Loans,  Personal Finance

Should I Fund an IRA or Finish Paying Off Loans?

Editor’s Note: As part of a special project on The PerkStreet Blog, we’re offering free question and answer columns on Saturdays with Customer Columnists Clint and Katy Davis of Davis Coaching. If you have a question you’d like to submit to get advice from these financial coaches, email it to editors@perkstreet.com.

Question 1: Fund an IRA or Pay off Debt?

Dear Clint and Katy,
My husband and I have been working hard and we’ve paid off all our credit card debt. We still have one student loan left at about $56,000, and our total combined income is about $144,000. We’re considering funding our IRAs while we finish paying off the college loans. What are your thoughts about this?

-Sabrina, NC

Dear Sabrina,

I wouldn’t recommend doing it that way. When you’re working the debt snowball and paying off debt, you should stop all saving and investing and do everything you can to dump that last debt… once and for all! I know where you’re coming from, though. Looking at that last student loan, it can be difficult to imagine the light at the end of the tunnel. Even with all the success you’ve had so far, a debt of that size can make you feel hopeless.

But, as the saying goes, how do you eat an elephant? One bite at a time. That’s what you need to do, Sabrina. When you spread your efforts and focus across several different priorities, you don’t make very much progress at any of them. We’ve seen that happen to a lot of people, and they end up paying off that last student loan for a decade or more.

You guys have made awesome progress, and you make great money. Don’t veer off course now. If you stay focused and relentless about becoming debt free, that student loan will be history in about 18 months. If you’re ticked off at this loan and you feel like it’s holding you back from investing and building wealth…GOOD! Get ticked off at it and attack!

I understand the desire to move forward, but I encourage you to stick to the plan. Become debt free, save your full emergency fund and then begin to invest heavily for your future. Great job so far, Sabrina! Thanks for the question.

-Clint

Question 2: Should I Co-Sign on a Loan?

Dear Clint and Katy,
My mother is planning to go to school to become a surgical technician after spending many years out of the workforce. I know her credit scores aren’t very good and today she asked if I would be willing to co-sign on her student loans. I’m happy that she’s going to school, but should I help her by co-signing? Thank you for your guidance.

-Debbie

Dear Debbie,
It’s fantastic that your mother is pursuing school and a new career. But any time someone contacts us for financial coaching and says, “I co-signed a loan…” the sentence always ends the same way: “…and now it’s on my credit report and I’m getting calls from a collector.”  When you take the Financial Coach’s Oath (which I’m completely making up), you promise to take a hard line on a few items:

  • Always take your 401k match and never raid your 401k
  • Never go without health or life insurance
  • Never co-sign on a loan

Anytime someone asks you to co-sign on a loan, you need to ask yourself 2 questions:

  1. Can I afford to pay off this debt if/when the other person can’t/doesn’t? (If the answer to this question is “No,” you can stop right here.)
  2. What will it do to my relationship with this person if they stick me with the bill? At best, the relationship will be strained and you will feel betrayed. At worst, it will be the end of the relationship, you will be bitter and hurt about it for years, and the other person will be filled with shame and embarrassment.

It’s great that you want to help your mom but do so in a way that will actually help, rather than putting your relationship and financial security in jeopardy. Help her explore her options with grants. Or, help her develop a plan to earn and save the money for her education before she starts the program.

You’ve been put in a difficult and awkward situation, and I’ve been there too. Lovingly let your mom know that you’d love to help her, explain why you don’t think co-signing is the best option, and discuss alternative ways you can help her complete her education. Thanks for the question, Debbie!

Clint and Katy Davis are PerkStreet Customer Columnists and founders of Davis Coaching. As financial coaches, their passion is helping people become and stay debt free! Their personalized coaching is designed to help you get your financial life where you want it to be. Like personal trainers for your finances, they can help you develop a specific plan to achieve your goals, and provide the expertise and accountability to get you there. If you’re ready to take control of your financial life, visit Davis Coaching online, check out the Davis Coaching blog, and connect with Clint and Katy on Twitter and Facebook.

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