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Originally Posted by JinCO
It seems like a lot of the posts are saying that we have been financially irresponsible by accumulating so much debt. When making the decisions to go to graduate schools and finance via student loans we fully undertood the financial implications of both paying off the debt and increasing our lifetime earning potential. I get the sense that most people in this forum are very debt adverse and wouldn't take out huge student loans to finance education. When deciding to take on this debt we viewed this as an investment in ourselves. We were making decent money before graduate schools but now have a much higher top end earning potential.
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Jinco- you hit the nail on the head so hard you only needed to swing the hammer once.
Most people on this board are debt averse. In addition there are people here which can squeeze every last penny out of a budget if you need that assistance.
Hopefully you saw that I did not criticise the debt load. More than likely what you need is a plan, and what I see is the desire for a plan, and a lack of knowledge of what the various issues you need/want/would consider.
For example- what are your goals? You did not state anything to really form a plan on. And to this forum's credit, many people assumed you need/want a debt free goal (and want that goal achieved soon).
In defense of the board, your first paragraph read
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My wife and I have a considerable debt load in the form of our home mortgages and student loans. Our focus in the past couple of years has been to reduce the interest rates where possible through consolidation or new loans and attempt to pay off as much debt as we can as quickly as we can afford to.
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I saw the last paragraph and considered this the goal
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I am trying to figure out at what point it makes sense to switch some of the money we are paying on our debt to investments. We are currently paying about $20K more than we need to on our debt items. Should we reduce some of the amounts we are paying on our debt items and purchase stocks or other investments?
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Most people's advice was not to shift from debt reduction to accumulation.
I will again state that my advice would be to accumulate as much as possible (as much as you are comfortable with relative to the debt load). 15k into the 401ks is not enough (IMO). 15k is 7% of 210k. You need to double that savings rate.
You need to do a timeline of the following:
1) when will each debt currently be paid off (with no extra payments)
2) when will each debt be paid off (with current 20k of extra payments).
3) if you invested the 20k (or a portion of it), how much risk would you take with it, and what return would you expect?
4) as debts got paid off, what would you do with the money allocated to the debt?
1) and 3) are really the same plan- this considers more money is invested now, net worth will be proportional to investment performance from the start (more or less) because the debt will be around for a long period of time and decrease slowly. When debt is paid off net worth and retirement accounts will be quite high.
2) and 4) complement each other. This considers the money from debt 1 being paid off is either then invested or applied to debt 2. When debt 2 is paid off, you will apply the money to investments or debt 3. Net worth will go up real slow (relative to case above), but debt load decreases real fast. Generally speaking, you can only catch up to first scenario if you increase savings rate.
plot a timeline with the following numbers crunched:
a) debt load each year
b) net worth each year (this would reflect less debt year over year, and increased home equity year over year, in addition to retirement accounts)
c) retirement account value each year (only include money invested for retirement or long term spending).
You need to run 1) and 3) with outputs of a-b-c
You need to run 2) and 4) with outputs of a-b-c
You need to run 1) and 3) and see a savings rate of 16% compound over time. When you run 2) and 4), you need to realize your savings rate is about 7%, and to retire you will probably increase savings rate to about 25% to reach same goal/net worth/ retirement account size as the 1) 3) scenario.
Note the reason for a timeline is so you can see what it costs you. If student loans have a 5 year repayment period, it might make more sense to pay them off sooner, then invest that whole student loan payment and the extra 20k (debt paydown) once the student loans are paid off. If the student loans have a 30 year repayment period, not paying them off sooner will probably work out better.
Each situation is different. The primary issue is the 20k you apply to debt and the proportion the 20k is to the size of the debt and the monthly payment you save when debt is paid off.
Either scenario is OK (2-4 has less risk than 1-3); 1-3 has higher probable return than 2-4, higher net worth and more risk.
If you are comfortable managing the risk, then you can make a good decision (which is what I assume you posted here to determine).
This is just the start.
Then you need to look at current tax return and see if you can do the same plan above (1-3 or 2-4; whichever you choose), but get more money working for you (based on tax savings, such as an HSA, or using tax efficient investments). Creating a small business would also help.
You would also need to factor in mid term problems. New car needed? Emergency fund? Health care spending now and in future. Child's education? Continuing education for you and spouse.
These would impact taxes, so if you have a goal, state it.
My advice will center around a broad financial plan which
a) sends at least 15% of gross income to retirement
b) keep spending moderate (spend less than you earn)- spending is calculated on net pay with 15% of gross already deducted. 15% of 210k is 31.5k per year (this is the amount I would suggest you invest for retirement each year).
c) keep debt to a minimum
d) build a broad financial plan to diversify risk, stay involved in community (give back) and do what makes you feel good.
