Pay off debt or invest?

[jIM_Ohio]

Originally Posted by disneysteve

Some people think all debt is bad. Others don't.

Having graduated professional school with 6-figure student loans, I'd have to say I'm one who doesn't see a problem with taking on debt that serves a good purpose and that you will have the means to repay in a reasonable amount of time.

When I was first out of school, and for quite a few years after that, we lived pretty lean and frugal. My loans had a 25-year repayment schedule. I paid them off in 12 (and it would have been 10 had I not changed jobs and been unemployed for a few months along the way).

Med school isn't something you can do part-time, online or through night school. It is all or nothing. Without the loans, it wouldn't have happened, so I've got no regrets at all.

Just wanted to throw in that opinion.

Agreed on both highlighted points. Student loans are an investment. In my case I took 8 years to pay off a 10 year loan (some loans were paid off sooner). I graduated with a job which paid quite well based on the investment.

[LivingAlmostLarge]

Here's the thing, many people seem to consider your house and school loans outrageous and should not have happened. I think it's fine, but take a different tack. One such that those are expensive, but kids are moreso (as childcare costs indicate). Thus an easier answer than don't buy that house, don't go to graduate school, don't take out student loans would have been not have kids 1 year later. BUT no one likes to hear it.

And like I said, it's all done. Student loans, kids, and mortgage.

I think that moving forward you just have to be more strategic. I'd personally keep all my debt and pay it off slowly. But I like to have cash on hand, in the sense of keeping it invested. NOT actual money market cash.

My DH won't allow for a traditional EF. We can keep maybe 1 month of cash in checking, 1 month in savings and the rest is always invested.

His opinion and one I won't fight about is that it's all one pot of money. Whether we are laid off or injured, we're going to run through our taxable money either way. So it doesn't matter where it is, as long as we have enough of it. Meaning if we have say 3 months invested and we're adding to it, then who cares if it's a bit above and growing? Am I really going to say I only need $15k and I'm done???

No, it's still our money. We might accrue say $100k in taxable account and then get hit with layoffs. We won't sit there and say "oh we shouldn't spend more than our EF?" it's Crazy.

And I agree with Jim, I budget my monthly expenses with all luxuries. When the time comes I can cut, but cutting bare bones budget beforehand is not smart. It's asking for more trouble when it happens.

And previously my DH had a car loan for 3 years @ 0%, we kept it all 3 years. Because we had the cash to pay it off but we would have been broke otherwise. This way we had an emergency fund and were able to pay it monthly, so even if we had lost our jobs in the 3 years we could have still have made payments.

So debt properly managed can be a good thing. We weren't rich but we were trying to manage our cash flow.

[JinCO]

jIM_OHIO - thanks so much for the detailed recommendations. Reading your responses have been very thought provoking and will help to provide a framework for some of our longer term planning. It is very timely as my wife and I have spent a lot of time lately discussing our financial state and goals. I am realizing that we have not had much of a financial plan at all to this point. We have been focused on increasing our income, paying off our debt, investing in our 401Ks, but not with an end game in mind. I appreciate your help.

[disneysteve]

Originally Posted by LivingAlmostLarge

debt properly managed can be a good thing.

Absolutely. We've discussed this before, particularly in regard to mortgages. There are quite a few of us here, myself included, who have enough in savings to pay off our mortgage at any time. We choose not to pay off the mortgage because the money is doing better invested. Ok, maybe not this year, but over the long run, we'll end up with more money in the end by not paying off the mortgage early.

You always need to look at the big picture. Should you pay off your debt? It depends on what else is going on and what you would do with the money if you don't use it to pay off debt.

[jIM_Ohio]

Originally Posted by JinCO

jIM_OHIO - thanks so much for the detailed recommendations. Reading your responses have been very thought provoking and will help to provide a framework for some of our longer term planning. It is very timely as my wife and I have spent a lot of time lately discussing our financial state and goals. I am realizing that we have not had much of a financial plan at all to this point. We have been focused on increasing our income, paying off our debt, investing in our 401Ks, but not with an end game in mind. I appreciate your help.

I appreciate the recognition. Taking action without set goals will lead to nowhere.

"You better know where you are going, or you may never get there" -Yogi Berra

One issue I know in our house is my wife does not talk about goals as specifically as me. I know that miscommunication is at the root of the few financial problems we have.

Remember my quote

"general problems get general solutions, specific problems get specific solutions".

