Pay off debt or invest?

[maat55]

Originally Posted by LivingAlmostLarge

Actually maat, a better way to have paid off their debt because their mortgage is probably around the same as renting is NOT to have had a kid.

I bet that the daycare is almost the same as the mortgage! So delay kid one year = debt paid off faster.

But who wants to wait for kids? Not the house, I bet without $2k/month daycare, how much do you pay JinCo, is it close to your house payment?

Plenty of people are living debtfree on less than 80,000 a year with kids. At least there debt is low interest debt. They have a good start on their nest egg, I think going aggressive at debt is a good plan. IMO.

[LivingAlmostLarge]

Yep, they'd be debt free in 1 year if they didn't have kids and instead they focused on debt. They would have no mortgage and no daycare! There is everything!

So they could afford the mortgage even with the debt because it decreases the tax liability and costs about the same as renting I'm guessing.

So not having kids would free up a lot more!

[JinCO]

LivingAlmostLarge - agreed it would be much easier to pay off our debt without the childcare expenses. We were actually putting closer to $40K per year towards debt before the child (only 1 year). Believe it or not, our student loan debt was at one time much higher! We also had some credit card debt when first married. We are currently paying about $2600 / month for an in-home nanny, all of which is not tax deductable. I have suggested that we try to reduce the spending in this area, but my wife feels very strongly about using a nanny and not a daycare. I agree with your comments about building up the emergency savings fund. Would you suggest a high interest savings plan for this money or should we put some in stocks?

[JinCO]

Scanner - thanks for your comments on the 401K investing. We have most of our accounts in a 2035 target funds. I also have some in international funds. I don't think my company has any 401K options for sector funds, but I'll take a look.

[JinCO]

Maat55 - I'm sure people are in a far better financial situation than us that are making less money, but that isn't the subject at hand. I'm trying to figure out the way to maximize my situation given the current cards on the table.

[Scanner]

Scanner - thanks for your comments on the 401K investing. We have most of our accounts in a 2035 target funds. I also have some in international funds. I don't think my company has any 401K options for sector funds, but I'll take a look.

Yes, IMHO, that's a bit too conservative. You are probably somewhere near 30% bonds and then taking 20K and putting that into debt reduction.

Even if there isn't a sector fund. . .move your 401(k) assets entirely into equities. Then, get back into the target funds once you get much of your debt retired.

[LivingAlmostLarge]

$2600 x 12 = $31.2k/year. Yep, I am guessing even renting instead of purchasing would save you at most $600/month with the tax break.

Maat you gotta look whole picture, house mortgage with their income + tax break = a lot less. And renting where they live is expensive. So they wouldn't be saving much $7200/year.

NOT having a child for 1 more year would have been $30k extra to debt! And $30k is nothing to sneeze at, way more than not having bought a home. JinCO, not saying not to have children, but it really would have been the best move financially (not emotionally or mentally).

Plus, you without a child, you work more, get more money through bonuses, overtime, etc.

Right now I'd leave it in cash the EF. When you get more, then I'd move it into stocks. It's how I am, our EF is invested because we carry a lot of cash monthly because of DH's tuition. But everyone's situation and risk tolerance (ours is high), is different.

We're also about 90% into stocks in our retirement accounts and not exactly 10% bonds/cash. It's a good mix, and one we'll keep a long time and we're 28 and 30.

Keeping it in stocks retirement funds isn't a huge risk, you've got maybe 25-30 years at least.

[maat55]

Originally Posted by LivingAlmostLarge

$2600 x 12 = $31.2k/year. Yep, I am guessing even renting instead of purchasing would save you at most $600/month with the tax break.

Maat you gotta look whole picture, house mortgage with their income + tax break = a lot less. And renting where they live is expensive. So they wouldn't be saving much $7200/year.

NOT having a child for 1 more year would have been $30k extra to debt! And $30k is nothing to sneeze at, way more than not having bought a home. JinCO, not saying not to have children, but it really would have been the best move financially (not emotionally or mentally).

Plus, you without a child, you work more, get more money through bonuses, overtime, etc.

Right now I'd leave it in cash the EF. When you get more, then I'd move it into stocks. It's how I am, our EF is invested because we carry a lot of cash monthly because of DH's tuition. But everyone's situation and risk tolerance (ours is high), is different.

We're also about 90% into stocks in our retirement accounts and not exactly 10% bonds/cash. It's a good mix, and one we'll keep a long time and we're 28 and 30.

Keeping it in stocks retirement funds isn't a huge risk, you've got maybe 25-30 years at least.

It's woulda, coulda, shoulda as fars as the kids are concerned. Dave Ramsey calls it Doc itis, people take on more debt because they make larger incomes, when they could have lived on less to pay off debt. My whole point has been geared toward focusing on paying off debt out of school in place of taking on more debt.

