The Dilemma of the Raise
I’m getting a raise: I got the official paperwork today and the extra money will be on the paycheck I get on April 27. Also on that check will be the 1% increase toward my retirement savings. I do this purposely so that I never miss that extra 1%. It comes at the same time as my average 3% raise (this year it’s 3.75%), so I see extra money on my check and extra money goes to my 403(b). I consider that a win/win.
I should have about $120/month extra in take home pay. So the question becomes, of course, what to do with that “extra” money.
Put it in Savings: My first inclination is to stick it straight into savings. That helps cover adoption costs and the raise in tuition for C that we know we will see next year. At the same time, April was our final payment on the basement work we had done (to prevent flooding), and we’re already going to be putting an extra $400 in savings every month starting in May. That is earmarked for home improvement work, like replacing all of our windows this summer. However, we already have some money earmarked for this, and I’m just not certain that it will need the full extra $3,200 we will be saving. That means some of that money could go toward tuition and adoption expenses.
Or Pay Down Debt: My other thought was to apply $50 or $100 more per month toward our existing debt- which is only my student loans and the mortgage. The mortgage is our highest interest debt (at 6%), but with 23 years still to go on the loan term, I just don’t see putting the extra money there as a timely enough benefit for it to matter right now.
Instead, I looked at putting the money toward my student loans. If we paid $50/month extra on my student loans starting in May, it would knock 6 months off the repayment period. At first, 6 months did not seem like it was really worth it to me, but then I looked at the dates. Paying off the loans 6 months earlier means they are paid off in mid 2016 instead of early 2017. If we get a child born this year, 2017 will be the year he/she starts kindergarten, and having an extra 6 months to save for private school tuition seems like a good thing.
And then there is the math. Adding $50/month to the pay off of my student loans, it will take us 53 months (as opposed to 59) to pay everything off. That is $2,650 that would otherwise go straight to savings. Currently, we pay $710/month toward student loans. Cutting that short by six months would save us $4,260 (not counting the $50 extra/month). That’s a real savings of $1,610. Even over 4+ years, I can’t get that kind of interest return on $2,650 put in to savings.
So if $50/month was good, I wondered what $100/month extra toward my loans would look like. Well, that would cut another 4 months off the repayment time. So that means for a cost of $4,900, we would save $7,100, for a real savings of $2,200.
Shared Decision Making: Both of those seem like excellent investments. And yet, I’m still not certain I wouldn’t rather hedge our bets with adoption costs, tuition, and home improvement.
And that’s the reason I’ll be sitting down with C tonight and looking at the numbers, and we’ll make the decision together.
Why don't you refinance the mortgage? Interest rates are in the 3's right now, or are you not able to because of an equity issue? If it is an equity issue, then I'd lean towards the mortgage because I'd want to minimize my interest expenses.
I think Thursday's post is going to be about our mortgage situation. It is an equity issue, but not one that is going to be cleared up anytime soon, unless there's another significant change in the housing market.
While I do like to minimize interest expenses, with the plan to adopt and the very high likelihood we'll send our child to a private school, I'm more interested in cash flow and getting rid of bills altogether.
Congratulations! Traditionally, I've put raises towards paying down debt. However, this year, the money is going to keep the family afloat while my wife is out of work. Strangely, paying down debt was more fun.
I've been the sole earner for almost 3 years now (though only 10 months without UE), so my paycheck pretty much has to cover everything- keeping the family afloat and paying down debt (but you're right, paying down debt is more fun). I can't really complain though, as I am now making, on my own, about what we were making combined when we bought our house in 2005.
You didn't ask me to weigh in, but this is the "comment" section, so you're stuck with my opinion! Based on the little I know about the situation, I'd recommend this:
– Put the extra money in savings because you know there are huge variable expenses coming down the pike. For the average person, I'd put systems in place to make sure the money is automatically saved and STAYS THERE, but you're not the average duck….you'll save it.
– Then, when the expenses don't happen, I'm lay huge payments toward the student loans AT THAT TIME. Then you get the extra liquidity now for the cost of a few extra bucks of interest payments….not a high cost for some big benefits.
I feel better now.
You should always assume that my posts end with the unwritten line "What would your advice be, Averagejoe?" 😉
To be honest, that is likely what will happen. I already need to adjust the automatic withdrawal to savings to include the $400 from having the basement paid off. I can easily add the extra $120 in there, as well. Now I just need to decide if I want to keep deducting it as one big payment to savings each month, or two smaller ones, for cash flow purposes.
Of course, my problem isn't that the savings won't happen, it's that I will then later not really want to reduce my lovely savings number and make the big payment to the student loans.
Congrats on the raise! 53 verses 59 months is huge!
Cutting 6 months off any debt is big, definitely. We'll see what we are able to end up doing.
Congrats on the raise! I'd say put it towards savings, all of it. Keep up with paying off debt but make sure to build your cash reserves as well. I think cash is more important now. Just my two cents.
As is now mentioned in my Sunday Evening Post, savings just became a little less important. We'll hopefully have some time to sit down this week and process and make some decisions.
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