It is OK to have a general plan for general goals. The issue will be if either of you have a specific goal or specific plan from something real general. Maybe a specific goal is $1 M by age 40 or debt free by age 45 or something like that... but if you only have a general plan (pay down all debts 5k per year) there is lots of details missing to know if the action meets the goal.

General goals I have:

1) retire between ages of 53 and 57
2) live on less than I earn (we save 16% of gross income for retirement)

Specific goals I have:
1) pay off mortgage before retirement
2) get secondary emergency fund to 12 months expenses (48k) as soon as possible.
3) be able to pay cash for a new car within 7 years.

I do not necessarily have a plan for each of the specific goals. I know the general plan for the first two does not cover the bottom 3.

[maat55]

I would like to remind you that student loan debt is unsecured debt and non bankruptable. High incomes are also not garanteed. Mortgages are usually protected by the value of the home, your education is worthless if you become disabled or mentally incapacitated.

Questions that needs to be asked are: Was it necessary to pay as high a price for your education as you have borrowed? Would have living on half of your income and paying off debt, been a better investment in the longrun? Is unsecured student loan debt a risk?

If your world stays perfect, you may not need to worry about these questions. You have a big shovel to move the mountain of debt you have, I would build up your EF and make sure you two have sufficient life & disability ins.

Yes, there are those here who are debt adverse and those who are debt tollerant. The good thing for you is that you will get to hear both sides and maybe something in the middle. IMO, personal finance is not just a numbers game, it is a lifestyle. To me, being debt free, having an EF and investing for the future is a safer less stressful lifestyle. Finding a plan that fits you is your task. Good luck as you do this.

[disneysteve]

Originally Posted by maat55

IMO, personal finance is not just a numbers game, it is a lifestyle...Finding a plan that fits you is your task.

I agree. It isn't just about the numbers. As I said earlier, I paid off my student loans in 12 years when they were scheduled for 25. That was not a good financial decision as the interest rates were low and the stock market was doing great. I missed out on a lot of potential growth by prepaying the loans. But I hated having them. Had I just made the scheduled payments, I would still have been paying off my own loans when my daughter went to college. I just couldn't see doing that. So I prepaid them pretty aggressively and repaid them in just under half the scheduled term. I was willing to sacrifice some growth to be rid of the debt.

[maat55]

Originally Posted by disneysteve

I agree. It isn't just about the numbers. As I said earlier, I paid off my student loans in 12 years when they were scheduled for 25. That was not a good financial decision as the interest rates were low and the stock market was doing great. I missed out on a lot of potential growth by prepaying the loans. But I hated having them. Had I just made the scheduled payments, I would still have been paying off my own loans when my daughter went to college. I just couldn't see doing that. So I prepaid them pretty aggressively and repaid them in just under half the scheduled term. I was willing to sacrifice some growth to be rid of the debt.

I bet you (Due to good financial planning and management) are doing great now and will in the future. There's something to be said about the freedom from debt that a few more investment dollars can't measure. I hope some day you will get the same feeling of enjoyment when you walk through the yard of your home, the day you pay it off.

[LivingAlmostLarge]

Basically you are saying student loans are not worth it. They are only worth it if the person taking them out feels they got their values worth. That's the only part of the equation that cannot be measured by anyone else.

Can you be a doctor without loans? Not really, unless your parents or your spouse pays for it. Going on at 22 without income, how do you pay for it? But if you want to be a doctor because you dream of it, well then it's probably worth it to you.

Truth is that in life it's all about choices. And making decisions based on what you value. Many people would say being a stay at home mom is a terrible idea.

Why? Loss of income, potential earning power you can't catch up. Yet many do it because it's important to them. One could argue much like student loans, which are non-secured loans, what is the benefit of staying at home? It's unsecured, loss of job skills, etc.

But again it's a personal choice. Staying at home with a child is a risk. Risk of income, risk of death, risk of disability of primary breadwinner, risk of divorce, but consciously people make choices like taking out a mortgage or student loan.

[maat55]

Originally Posted by LivingAlmostLarge

Basically you are saying student loans are not worth it. They are only worth it if the person taking them out feels they got their values worth. That's the only part of the equation that cannot be measured by anyone else.

Can you be a doctor without loans? Not really, unless your parents or your spouse pays for it. Going on at 22 without income, how do you pay for it? But if you want to be a doctor because you dream of it, well then it's probably worth it to you.

Truth is that in life it's all about choices. And making decisions based on what you value. Many people would say being a stay at home mom is a terrible idea.

