, here is the status.

Ford Credit: $ 19,410 ($178): I usually pay extra on this loan, but I’ve gotten so far ahead that I decided to make a smaller payment and put the extra cash to my small student loan so I can get rid of it!  Apparently, I’ve paid $222 so far this year to service this note.  It will be nice when all that cash is back in my bank account.

Total Debt Level: $ 41,229 ($1453) Another month where this number dropped.  This is one of the biggest decreases I’ve seen in a long while, and its great.  Unfortunately, I know this wont continue next month as I’m going on vacation (but got free airfare/2 nights hotel from reward points).  It will be nice to get away and relax, but it’s going to pull a few teeth from my debt chomping machine.

How much debt did you pay down (or money did you save) last month?

It’s Called “Personal” Finance for a Reason

Personal Finance is one of those things that’s different for just about everyone.  Sure, some parts can be strikingly similar like saving money and spending less than you earn, but for the most part, it’s a different beast for every person or family.  One family may not value things that their friends do, and it will reflect in their spending habits and money management.  I’ve been thinking a lot lately about one thing that I did that flew in the face of all the personal finance advice that I have read and seen, and I’d like to go into depth more about why it has worked out well for me.

The decision to buy a car will confront all of us at some point, and if you’re in your 20s like me, it’s probably the most expensive thing that you will buy until you buy a house (excluding that education that we took out loans for).  Due to this, there is TONS of advice out there for people who are looking to buy a car, related to how much they should spend, what capabilities they need and whatnot.  Most of it is great advice for 95% of the population, and if you follow it, you’ll end up just fine.  The biggest spokesperson for some of this advice is a  titan of personal finance, a person who (some believe) stands below, but quite close to the big man (or woman) upstairs: Dave Ramsey.

Dave has a lot to say about cars, and for good reason.  During the time when Dave was losing all his money, there was 1 thing he felt like he absolutely had to keep, and it wasnt his home.  It was his Jaguar.  To keep up appearances that people had expected of him, he felt he NEEDED to have the jag, even though it was a huge money pit for him.  Dave learned a valuable lesson as the car was (I think) repossessed some time later.  Dave is now completely against the buying of a new car for anyone at any time (unless they can pay cash, I’d assume).  This is because most vehicles typically lose a large percent of their value after you take it home from the dealer (its around 30% I believe).  This, coupled with the american habit of wanting a new car every few years means that you’re borrowing to pay for something that will lose much of it’s value right away and will stay at that lower value until the typical consumer trades it in for a new one, and the process starts over.  Dave calls this a “Stupid Tax” , meaning that you only pay the tax if  you’re stupid.  For 95% of the population, I think Dave is completely right.  If they took this advice, they would probably be much better off buying a car that is a year or 2 old.

My issue with this is that it’s a blanket statement, and many of you who make blanket statements know that they are most likely going to be eaten at some point.  If you say X always leads to Y, you are begging for someone to prove you wrong.  In my case, Dave’s advice wasn’t the most applicable in my situation, and I feel like he left out a few of those things that were present in my situation that are not present in everyone’s situation, and I’ll list them below with a bit of explanation.

