Another should I invest or pay debt off scenario.

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firebrick
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Another should I invest or pay debt off scenario.

Postby firebrick » Tue Oct 23, 2012 7:34 pm

Wife and I are 34. Id say we have done pretty well so far and we invest alot of our income. I like to see our investments go up but our debts still haunt me as they have for years now. Currently we owe about 30k on our car at 4%, 25k on her student loan at 2% and 6k on a CC at 15%. We have 10K in a safety fund, 240K in retirement so far, currently maxing both our 401k's and 2 roth IRA's. We owe 350k on a house worth 330k (down from 420k several years ago). One year ago we actually had quite a bit of extra money left over to play with each month due to us each working an extra job. Now we have a ten month old and no longer have the extra jobs. Money is now tight with the same investing and regular everyday expenses. We paid off the CC every month but now can not catch it. We could continue this senerio indefinately I think but the debt stresses me out and Ive wanted to debt snowball it for years, we just never have, living to high on the horse. So my question is, what would you do if this were you? Heres some of my thinking but it goes against everything Ive learned about investing. We could step away from our 401k maxes, and just go up to the match and use that money to start the debt snowball. That would bring about $1600/month extra to use. That may push us up into a higher income to where we cannot fund a roth anymore. In that case thats another $900/month we could use for debt. So at an extra $2500 a month we should be able to pay off the car and student loan in 2 years. Then we would just have the house payment and I think I would be alot less stressed about funds, and we could go back to maxing retirement. But that means 2 years without 2500/month going into retirement which means 60,000 less put into retirement. That could play out huge in the long term. So should we do anything? Nothing? Is the stress relief of debt free, besides house, really worth the missed 60k investment? Sorry for the long post, we are just trying to decide what to do. Thanks.

DoingHomework
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Re: Another should I invest or pay debt off scenario.

Postby DoingHomework » Tue Oct 23, 2012 8:40 pm

The only thing I would be in a hurry to pay off is the credit card. I would not sacrifice investing to pay off 2 percent debt and 4 percent is questionable. You are doing well.

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Re: Another should I invest or pay debt off scenario.

Postby emoore » Tue Oct 23, 2012 9:06 pm

I would take $6k and pay off that credit card. The other debts have low interest and I agree with doinghomework. I have a student loan at 2.25% and I just pay the minimum. I'd rather put extra into my retirement than pay it off early.

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Re: Another should I invest or pay debt off scenario.

Postby LeRainDrop » Tue Oct 23, 2012 9:21 pm

I think I agree with DoingHomework and would advise backing off the 401k to the employer match point in order to pay off the credit card debt, but probably not for the car and student loans at those low rates. I definitely can understand the psychological aspect of having the old debt hang there, even when you have low rates, but financially I do think it's better for you to continue with your investing rather than paying those two down quicker. Also, the future can bring surprises and you may find yourself in a situation where you NEED to decrease 401k contributions for family/home/emergency purposes. In that event, I think you'd be happier to have kept investing now rather than paying off low interest debt. I also agree you are doing well with your emergency fund and retirement savings so far.

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Re: Another should I invest or pay debt off scenario.

Postby kombat » Wed Oct 24, 2012 5:05 am

I agree with the previous posters, but I'd go a little farther and include paying off the car, too. I wouldn't be in any hurry to pay off the student loan early, but I think the peace of mind of eliminating the car debt - and definitely the credit card debt - would be worth sacrificing a little in retirement savings.

Look at it from a "net worth" perspective. Sure, you'll lose some money in retirement money under the "assets" column, but you're also eliminating some big numbers in the "liabilities" collumn. You're not really losing $60,000 in total net worth, you're really only losing the difference between the rate of return you would have earned had you invested that money and the interest rate you were paying on the debt.

Scale your 401(k) back to the match, use the excess to pay off the credit card, then the car, then ramp the 401(k) contribution back up to the max. Then sleep well. :)

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Re: Another should I invest or pay debt off scenario.