Why? Loss of income, potential earning power you can't catch up. Yet many do it because it's important to them. One could argue much like student loans, which are non-secured loans, what is the benefit of staying at home? It's unsecured, loss of job skills, etc.

But again it's a personal choice. Staying at home with a child is a risk. Risk of income, risk of death, risk of disability of primary breadwinner, risk of divorce, but consciously people make choices like taking out a mortgage or student loan.

Not at all, I'm saying, you can pay a lot of different amounts for the same degree. Maybe he could have paid less for his degree, Maybe not. As a rule, it seems that high SL debt does provide for a high income, which is good, but IMO, paying off the debt before you set your lifestyle to the income is a good plan. It's hard for me to ignore that SL debt is only backed by your abillity to pay it.

The longer you keep the debt, the longer you are at risk. OP is where he is today, I would concentrate on paying off the debt even before the 401k match. In a short period of time he would be debt free and have gobbs of money to invest without the monkey on his back.

[jIM_Ohio]

Originally Posted by maat55

The longer you keep the debt, the longer you are at risk. OP is where he is today, I would concentrate on paying off the debt even before the 401k match. In a short period of time he would be debt free and have gobbs of money to invest without the monkey on his back.

This is pure foolishness, IMO.

Obviously sidetracking/ hijacking the thread, but when I see useless drivel like this, I cannot help but respond in the event some lurker mistakes this for real sound financial advice.

1) student loan interest is tax deductable. You don't even need to itemize to get 25% or 15% of the interest paid back every year.

2) the match is FREE money.

3) investing early established a savings habit. The creation of the savings habit is more important that nearly any other financial habit (except living on less than you earn).

Those above 3 things are facts which apply to most people.

For some additional commentary, keep reading.

I did not tell the OP to pay down the debt, or not pay it down. I suggested the 20k is best spent from a net worth perspective on investing. The compounding curve greatly favors TIME- the time money is invested is a bigger multiplier than the actual amount inside the account. The gobs of money you mention does not account for the lost time. Unless the amount of the student loan payment is high enough to overcome time (possible but not probable), then the advice given in the quote above is flat out wrong, IMO.

So invest early and get the match- compounding works from the day you begin.

As more disposable income is available, a person can consider using it to pay down debt. But there are bigger issues in some cases. A person making 210k per year will pay more in taxes than in interest on a 2.6% debt. I'd think the goal is to make the 210k work better for the individual, not live life based on some principal that if a person is or is not debt free is some type of status symbol.

I paid my student loans off early (took 8 years when repayment period was 10). I invested each of those 8 years to get at least my match and now I have 160k in bank (I have only been working for 11 years). I would not have anywhere near 160k had I paid down the debt aggressively, and I would also have paid more in taxes had I taken that same advice to pay down debt at all cost.

Maybe the monkey on your back is heavier than the monkey's I have dealt with all my life.

There is little risk in carrying student loan debt... that risk of carrying debt was brought up a few posts ago and I don't buy that. What risk? The idea that if I file bankruptcy I still get the debt? Well my 401k and Roth IRA are also possibly exempt from same bankruptcy too, no? I don't know about the retirement accounts for sure, but I understand the only thing those accounts can be affected by are divorce or IRS freezing the accounts for another reason (criminal activity or similar).

I do not advocate keeping debt forever. I believe debt should be retired in it's time and do not like "interest only" debt without seeing principal eroded each payment. In case of this thread I could see OP "rounding up" payments to nearest $100, then investing the rest as a broad, diversified financial plan. This is how I started paying down my debt, and how I pay down some of my debt to this very day.

[tripods68]

Obviously, they made decision that paid off well; combined incomes well over $200K. They made good choices; invest in their education and it has paid off so far. I understand what you are to trying to say with regard to having to live a life "debt free". I don't know anyone that wouldn't want that. Their just starting out; new baby, new house, etc. But I'm sure 10 years from now, they would be in a much different situation.

[disneysteve]

Originally Posted by maat55

I would concentrate on paying off the debt even before the 401k match.

Originally Posted by jIM_Ohio

the match is FREE money.

Jim, I agree with you but for the benefit of others, it isn't just that the match is free money. It is the amount of that free money that really tips the scales. If you prepay $100 of a loan at 5%, you save $5 in interest. If you invest that same $100 and get a 50% match, you receive $50 free from your employer. Save $5 or earn $50. That should be a no-brainer. Add in the compounding growth that then occurs on both your $100 contribution AND the $50 matching funds and the advantage becomes even greater. Worried about the stock market? Fine. Even if you invest that money in a conservative, fixed-income investment, you'll still come out way ahead.

