Generate Income or Pay Down Debt?

Question

I have bounced quite a few questions off this forum and thought I had a plan. Then, I spoke to my lawyer and accountant and the plan might be out the window. I relocated from NY to Tampa, sold the house in NY and wanted advice about what to do with the left over proceeds of the sale. (350k) That amount would pay off the new house AND the 6 year car loan.. some of you suggested that was the way to go.. but, many of you have suggested that I use it for investments to generate income that is equal to or greater than the money I'd save monthly. Good advice from all sides. So, now I have a question.. would you rather be debt free or generate income with the money if you had to give 20% of ALL additional income towards child support? I NEVER considered this when I asked the original question and only realized when the accountant and lawyer brought it to my attention. Basically.. if the money is used for income, every 2 years we go over taxes and she WILL DEFINITELY ask to modify based on the new numbers.. my support rate is about 20% for two kids.. 5 and 7 years old. Then, there's the taxes I'd pay on the income. Seems like between support and taxes, I'd be out 30-40% of the income right off the top. Ideas?

Paul Vail · Answer

Reframe this: you aren't giving her/them 20% of the 350K, only 20% of what it NETS for you. You get to keep 60% (if we go along with the earlier math that taxes may take another 20%) of the NET. You are 3/5s ahead. Do nothing and you (all four of you) are 0/5s ahead.Let's assume you currently have a job. And your takehome pay covers all of your monthly expenses, maybe with a small bit left over -- i.e., you are not going into debt. If you pay off the house and the car (see my other note on car), how much do you have left over? Enough to buy some property, maybe BRRRR your way into more properties, or invest in notes or loans or fix/flips or whatever you expect to do in real estate? How long will it take to build that nest of properties (I'm asking what is your end goal here with real estate)? Or, if you elect not to pay off the house (we don't know your bank loan interest rate, but let's pretend it is at or under inflation) -- how many more deals could you do in the same time frame to build your end goal? How much more quickly will your real estate side hussle get you to FI (financial independence of a W2 gig)? And yes, even with the spouse's 20% tax on you, we can calculate that it will take 20% longer to achieve that end.If all other financial cash streams are net positive every month from your day gig, figure out you goals, and do the math on whether being 'debt free' or using the whole of the $350k nest egg will get you to those goals faster.

Theresa Harris · Answer

Look at it slightly differently....you get to keep 80% of that money to do what you want. The other 20% goes to your kids-hopefully your ex uses it to make the kids' lives better or saves it for them.

Eliott Elias · Answer

Generate that income. Grow and use the cash to buy MORE deals

Paul Vail · Answer

I fully disagree. Time is the only aspect of life that has value. And it is Time alone that allows current investments of any form to compound. Being 'debt-free' is a wonderful feeling, but if your investments bring in positive cash flow that allows you to both live and pay down obligations, then the investments for the future are more valuable than the warm-n-fuzzy of not 'being owned by the man'. Don't like being owned? Why is there a car payment? Put that ego on a shelf, sell the expensive toys, buy a cheap car outright and make it make do. The OP is upset about paying taxes. Taxes happen, even in a no-income state like FL. Gotta pay for your infrastructure somehow, unless we elect to have a society without schools, libraries, transportation, first responders, etc., etc. Libertarian wet dreams don't live in reality, and couldn't take the chaos of the results if their dreams came to pass. Regardless of how you make a living, how are you NOT going to pay taxes in some form or another? So set THAT fussing aside, too.Thirdly, yes, so the relationship didn't work out. I feel for both you and the spouse. I REALLY feel for the kids - because they are the ultimate victims here. The adults should feel proud to provide for those kids -- whether directly by making an income that allows you to pay for their needs or indirectly by making an income that helps the spouse provide for their needs. Choosing to make less in some alternative-universe way of 'punishing' the spouse by denying 1/5th of what more you could make seems ... to not be in the best interest of anyone in the equation. You have some resources that could set you up for success going forward. Are you really NOT going to do that because someone else is going to get only 1/5th of your efforts. Every EXTRA dollar you make by investing now and into the future means you get to keep 3/5ths of that EXTRA dollar. Denying yourself that EXTRA dollar means YOU lose out on 3/5ths of an opportunity and the spouse loses out on only 1/5th. Let's redo the math: you'll lose 100% of your EXTRA opportunity if you do nothing, she only loses 20%. Of course, those kids ages 5 and 7 will lose out on a portion of that fraction you are electing to deny her AND a fraction of what you are denying yourself. You were hurting when you wrote your OP. We get that. Might be time to step outside your skin to try to reframe your opportunities. But TIME matters. Your kids will have but once chance to see their dad remake himself into the best possible model of a human he can -- it starts now.

John Dersoe · Answer

Sure, but factor in that I take them to and from school every day, can't even claim them as dependents on my taxes, provide full medical, dental and vision coverage.. and they stay at my house overnight 50% of the time, and I'm probably paying too much. Child support is the biggest scam going.

Drew T. · Answer

20% is the minimum you should be paying to support those kids.

John Dersoe · Answer

A friend mentioned something similar to this. Run the property "at a loss or even". I'm currently exploring options around Tampa, Clearwater etc.

Frank Avallone II · Answer

@John Dersoe, Hey, honestly don't know much about how child support works. However, is it possible with write offs from real estate expenses and such you could shelter yourself from both of those expenses you are bringing up?

John Dersoe · Answer

Good assessment. I am 47. I just can't get my head around using this money to generate more income to "give" away 20+% of it after paying 15-20% taxes. I'm already paying thousands a month in child support.. and I'm currently financially stable. So eliminating debt might be where it goes. It sucks to have to think "I shouldn't make more money because she'll take 20+% off the top".. and believe me, it's not being spent on the kids.

Bjorn Ahlblad · Answer

@John Dersoe I am guessing that you are fairly young probably around 40 in which case I'd pay off the house and car and enjoy that security. You have plenty of time and can invest later.