Starting Our 40s Off In The Right Direction

Starting Our 40s Off In The Right Direction

My husband and I are both federal agents and seem like every other American couple in regards to finance. We're not in financial trouble by any means, neither of us have ever missed a payment. But after watching Dave Ramsey we want to be debt free!

We have cut back on our spending a little bit, we were never out of control spenders but there are definitely some things we could go without in order to save even more money.

As our kids get older and apply for colleges we want to be able to pay for their tuition, something neither of our parents offered me or my husband.

Current Situation

TSP Portfolio Balance: $39,000

Debt: 

  • Student Loan - $34,000 | 7% (minimum payment = $264)
  • Car Loan 1 - $10,500 | 3.4% (minimum payment = $191)
  • Car Loan 2 - $14,000 | 4.5% (minimum payment = $261)

Current Debt Total: $58,500

Current Monthly Payment Towards Debt: $716

Current debt payoff timeline: 20 years

Total Interest Paid: $31,742

Leftover Cash Monthly: $75

Is A TSP Loan Worth It?

The main argument against taking money from any retirement account to payoff debt is...

"By taking money out of your account you are now losing money in the stock market"

While this is a generalization, it is important to note it is a valid argument. We believe it's worth exploring a little more. The stock market averages between 8-10% annual returns. So hypothetically speaking, the money taken out of your TSP account in order to fund your TSP loan could have been earning 8-10%. Here's an example...

A TSP loan of $3,000 | 1.875 with a 12 month term will effectively have an opportunity loss of $240-$300.

Knowing this, the question then becomes "Does the debt payoff and total interest payments saved make good financial sense?"

Plan of Action

Make it so TSP Loan doesn't make sense

TSP Loan Recommendation: $14,000 | 1.875% (monthly payment = $335)

  • Payoff Car Loan 2
  • Loan Term = 44 Months
  • Total Interest + Fees = 538.75
  • Opportunity Loss In Stock Market = $4,106 - $5,133

The Benefit: TSP Loan vs. Current Situation

  • Total Interest & Fees: $538.75 vs. $1,660
  • Loan Term: 44 months vs. 60 months

Continue Paying:

  • Student Loan - $34,000 | 7% (minimum payment = $264)
  • Car Loan 1 - $10,500 | 3.4% (minimum payment = $191)

This scenario couldn't be any clearer, it does not make financial sense to take out a TSP Loan in order to pay off the 2nd car loan.

When you look at the numbers it's obvious you will pay less in interest and reduce your loan term by a year and a half. That is great news, no doubt about it. However, when you factor in the potential opportunity loss of approximately $4k-$5k in the stock market it just doesn't make sense. It's not worth the risk and it's not worth the hassle.

Additionally, if this individual would apply an extra $75/month towards the monthly payment of the 2nd car loan then it would reduce the loan term from 60 months to 46 months. And the total interest paid would drop from $1,660 to $1,255.

A TSP loan can be extremely advantageous when used the right way, but can also be devastating to your financial well being if used the wrong way. Ensure you are looking at your own personal situation and evaluating the overall benefit of a TSP loan in your debt management plan.

Here's to our wealth!

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