[JinCO]

maat55 - It seems like you are a little over the top on some of your advise / comments. We are actively paying down are debts. We are hoping to be able to reduce our debt load by $25K this year. As our income increases this will be accelerated. I don't understand how you could suggest that we pay debt that is at fairly low interest rates before investing in our 401Ks. We would end up paying more in taxes if we did not invest in our 401ks, not to mention the free money from the employer match. This is not sound financial advice.

Obviously I would prefer to have no student loan debt, but I believe that this was a good investment and would not make a different decision if I had the opportunity today. We could not have financed our education with less money. We could have achieved a similar degree for less money, but when you go to graduate school the school that you attend impacts the amount of money you will make upon graduating. Most of our loans is for my wife's degree who went to a top 10 business school. Going to a lesser school would have been cheaper but also would have had a smaller financial upside.

I think a lot of our differences of opinion come down to risk tolerance. I do not lose sleep at night or stress about the fact that we have a lot of debt. I am trying to make good financial decisions based on my current state of affairs, and not make decisions based on fear. I agree with a lot of the people who have suggested that we increase our emergency fund, and we will do that. I don't agree with paying off debt just because debt is bad or because it will improve our "peace of mind".

[disneysteve]

Originally Posted by JinCO

I don't understand how you could suggest that we pay debt that is at fairly low interest rates before investing in our 401Ks. We would end up paying more in taxes if we did not invest in our 401ks

True. The taxes are another factor. When I was prepaying my student loans, I didn't have a 401k as an option (still don't) and I was still maxing our IRAs. So additional investing would have been in taxable accounts with after-tax money which wouldn't have been quite as lucrative.

I don't agree with paying off debt just because debt is bad or because it will improve our "peace of mind".

I do think peace of mind is a powerful motivator, but that means different things to different people. Ultimately, you need to be able to sleep at night. If you are lying awake worrying about all the debt you have, then you probably should be focused on paying it off more quickly. I wasn't exactly losing sleep over my student loans, but having them did really bother me, so I paid them off pretty quickly. I could have done it even quicker if I hadn't also been investing at the same time, but I think doing that would have bothered me even more. I found a balance that worked for me.

[LivingAlmostLarge]

Bad, bad, awful idea to give up a 401k match. That's 100% return, it cannot be beat. Sure the market can go down, but basically if you get a 5% match, you've just PASSED up a 5% RAISE!!!!! Who here doesn't want 5% raise? Give it to me, I'll take it anyday of the week.

Second, besides jim's point of $50 versus $5, here's the tax breakdown. For every $100 not in the 401k, they will be paying $40 in taxes, so $60 to debt. That saves them $5 of interest to have lost $40 in taxes. NOT a good idea.

I think, not sure, but if Disneysteve had been given an option of a 401k, I wonder if he would have paid off debt as quickly or he would have tried to maximize his 401k?

As long as you can sleep at night. Personally I'll sleep better when I have enough in my taxable accounts to pay off my mortgage, then I know I'll have a very positive net worth.

Until then, I'm not prepaying a penny to my mortgage. Everything will be funneled into taxable accounts. Until you own a house 100% it can be foreclosed on.

And you can lose a job, so the risk with and without debt is the same. Until you can pay all debt 100% in full, there is no difference.

Just cause you pay $100k in student loans down to $50k and I have $75k left but $25k in the bank what's the difference? If we both were disabled you'd owe $50k without an ef and I could make payments for years.

Same with our $200k homes, where you owe $100k, I owe $150k with $50k in the bank. You get disabled the bank in 1 year can take the house away, me I could live off the $50k making payments maybe trying to retrain.

Matter of perspective. Until anyone can afford everything 100%, we're all the same boat of risk, except I have a larger safety net. More conservative people keep cash on hand until it's 100% paid in full.

Riskier people live with $1k EF, pay off debt, etc. They have very little room for error.

This guy needtobedebtfree.blogspot.com, he is a DR follower. He was living on a $1k EF, but stuff kept happening. Then he gave in to his wife's begging and saved like 1 month's expenses $3400. Turns out they needed it, she had to travel for a family emergency, and isn't getting paid. And they still have debts to clear....hmmm without the extra buffer how would they pay their mortgage, credit cards, and extra? I'm guessing whipping out the credit card. So much for everyone telling him to quickly pay off debt.

