Pay off debt or invest?

[cptacek]

Our current debt load is:
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%

I would start investing, firstly in a Roth IRA for both of you. The two student loans are very low interest already. The two mortgages are tax deductible, so if you are in the 28% tax bracket, the effective interest rates are 4.5% and 3.23%.

The student loans aren't tax deductible, are they, because of your income? If they are deductible, they are even lower interest.

[disneysteve]

I would start investing, firstly in a Roth IRA for both of you.

Probably not eligible due to income. MAGI needs to be under $166,000.

[maat55]

maat55 -- thanks for your response, but I'm not sure your advise is accurate. Our home is fairly entry level for the area that we live in. When we were shopping mortgages our lender suggested that we could be approved for a loan of $800K - $900K, but we chose a much less expensive home so that we could pay down our debt. Our largest monthly expense is childcare for our 1-year old. We both work full time and 50 hours of care per week is a significant expense. In terms of other expenses, I think we are more on the frugal side. We don't eat out much, don't travel much, don't drive expensive cars, etc.

I'm not sure I understand your point. Are you saying we should not have purchased a home until our student loan debt was paid off? I don't know that it would have made finanical sense to rent given the tax implications.

Yes, if making 200k + you would have lived on 70 to 80k you could have knocked out your debt quickly. Having only 20k extra to pay down debt and no sizable EF, means theres a leak in your boat somewhere. Your home is not a problem when you are debt free, but for now you could have concentrated more on the debts first.IMO.

[Scanner]

Here's one piece of advice to add to the hodgepodge here. . .I would consider your "debt reduction" the "bond part" of your portfolio.

Redeploy your 401(k) to the most aggressive funds you have available to you for choice to give you a "balanced approach" to wealth accumulation/increasing net worth.

So. . .you are putting 31K/year into both 401(k)'s. . .and 20K into debt reduction.

For instance, I would maybe put 50% on a sector fund like healthcare or technology and 50% in international. . .then the other 20% goes to your "conservative investment" - debt reduction.

[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?

[maat55]

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]

$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]

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.