JinCO, your going to be OK if you establish a prioritized financial plan. The best thing I can suggest to you is to read:

The Millionaire Next Door, good luck.

[disneysteve]

Originally Posted by maat55

people take on more debt because they make larger incomes, when they could have lived on less to pay off debt.

I agree with you here. Most people allow their income to dictate their lifestyle. More money = more stuff. What should really happen is that as income rises, debt should get paid off and savings should get built up. Sure, you want to enjoy some of the fruits of your labor, but you don't need to spend all the extra you are earning. You'll be a lot better off in the long run if you keep living lean and get rid of debt and build savings rather than elevating your spending to match your rising income.

That said, this is not the topic of this thread. Debating what OP should or shouldn't have done in the past isn't really of value to the OP (though it might be helpful to others reading this who are at a different stage of life). OP is already paying an extra $20,000/year to debt repayment, which is great. The question is if he should continue to do so or slow down the debt repayment and put more in investments.

[LivingAlmostLarge]

Right but to really have been "gazelle" he shouldn't have had kids. Then he could have cleaned up the mess a lot faster.

But reality is that most people will not postpone kids.

Truth is that paying off the debt is not in their best favor. What is? Having more cash on hand in case one of them loses their jobs.

Right now they have debt and they won't knock it out fast enough that they can survive if they lose either job. Well they could, but they'd be basically treading water.

[maat55]

Originally Posted by disneysteve

I agree with you here. Most people allow their income to dictate their lifestyle. More money = more stuff. What should really happen is that as income rises, debt should get paid off and savings should get built up. Sure, you want to enjoy some of the fruits of your labor, but you don't need to spend all the extra you are earning. You'll be a lot better off in the long run if you keep living lean and get rid of debt and build savings rather than elevating your spending to match your rising income.

That said, this is not the topic of this thread. Debating what OP should or shouldn't have done in the past isn't really of value to the OP (though it might be helpful to others reading this who are at a different stage of life). OP is already paying an extra $20,000/year to debt repayment, which is great. The question is if he should continue to do so or slow down the debt repayment and put more in investments.

I have to disagree, I'm reminded when Dave say's personal finance is 80% habit and 20% knowledge. What I see is an OP with a 125k noose around his neck and no great concern about it. People who learn to be comfortable with debt never really get out of debt and make bad consumer debt choices along the way.

Great incomes are not a garantee, using it to unload the debt would be my first priority. My reflecting on his past is also a warning for his future. There's plenty of advice to go around, I'm just giving him food for thought.

[LivingAlmostLarge]

Maat, you're approaching the debt from only one perspective, debt. Not looking at the larger picture.

They have high incomes, but they need to secure some sort of EF more than $7k because they have these bills which are $600k. Even with their incomes it will take time to clear their debts.

Unfortunately until they clear $600k the bank can come in and foreclose on the house. Hence if they lose their job(s), they need money not in retirement accounts to tide them over until they can find jobs.

Reality, you can't live for years on end without an emergency happening. And the higher the income the longer it usually takes to find a job. They will likely get severance depending on what fields they are in, but no one should count on it.

Plus they have to still make their monthly obligations, and by your method if they lost their jobs, what would they stop paying? There isn't much you can stop paying.

Truth is what's done is done (like debt and children). They can't go back and undo student loans, and they can't undo kids. And it seems like the student loans were a pretty good investment if they are raking in $200k+/year at 31 with potential to go a lot higher. ROI on student loans is looking mighty good.

Wisely because they are stashing $31k/year into a 401k, they are able to save for retirement. That would only be about 60% towards debt anyway with their incomes. So it would only pay off $18k/year extra. Almost 50% loss off the top, not worth it at all considering their interest rates.

Now, if they focus on not increasing their lifestyle in the next 3 years they should be golden.

[disneysteve]

Originally Posted by maat55

My reflecting on his past is also a warning for his future.

Good point. One thing you don't want to do is make the same mistakes over and over again, which is what too many folks do. While you can't change the past, you can change how you handle things going forward. I've said before, and it goes along with what you are saying, that mindset is really important.

[Scanner]

I have to disagree, I'm reminded when Dave say's personal finance is 80% habit and 20% knowledge. What I see is an OP with a 125k noose around his neck and no great concern about it. People who learn to be comfortable with debt never really get out of debt and make bad consumer debt choices along the way.

Au contraire, Matt.

I don't get any sense that the OP is somehow lackadasical about reducing debt.

I realize you are a Dave Ramsey cultist but debt does serve a purpose.

(it's okay, there are Vanguard Cultists here too and I am a "Silver Bug")

The OP makes 210K/year and obviously, by the breakdown below, he and his wife have invested a lot into higher education, and probably into careers that nobody wants to do (thus the high pay. . .if they were social workers, they wouldn't be making 210K/year).

