Ask Money

Too much Debt

Chris Farrell Mar 6, 2008

Question: I’m 54, earn about $80,000/yr and plan to work for 10 more years. I have $100,000 invested with Edward Jones in growth funds and would like to use some of that to reduce my $140,000 home equity loan. I have another $500,000 in 401k & IRA savings. And I don’t have any other debt — no car loans or mortgage.

Currently I am in a loan plan with my bank where I only pay interest on the debt. That plan continues for 4 more years. The interest rate is ~6.7% or $850/month. I have not paid anything on the principal in the last year.

I know I earn a comfortable salary, but after enormous increases in property taxes and some unexpected house maintenance spending, it seems I live from pay check to pay check…even though I’m a pretty frugal person.

I contribute the maximum amount to my 401k–$17,000/yr. My friends say I put too much money into my retirement, but I plan on doing some spendy playing when I retire: ski, travel, hike the Sierra Mountains and Wine country etc.

How should I manage by debt and savings? I’d appreciate your advice. Sincerely, Mary

Answer: Mary, many people are in similar financial circumstances. Like you, they’re carrying too much debt, but hardly living the champagne lifestyle. I wish there was a magic-wand-suggestion for eliminating debt. But there isn’t. But there are trade’offs to consider. Here are some thoughts and suggestions.

You need a budget, but that’s not the same thing as bookkeeping. Budgeting is really all about bringing goals, expectations, and money into accord. Ask yourself, where do you want to be a year from now, 5 years from now, 10 years from now? Then map out a way that will get you there. The real trick here–I can’t emphasize this enough–is that you don’t want to go through all this work to get rid of debt only to start building it up again.

Once you’ve gone through that process, and only then would I tap into your savings to pay down a chunk of your home equity loan. You can get rid of the rest of it over time with a budget. So, play with the numbers, and see how much you want to take out of savings (and pay capital gains tax on) and how long it would take you to get rid of the debt.

One other reaction: I’m with your friends. It’s terrific that you’re aggressively saving for retirement and that you have all these plans for what you want to do in your Golden Years. My fear is that you’re denying yourself too much today to pay for your dreams tomorrow. Ease up a bit to shore up your finances now–and for tomorrow.

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