Quote:
Originally Posted by JinCO
jIM_Ohio - thanks for your post. I like the idea of the forecasting analysis that you have proposed. I put together a net worth model last week based on our current assets/debt/spending/savings plan. I think it would make a lot of sense to put together a few different "what if" scenarios by modifying the amount of money that went towards paying debt vs. investing. The one thing I always strugle with is what number to use a projected growth rate. I am currently forecasting a growth rate of 6% in my 401Ks, but I have read that people use 8% - 10% or higher in a lot of cases.
I also agree that we need to factor in some of our mid-term financial goals. We receive bonuses in Aug and Sept. so my plan is to use this to build up or emergency fund. We also need to factor in car expenses and savings for my daughter's education.
You are correct in assuming that my ultimate goal is not to pay off all of the debt as soon as possible if this will result in less net worth long term. I should have been more specific in my post.
One correction to your post - we are actually each putting in $15.5 annually towards 401K so $31K total. I would like to increase this number over time, but will probably keep this as our primary retirement savings vehicle over the next 3 years as we try to reduce our debt load.
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A good, specific post.
General questions get general answers (3 pages of them so far)
Specific questions should get more specific answers.
8% return for planning in 401k should be minimum. If you are planning (investing) in such a way to get 6% return, I would pay down the debt before accepting a 6% return.
In a taxable account, 7% return should be acceptable (lose 1% to taxes).
Plan for 8% long term and track this- so you know if you are getting the same return as your investments. If mutual fund reported an 11% yearly return and you only calculated 8%, there is an inefficiency you need to track and possibly fix.
In general, investing will beat paying off debt like yours every time. Investing for a 7-8% return while borrowing money at 3-4-5% rates is a net gain of 2% (7%-5%=2%).
This is leverage working for you.
Your risks with leverage would include losing a job, so make sure you hedge this risk with an emergency fund of around 12 months worth of expenses.