I see his financial future as pretty strong, even if he just continues with an extra 20K/year of debt reduction.

What many here don't realize is when you make 210/year, you are going to be taxed to hell. . .so putting down an extra 20K/year is really nothing to sneeze at as he probably only brings home 100K/year after taxes.

Many here just see 210/year and automatically assume that's what he takes home.

(just like many of my patients pay me $40 and think I shove that into my pocket)

Primary Mortgage: $405K @6.25%
Home Equity LOC: $70K @ 4.49% (tied to prime so will rise as prime increases)
My student Loan: $35K @ 4.12%
Wife's student Loan: $90K @ 3%

Personally, I'd retire the student loans first, unless the term is under 10 years. Then I'd do the HELOC. If the term of the student loans is close. . .then just let that die a natural death and do the HELOC and add 20K/year to reducing that.

[noppenbd]

Originally Posted by Scanner

What many here don't realize is when you make 210/year, you are going to be taxed to hell. . .so putting down an extra 20K/year is really nothing to sneeze at as he probably only brings home 100K/year after taxes.

I think that estimate is off. That would amount to more than 50% paid in taxes. Federal income tax on 200K of taxable income is "only" $45K, and that is assuming he doesn't have substantial deductions. Add in state, FICA, and property, and I doubt you are close to $110K in taxes a year. Probably closer to $60-70K a year.

[Scanner]

Yeah, I estimated a possible 55% taxation rate, but I was only figuring in probably very high property taxes. Point is. . .with student loans. . .I suspect this person is leading more of a middle class lifestyle than you may suspect.

I also allowed some discrepancy if he is self-employed. . .who pay more tax in this country.

[LivingAlmostLarge]

Actually if they make $210 - $31k = $179k taxable income, assume no other deductions. Plus AMT might kick in. -$10.5k personal exemption - $10.9k standard dedution = $157.9, using fairmark,
Reference Room, they'll owe $32.9k. Then add in 6.2% SS up to $102k = $6.3k x 2 = 12.6k, 1.5% medicare = $3.2k = $48k minimum before state income taxes, $162k before state taxes, medical, $31k/year child care, etc. They are working off of $131k - $20k debt repayment extra, not counting the minimums on everything.

If they stopped the 401k, basically they'd be screwed tax wise, paying a lot more.

[noppenbd]

Originally Posted by Scanner

Yeah, I estimated a possible 55% taxation rate, but I was only figuring in probably very high property taxes. Point is. . .with student loans. . .I suspect this person is leading more of a middle class lifestyle than you may suspect.

I also allowed some discrepancy if he is self-employed. . .who pay more tax in this country.

Since he has 401k with employer match & bonuses, I doubt he is SE. Also don't forget 30-40K a year in bonuses above 210K income. So I have no doubt that lifestyle is comfortably upper-middle class. Nevertheless, his attitude seems right, and 401k balances are 170K, which suggests this is not a new phenomenon. There is always room to cut more, but OP seems to be doing ok in my book. I would definitely build up EF to 3 months of expenses rather than pay down debt.

AMT is a good question, can OP address it? If AMT is being paid it may change the equation slightly.

I definitely agree he should keep 401ks fully funded since cash flow does not appear to be a major issue.

[Scanner]

I accept your number crunching.

My point is that I think Maat is thinking there is a lot of discretionary income there up for grabs for debt reduction and while perhaps they could increase it some. . .my gut tells me there isn't much there to work with. With 100K in student loans, that's probably $800-1300/month right there, depending on the term.

You guys present a good proof on why you have to consider taxes into the equation.

I float a small amount of debt at my business and I face that dilemma all of the time. . .sure, it would be nice to get rid of the $200/month loan payment on my business LOC but then again. . .I'd have to pay that "after taxes" so I usually just keep "revolving it."

As you note, for tax reasons, I wouldn't make the 401(k) the sacraficial lamb.

[LivingAlmostLarge]

Hell no, I only considered them employees, with self-employment double my SS and Medicare numbers which is a heck of a lot more.

Plus cutting the 401k is a terrible idea, especially since I forgot about the $30-40k bonuses.

I too believe they aren't living high off the hog. The huge number is the $31k/year child care from already taxed income! OUCH! That is painful and cuts deep into their pocketbook.

After assuming no AMT, which would make their tax bill bigger, they are looking at living on $101k/year for mortgage, minimum debts repayments and basic living expenses. This is pre-state tax, which is 9% in CA at their income so they'd be down another $20k potentially in state income taxes.

People in that bracket need to be extremely conscious about taxes. Belt-tightening in other areas is better than just saying "cut 401k." Focus on debt.

Consider repercussions for taxes.