Should we drain our mutual funds?

[ILoveTwins]

I've been following the Dave Ramsey plan since Jan this year. I REALLY, REALLY want to be on our way to being debt-free. I just haven't come across any info on whether taking out of our mutual funds to pay off debt is a good idea. I just need a jump-start because it seems like we have so many random expenses that I can't seem to make ANY progress. We're young (25) and have under $10,000 saved in it. I could use this to pay off a car loan and a credit card. Good idea or not?
Thanks in advance for your thoughts!!!

[msjd123]

What kind of account are the mutual funds in? A tax-sheltered retirement account, or just plain old savings? And, how long have you held the mutual funds? Have the investments preformed well, or not so much?

[skueppers]

If you already have an adequate emergency fund, then I think it's probably worth paying off your debts with the money you have saved in your mutual fund. If, on the other hand, the mutual fund IS your emergency fund, then I don't think it's a good idea to drain it.

Remember that an emergency fund is what prevents you from taking on more debt when something goes wrong, so it's very worthwhile having one!

Oh, and another thing -- when you do your budget next year, remember to account for the "random expenses" you encountered this year, so they won't throw you for a loop next time. If you know that you usually spend about $1000 on car repairs every year, for example, including that in your budget helps keep you on track.

[velochic]

Your investments are probably not earning what your consumer debt is charging you in interest, but there are many factors to weigh before you take this leap.

If you hold the mutual funds inside a retirement account (that's considered "tax-sheltered), then you are going to lose a lot of money in fees and taxes, and it probably isn't worth it.

If you hold the funds in a taxable account (outside retirement), then you need to look very carefully at the tax implications along with the expense ratio (often abbreviated E/R) to see if your investments are outperforming (earning more) than you debt. If not... proceed with liquidating your assets.

Second thing to consider. Have you held the funds for more or less than a year? THIS ONE CAN GET TRICKY!!! There is something called "dollar cost averaging" where you invest at scheduled times to average out your liability. That means that you can inadvertently cash out funds you've held for less than a year. If you do that, your tax liability is much higher.

And there are other things to consider.

So, as you can see... there is really no simple answer.

[ILoveTwins]

Our funds are in a regular savings account and we've only been saving for a little under 4 years. For what we've put in, the fund seems to be doing really well, I'm just excited at the prospect of being able to contribute a whole lot more to it once our debt is taken care of.

[ILoveTwins]

Thanks for the great info. I'm going to have to call our investment manager tomorrow and get some of these things clarified.

[kijip]

Originally Posted by ILoveTwins

Our funds are in a regular savings account and we've only been saving for a little under 4 years. For what we've put in, the fund seems to be doing really well, I'm just excited at the prospect of being able to contribute a whole lot more to it once our debt is taken care of.

If it is not retirement $, I would tend to suggest keeping a couple of months living expenses and then using the rest on debt. I would pay off the credit cards first and then the car loan. The car loan looks slightly better on your credit report since it is (somewhat) secured with the car.