Can I Pay Off My Debt By The End Of My Deployment?

Can I Pay Off My Debt By The End Of My Deployment?

I'm headed off on my 3rd deployment in a couple months and really want to take the time to get our financial house in order.

Quite frankly we've always been overwhelmed with debt. We make the required payments and try and make big payments when we can but it just seems as if we can't make a dent. It feels out of control to be quite honest.

I've made it a point to make some major changes in how we do things prior to my deployment. One being I've already sold my car, which alleviates a car payment for us while I'm gone. It just didn't make sense for the car to sit there for a year.

We also cut out foolish spending such (i.e. restaurants, needless toys for the kids, etc).

Like I said, I know we have quite a bit of debt left, but I'd like to knock out as much as I can over these next 12 months. Any suggestions?

Current Situation

TSP Portfolio Balance: $51,000

Debt: 

  • Car Loan  - $25,674 | 3.75% (minimum payment = $480)
  • Credit Card 1 - $7,500 | 22% (minimum payment = $300)

Current Debt Total: $33,174

Current Monthly Payment Towards Debt: $780

  • Current debt payoff timeline: 14 years (170 months)
  • Total Interest Paid: $8,623

Leftover Cash Monthly: $25

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

0% Balance Transfer: $7,500 | 0% (monthly payment = $325)

  • Payoff Credit Card 1
  • APR Grace Period = 12 months
  • Total Interest + 3% Transfer Fee = $225
  • Opportunity Loss In Stock Market = $0

In this scenario we have the individual taking advantage of a promotional credit card which allows you to transfer balances at a 0% interest rate for 12 months.

The Benefit: 0% Balance Transfer vs. Current Situation

  • Total Interest & Fees: $225 vs. $6,160
  • Loan Term: 12 months vs. 170 months

Unfortunately, this individual will not be able to pay off the entire balance before returning from deployment. However, they were able to put a sizable dent in their credit card debt while it accrued 0% in interest. The remaining balance is $3,825

TSP Loan Recommendation: $3,825| 1.875% (monthly payment = $325)

  • Payoff Remaining Balance on 0% Promotional Credit Card
  • Loan Term = 12 Months
  • Total Interest + Fees = $89.25
  • Opportunity Loss In Stock Market = $306 - $382

The Benefit: TSP Loan vs. Promotional Credit Card (after grace period)

  • Total Interest & Fees: $89.25 vs. $524
  • Loan Term: 12 months vs. 14 months

Continue Paying:

  • Car Loan - $25,674 | 3.75% (minimum payment = $480)

This situation throws a little bit of a twist towards the end.

We outlined the benefits of taking advantage of a promotional credit card that allowed the individual to transfer a balance and accrue 0% interest for 12 months. This proved to be very advantageous for the individual and allowed them to pay down a significant amount of debt.

However, we tried to piggy back on the success of the promotional 0% balance transfer with a TSP Loan but the numbers didn't seem to make financial sense.

We assumed after returning home from deployment and seeing the fruits of their hard work, this individual would continue paying $325/month towards their credit card instead of the 4% minimum. Although the interest rate went from 0% to 22% we did not see the clear financial advantage of utilizing a TSP Loan.

While it is clear they will pay $524 in interest payments over the next 14 months. When you factor in the $89.25 from interest/fees and the $382 from potential opportunity loss, it doesn't make financial sense to use funds from your TSP account to payoff this debt. Additionally you will only be in debt for an additional two months.

In the world of finance you will often find no two situations are the same and each situation deserves its own scrutiny while still applying sound financial principles.

Here's to our wealth!

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