Postby DoingHomework » Wed Oct 24, 2012 6:33 am

I can understand the emotional draw of wanting to be debt-free. There is nothing wrong with that. In our case our only debt is a mortgage at a great rate. It is tempting to prepay it. But it doesn't really make financial sense. So what we have done is set up a special fund that we put prepayments in. Our mortgage balance is a bit over $300000 like yours is. Our "offset account" now has about $60000 in it but earns close to 6% which is more than the mortgage. Once you get used to it the emotions are satisfied by doing this instead, at least for us.

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Re: Another should I invest or pay debt off scenario.

Postby firebrick » Wed Oct 24, 2012 6:50 am

Paying off our loans would be a purely emotional victory. Thats why I wanted to see what people thought. I know for sure we can continue on the path we are on and have alot of retirement money. Our tax return will pay off the CC debt early next year. One thing I spoke with my wife about is we like to travel, eat out at nice places, do things you generally shouldnt do to build wealth. But we have both seen too many people die young to want to save all of our cash for retirement. Before the kid and with extra part time work this was very easy to do. Now it is not as monthly payments towards debt and investments keep us on a much stricter budget. So when a great deal came along recently to travel with friends we are probably unlikely to do it. I postulated that if we threw our retirement money towards debt for 2 years, we would be debt free besides our house. I then asked, without those monthly loan payments would we even be questioning whether we should go on this trip or not? She said of course we would go. So the debt is definately impacting our life at this moment. I know we are only mid thirties and have a long ways to go and we should not wastefully spend money, but our other thoughts are we want to live life to the fullest while we are alive. Thanks.

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Re: Another should I invest or pay debt off scenario.

Postby Bichon Frise » Wed Oct 24, 2012 7:35 am

firebrick wrote:Paying off our loans would be a purely emotional victory. Thats why I wanted to see what people thought. I know for sure we can continue on the path we are on and have alot of retirement money. Our tax return will pay off the CC debt early next year. One thing I spoke with my wife about is we like to travel, eat out at nice places, do things you generally shouldnt do to build wealth. But we have both seen too many people die young to want to save all of our cash for retirement. Before the kid and with extra part time work this was very easy to do. Now it is not as monthly payments towards debt and investments keep us on a much stricter budget. So when a great deal came along recently to travel with friends we are probably unlikely to do it. I postulated that if we threw our retirement money towards debt for 2 years, we would be debt free besides our house. I then asked, without those monthly loan payments would we even be questioning whether we should go on this trip or not? She said of course we would go. So the debt is definately impacting our life at this moment. I know we are only mid thirties and have a long ways to go and we should not wastefully spend money, but our other thoughts are we want to live life to the fullest while we are alive. Thanks.


The "Savings/invest" problem is easily solved with math. BUT, if it keeps you up at night, perhaps some marginal points aren't worth it. I paid my virtually interest free student loan debt off as soon as I could. It kept me up at night.

Depending on how secure your jobs are, I would consider knocking out the CC debt with the emergency fund (assuming it is liquid, which it should be) now. And then applying that payment to building up the emergency fund (which is most likely, on the light side). And the tax refund.

If you are planning on a tax refund, I'd adjust the w4 so you start to get it now, rather than later. Assuming you can keep from spending it.

Re: travel, nice meals. Think outside of the box. My spouse and I have excellent credit, and we tap it to travel in more luxurious style than we can afford and cheaper than we would normally pay. For example, 2 roundtrip first class tickets to SE asia next month ran us about $160. Hotels where are cheap (mostly), but I expect to be out of pocket under a grand for the whole trip. Perhaps 2, as I am lusting for a nice laquerware piece. Anyway, it isn't for everyone, but I thought I'd throw it out there for a way to travel and save money. Of course, saving money would really mean we stay at home and do nothing.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

DoingHomework
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Re: Another should I invest or pay debt off scenario.

Postby DoingHomework » Wed Oct 24, 2012 9:28 am

Bichon Frise wrote:Re: travel, nice meals. Think outside of the box. My spouse and I have excellent credit, and we tap it to travel in more luxurious style than we can afford and cheaper than we would normally pay.


