Remima
Contributor

I will be receiving 40k bonus need to know what is the best place to spend it I want to start building wealth. Should

1. I pay off my most expenseive car which I plan on keeping for a long time (30k) interest rate 2.9% + 10k for cc 23%

2. Put 30k towards my house and pay down my mortgage (full balance 300k) interest rate 3.625 % + 10k towrds credit card debt 

3. refinance both and pay 15k to house and 15k to car

 

4 REPLIES

That is a wonderful question Remima. I understand how important this is, and I've sent a request for a Subject Matter Expert to review. Please allow sufficient time for the research to be completed.

Sounds like that 40K is burning a hole in your pocket, especially since you used the word "spend" instead of "invest." 

 

You mention 10K in credit card debt, how much do you have set aside for emergencies?

 

A few suggestions, based on the school of hard knocks.

 

1.  Pay off the CC debt.  Then, don't put more on it than you can afford to pay off each month.

2.  Set up a 3-month CD ladder, $6,000 that rolls over at the end of each 90 day period.  Stagger these 30 days apart.  That way if you have some calamity, like a fire, you can lay your hands on the deductible for your homeowners insurance without having to pull out the credit card.

 

As for the car, what was the amount originally financed and how long have you had it?  Are you paying "simple interest" on the balance due, or is it another scheme?  It is not unusual tor finance companies to set up such loans so that you pay a great deal of the interest in the first year or so, and only once a substantial amount of the interest is paid do you begin to pay down your balance.  In other words, paying the car off early might not save you much.  Get out your statements, add up the total itnerest paid so far, and compare it to the total amount financed.  If none of this makes sense, find somebody local who can explain it to you in person.

 

As for the mortgage, if you pay off the car, add a fixed percentage of what that payment was to your mortgage payment each month as additional principal.  Then try to increase that by a modest amoutn as you get promotions, etc.  This sort of nibble can make an enormous difference and knock years off the time until you are paid in full.

 

Are you married, kids,etc?  No matter what, take about 5-7% of this money and go on a reasonably priced but memorable vacation - the sort that creates memories.  Then you will have achieved two things:  had a memorable experience with loved ones AND getting yourself on a better financial footing!

 

About the house, do you see any major repairs on the horizon, such as a roof?  When was the last time it had a good coat of paint?  How old is the furnace/air-conditioning?  Replacing a roof that is "getting bad" is much cheaper than waiting until visible stains appear on your ceilings.  Likewise with repainting before the peeling starts, this prevents unpleasant repairs such as dry rot.    Energy efficient upgrades can cut your monthly costs enormously and make the house more comfortable to live in.  Prioritize these and don't do anything mroe than you can afford to pay for in cssh.  Again, easy payment loans are not always what they appear to be.  Plus, a house that is proactively maintained, ie not waiting for emergencies ultimately becomes a house that looks like it has been well cared for all along.  It is a good form of self-discipline to develop, and one that carries over into other parts of your life.

 

As for investments, there is a lot of smake oil out there.  Beware of people who "specialize in the military."  Just because they were in doesn't guarantee ethical conduct.  I learned that the hard way.  For your CD ladder, look at USAA.  Despite their probelms with banking, they do offer some good products.  For other investments, don't buy things you don't understand.  Anything that sounds like the next miracle on the horizon is likely a bad deal.  Con artists and other unethical people have become more emboldened than usual in the past 18 months and that is a problem that will be with us for awhile, I'm afraid.

 

Good luck and I hope this helps.

 

LibEngineer   I agree with a lot of what you say except investing with USAA - if you are going to set aside money there are many more options out there that pay much much more in interest and have better rates of return.  They are not that hard to find.  We moved almost our entire emergency fund out of USAA and make more money now in one month than we were in a year at USAA.  They just are not competitive.  

Great answer! Includes common sense, balanced and achievable goals, issues prioritized...personal life NOT forsaken!