Today is a good day, Today I write to you about the latest credit card we paid off! Our USAA $6,000 limit (USAA 6K) MasterCard finally bit the dust. Now the method I used may be somewhat controversial to most of you and it wasn’t an easy decision to make. However, I knew my decision has to be based upon facts and mathematics and not emotions. We used my daughter, Natalie’s 529 College Savings Fund to do it. What?!!!! I know most of you must think I have lost my mind. Let me explain.
Last week or so, I was looking over our debt and budget. I then decided to look at the small amount of investments that we have. Looking at Natalie’s 529 college savings fund I noticed that of the $5568.86 balance, I had contributed $4750.00 of after tax money. So it had only made $818.86 over 9 years. This equates to approximately $91.00 a year or $7.58 a month. That is roughly 1.6% interest a year. I consider that a horrible investment. Now lets take a look at our USAA $6K MasterCard.
Our MasterCard had a balance of $5233.84 at 11.9% interest. Our minimum payment was $105.00 a month and we were being charge almost $60.00 a month in interest. Now my thought process at that time was to use the money in the 529 fund so we could pay off the balance and save almost $60.00 a month in interest and have $105.00 a month that we could use to pay on another debt. Mathematically speaking, this was very good financial decision.
Looking at this emotionally, was I robbing my daughter of her future education? Was I stealing from her? At first, my wife, Ruby, did not like my proposal. After we sat down and talk about it as a team we realized that the math did not lie and it was indeed a smart financial decision. We figure that since by being in the debt that we are, it was not smart to make any contributions to her college fund. Besides, the money invested would not be doing her any good right now anyway and it would really help us out. This is the plan we came up with and executed.
- Withdraw only the principal money from Natalie’s 529 account ($4750) and leave the remaining interest ($818.86) in the account to grow future interest, no matter how little it will make. By withdrawing only the after tax principal, we should be able to avoid paying any penalties. (Please check with your tax professional before making and financial transaction as we have)
- Take $483.84 from our monthly debt snowball and the principle from the 529 account ($4750) and pay off the USAA 6K credit card.
- Use the $105.00 a month saved from not having to make the payment on the credit card and apply to our debt snowball.
- Benefit from not being charged almost $60.00 a month in interest.
- Make future plans to make large contributions Natalie’s 529 account one we are debt free.
As of April 2012, we have paid off 34.12% of our total overall debt. We currently owe $47,170.22 in credit card debt. $29,263.96 of that debt is currently at 0% interest. We are trying to pay off as much as we can before the interest starts charging again. We currently have a total of $80,739.01 to pay before we are officially debt free. Seems like a lot until you see that we owed $122,554 back in August of 2011 when we started this journey.
How have you been doing on your debt free journey? What were your hits and misses? Any really good news to celebrate about? Let me know! I am interested…
To your financial health – Martilyo!
photo credit: Betts/Bloomberg