It didn't work. And in the OP's case, it won't either. Too much debt to expect to clear it quickly without crap happening.

[maat55]

Originally Posted by JinCO

maat55 - It seems like you are a little over the top on some of your advise / comments. We are actively paying down are debts. We are hoping to be able to reduce our debt load by $25K this year. As our income increases this will be accelerated. I don't understand how you could suggest that we pay debt that is at fairly low interest rates before investing in our 401Ks. We would end up paying more in taxes if we did not invest in our 401ks, not to mention the free money from the employer match. This is not sound financial advice.

Obviously I would prefer to have no student loan debt, but I believe that this was a good investment and would not make a different decision if I had the opportunity today. We could not have financed our education with less money. We could have achieved a similar degree for less money, but when you go to graduate school the school that you attend impacts the amount of money you will make upon graduating. Most of our loans is for my wife's degree who went to a top 10 business school. Going to a lesser school would have been cheaper but also would have had a smaller financial upside.

I think a lot of our differences of opinion come down to risk tolerance. I do not lose sleep at night or stress about the fact that we have a lot of debt. I am trying to make good financial decisions based on my current state of affairs, and not make decisions based on fear. I agree with a lot of the people who have suggested that we increase our emergency fund, and we will do that. I don't agree with paying off debt just because debt is bad or because it will improve our "peace of mind".

I consider myself a conservative in a room full of moderates and liberals. My advice is not intended to be a long term plan, but a rather fast track plan. No matter what you do, you will probably reach the finish line with large sum of money. My suggestions are based on getting out from under a threat you carry along the way.

My advice in a nutshell has been for you to protect your position with an EF and ins, Payoff your unsecured debt and then invest for the future. Use it, loose it, what ever.

[debtslayer]

Hi,
you may want to look into the Dave Ramsey Total MakeOver book. I think you will find excellent info in there to help you. I think you will be able to maximize your funds better by following his simple rules. He does suggest to pay off the house last and eliminate debt first. There is a suggestion in there that will help you to prioritize paying off debt and investing at the same time once you reach a level of saving for an emergency fund first and eventually investing.
Hope that helps, go to his website to look into this if you don't want to get the book. The site is pretty informative.
Good Luck!

[Scanner]

Dave Ramsey, Dave Ramsey, Dave Ramsey!!!

I'm going to explode if I hear his name one more time.

There was another author. . .George Clason. . .he wrote The Richest Man in Babylon.

The main prinicple of this book was:

1. Pay Yourself First

There is always someone with their hand out - the car mechanic, the doctor, the student loan service company, the Girl Scouts, etc.

You can always find someone you owe something.

If you don't pay yourself first (the 401k in question), you will never accumulate wealth.

You'll just acheive a zero sum net worth following Dave Ramsey's advice.

You'll have no liabilities.

But you'll have no assets either.

I don't know about some of you, but some years with my family, our Roth IRA contribution at the end of the year was all we had to show for our hard work. I'll be darned if I would let a TV entertainer tell me to not pay myself something per year.

[ActYourWage]

Originally Posted by Scanner

Dave Ramsey, Dave Ramsey, Dave Ramsey!!!

I'm going to explode if I hear his name one more time.

There was another author. . .George Clason. . .he wrote The Richest Man in Babylon.

The main prinicple of this book was:

1. Pay Yourself First

There is always someone with their hand out - the car mechanic, the doctor, the student loan service company, the Girl Scouts, etc.

You can always find someone you owe something.

If you don't pay yourself first (the 401k in question), you will never accumulate wealth.

You'll just acheive a zero sum net worth following Dave Ramsey's advice.

You'll have no liabilities.

But you'll have no assets either.

I don't know about some of you, but some years with my family, our Roth IRA contribution at the end of the year was all we had to show for our hard work. I'll be darned if I would let a TV entertainer tell me to not pay myself something per year.

DAVE RAMSEY!!! There I said it. Have you exploded yet? Darn!

I have used DR methods the last 10 months or so and have paid off over $30,300 dollars with at the time a house hold income of about $60,000 dollars and paying around 11% of our gross income to tithe at church and am now debt free (besides the mortgage). Now we are building wealth, we have assets and my wife and I did this without paying our selfs first. Now we pay ourselfs a WHOLE lot more now. And we only sacificed 10 months. His plan is to pay off debt (non mortgage) as fast as possible then begin fully funded EF (the full 3-6 months), investing, 401K, Roth IRAs, etc. Please don't knock someone because you don't like them. Thank you.