Friday, February 08, 2008
When $5,000 shows up in your mailbox.
It was a bit of a surprise when I opened the envelope last night, although it would be impossible to pretend that I didn't know a check was coming. Before my grandfather passed away, he explicitly expressed an intention for his four grandchildren to receive the funds left in his checking account. (That and all other assets were included in his trust, so my uncle and my father could perform transactions on his behalf.) Still, I knew some of the money had to go to funeral expenses, and I was expecting less than this.

And of course, it's all somewhat fraught, because it reminds me how readily he donated money during his lifetime.

I still want to do something worthwhile with the money. So I'm sending all of it towards the first tier of my credit union loan, which should allow me to eliminate that debt by the end of June, 15 months ahead of schedule. Why?

It will make the biggest impact on my cash flow. This loan is the single largest fixed expense I have after rent. Even though I'll be paying more on the second tier of the loan when the first one is paid off, I'll still free up about $150 a month for savings or other loan payments. (Or, given that I'll probably sign another lease to start in June, increased rent.)

It will eliminate my highest-rate debt. The loan was made at a quite reasonable 5.9% APR, but there's a gap between that and 5% on my Perkins loan, and a still greater gap between that and my 2.75% rate for my Direct loan. And of course, tier 2 of the credit union loan is at zero percent. (Long story.)

It will improve my debt-to-income ratio for when I purchase a condo. As I said, $150 a month will no longer be earmarked toward paying off debt, which will make the lenders (not to mention ME) more confident about my ability to manage a mortgage and the other attendant costs. Eliminating my Perkins loan entirely would lower my monthly obligations by less than $50 a month, which is far less impactful.

I could contribute this to the condo fund directly, of course. Boosting my downpayment would be nice, and I'll be saving still more to that end after paying off this loan. But lowering my monthly debt payments is probably more important as a first-time buyer.

And finally, it will give me more "outs" in an emergency. My emergency fund is based on continuing to make all my loan payments at present levels. However, should said emergency last longer than a few months, I have fewer options for this loan than I do with others. Borrowers can request that federal student loans be granted a deferral or forbearance. My tier 2 loan could presumably be dropped back to present payment levels in a real emergency. With this one, however, it's "make your payment every month."

Now, in a worst-case scenario, I could initiate a balance transfer from my credit card for the much smaller outstanding loan and give myself more time to get back on my feet. I have no intention of actually doing this, mind you. But it gives me comfort to know that I now have the option.

I think my grandfather would be glad to know that I used this money for something meaningful. And I think it will take a lot of worries away from me.

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