Indeed. When we fly farther than about 2 hours we usually fly first class. My wife refuses to fly to Europe (or Australia) unless we are in business class. But you know what? We rarely pay much if anything extra for that because we exploit all kinds of credit card and other gimmicks (miles, free upgrades, etc.) and then stay loyal to one airline so that we are high on the upgrade list. We do pay a couple of high annual fees on credit cards but easily get the money back. Most of these are tangible. Example: $450 a year for an Amex platinum card = $200 back from airlines, 2 nice android tablets from miles ($800) just this year PLUS lounge access when traveling, a nice concierge to call when I don't have the time to look for something myself or, when I can't find something hard to get available (like some primo sports tickets last year). People might criticize for paying that fee but I have always gotten it back at least 2-fold just in tangible benefits and then get the intangibles for nothing.

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Re: Another should I invest or pay debt off scenario.

Postby originalep » Wed Oct 24, 2012 12:20 pm

I agree with Kombat, look at it at a networth perspective and it doesn't make a difference at all. Personally, I would pay off the debt. You said yourself that it was impacting your life and if one of you were to lose a job or were unable to work, 401k contributions would be the last of your worries. Pay that debt off and keep your expenses as low as possible, then worry about building your wealth, plus you already have a head start on most people.
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firebrick
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Re: Another should I invest or pay debt off scenario.

Postby firebrick » Wed Oct 24, 2012 1:21 pm

So if I did decide to scale back on investing to pay off debt, would you just take the 401k's back to the match and keep fully funding roths? Or scale back the 401k's AND use the 10,000 we put into roths in order to pay down much faster? Lets just say you decided you wanted to eliminate all of the debts except mortgage. Thanks.

LeRainDrop
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Re: Another should I invest or pay debt off scenario.

Postby LeRainDrop » Wed Oct 24, 2012 1:42 pm

firebrick wrote:So if I did decide to scale back on investing to pay off debt, would you just take the 401k's back to the match and keep fully funding roths? Or scale back the 401k's AND use the 10,000 we put into roths in order to pay down much faster? Lets just say you decided you wanted to eliminate all of the debts except mortgage. Thanks.

Personally I would JUST scale back the 401ks to the match, but KEEP fully funding the Roth IRAs (assuming that doesn't push you over the income limit).

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Re: Another should I invest or pay debt off scenario.

Postby peachy » Wed Oct 24, 2012 1:57 pm

If you haven't already funded your Roth, but have the cash handy, I would use it. You have until April of 2013 to fund this year's Roth if you think you can swing it (which I think you can).

Don't take money out of your Roth if that's what you were thinking. Otherwise, I would follow LeRaindrop's advice.

firebrick
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Re: Another should I invest or pay debt off scenario.

Postby firebrick » Wed Oct 24, 2012 2:39 pm

I think with the new roth rules and no longer having part time jobs we are under the cutoff for roths. We have it set up to automatically take out every month, I will leave that alone. So I will talk with the wife and see about bringing our 401ks back to our matches and see how that affects our paycheck. Not sure how we will approach paying down debt as we will just suddenly have extra money in our paychecks and will need to find a way to set the extra aside to pay off loans. I dont think she wants to do the school loan early since its at 2.875 for 20 more years even though Id like to have it done. But I think we may be able to do this through the CC debt and car loan. She wants to build back up the emergency fund, it was at 30k but we ran through some money on home projects and big trips, not really emergencies. Im happy with it at 10k as I consider most of the 50k we have in roths to be a back up safety fund.

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Re: Another should I invest or pay debt off scenario.

Postby Matthew Clinger » Wed Nov 07, 2012 7:46 am

Hi there. I wasn't able to follow everything there having to do with saving money, but when it comes to the debt, here's my recommendations:

Pay off the CC. 15% is a high interest loan and beating that with investing is sort of iffy at best. The car at 4% and the student loan at 2% I would put off on paying in favor of investing.

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