  1. Dave Says that you should buy a used car because you’re going to trade it in a few years down the road.  What I’m assuming he means by this is that you’re not going to ” drive it until the wheels fall off ” and the car absolutely wont go another mile.  Who could blame you, anyway?  You could end up driving around a 25 year old car.  I was taught that you bought a new car if you could afford one, and you drove it for 15 years or more. My parents have done this for as long as I can remember, and I picked it up from them.  If you buy and hold a new car, a new car isnt a bad purchase, it’s just a purchase like any other.  You’ll lose a lot of value in the beginning (but it’s only paper value), but if you plan on rolling in the car until you’ve got to take it to the scrap pile yourself, who cares if it loses some value 30 minutes after you bought it?
  2. It’s also common knowledge that your car will depreciate after you drive it off the lot, and you’ll be upside down (owe more than  you can sell the car for) for the next year or so.  This is true for most cars but not for trucks.  Trucks are (no-no-)notorious for holding their value years down the road.  When I was test driving vehicles, I test drove a truck that was 3 model years old (it was a 2007) that was fairly nice with some extras, but nothing terribly fancy.  They were trying to sell it for about 3500 less than what they wanted for that same truck that was brand new.  Curious to see how my truck was holding it’s value, I checked it on kbb.com recently.  I don’t recall my exact sales price (but it was less than $25,000) but the value of my truck currently is $22,000 and the total cost of my loan was somewhere in the mid to high 23’s.  As it sits right now, If I sold the truck, I could make approximately 3500 on it, because I’ve been paying a small bit extra each month, and because the value didn’t tank when I drove it home.
  3. My future.  I went to the readers of Debt Free Adventure and got advice similar to what I’ve listed above.  It was all great advice, it just did not take into account one of the most important things about money: My (or your) personal future goals.  In the future, I would like to do a few things, most of which involve needing a truck or at the very least, something with high ground clearance and 4 wheel drive.  Where I live, 4 wheel drive is also almost a requirement due to adverse weather.  Along with possibly using this truck for a business that I’d like to create, I’d also like to purchase some land and work it.  I’m thinking of raising some sort of animals or growing alfalfa, but I have not really decided.  This is something I really want with my life and I know it’s in the future, so I figured why not get a truck, drive it around nice and new for a while, then when I purchased land and started a business, turn it into a work truck.  Whenever I see one of those really old beat up trucks on the road, I tell myself that soon my truck will be beat up and super awesome like the one I’m looking at.

The way that I see it, I made a pretty good decision and was able to balance my needs and wants and fly in the face of some sound financial principles.  Even though this is still debt and I still don’t like it, It sure beats waking up in the middle of the night wondering if my car will start so that I can get to work later that morning.

So readers, do you think I’m in an alright spot considering I broke a cardnial rule of Personal Finance?

If you were in a similar situation where you were going against most of the PF literature that you have read, would you be able to go through with it?  Admittedly, mine was easier because ‘normal’ people buy new cars, and typically people who buy used ones get looked at like they’ve got 3 heads.  But the question remains, Could you still go it alone?

June 2010 Month Review

Here is where I spent/saved in June of 2010.   For most of May, I was driving a rental car, so my gas prices have gone back up this month, which is unfortunate.  I also have paid off the last of my credit card debt, finally.  I used part of my snowball to pay off my credit card debt, and I’m going to send the remainder to my smallest student loan.  My goal is to have that loan gone by the end of the year.  Once that’s gone, I’ll have some decisions to make about what to tackle next, and I’m sure I’ll be asking for some help.

Credit Card Debt:

I cancelled two of my cards last month after I paid them off.  I’m pretty happy about that!  Right now I have 1 card that I think I’m going to keep, as it is pretty good with rewards miles.  I haven’t decided yet though.

Southwest  Card: $ 0 ! My last credit card (tear, not).  I’m so sorry that we are going to have to break up, but right now, I think it’s for the best.  Do you know how much money it will save me?

Student Loans:

This is by far my largest liability at this point — It’s unsecured and it’s just lame run of the mill debt.  I’ve got 3 loans from 3 different banks (way to go, feds!).  These loans came from 6 years of school, so I got out pretty good.

Nelnet Student Loan $ 3,041 ($32) This normal payment is $50, which I have been paying.  Apparently, of the $50 I pay, $18 goes to interest.  This is my next target.  Get ready to part ways, nelnet.

Direct Loan $ 7,109 ($359).  The regular payment on this is 92, and I paid that, but my parents send some money occasionally to this loan.  It’s a really, really big help.  This loan started out at 12k I believe.

Great Lakes Loan $ 12,944 ($86) Just paid the standard payment of $150, but because of interest, the amount it went down was much less than that.

Truck Debt:

This is for my vehicle.  I had already started trying to become debt free when I bought this, so I was quite torn as to wether or not to take on new debt while I was trying to eliminate other debt.  If you want to read more about it, check here, here and here.  Despite most of the advice I heard, I went ahead and took out a loan on this.  I’m still thinking I made the right move.  Either way, here is the status.

Ford Credit: $ 19,588 ($325):  This one is just holding steady for now.  I pay more than the minimum each month, and I call every month to make sure that they apply my extra to the principal.

Total Debt Level: $42,682 ($793) Another month where this number dropped.  I’m fine with that, although it’s not dropping as much/as fast as I’d like.  I’m hoping I can get another side hustle going  soon.  More importantly, I have spent less than I earned all year!  I’m hoping to continue this all year, and for the rest of my life!
Creative Commons License photo credit: Daquella manera