Pay down debt or invest?

[dczech09]

I would recommend allocating the assets between the two and not putting any emphasis on one over the other. Your student loan rate is 6.5% on average. With a Roth IRA or other retirement account invested in stock mutual funds, you should be looking at about 10.5% AVERAGE annual return over time. Even after inflation, your retirement account will still have a greater benefit. Also, interest paid on student loans is tax-deductible, which is a huge plus.

You should definitely pay more than the minimum payments, snowball the debts, and take the deduction to reduce tax liability. Contribute at least 10% to retirement. Whether you are 25 or 35, you cannot afford to forgo the benefit of compound earnings on your retirement assets. Rememeber, the final year is likely gonna be your highest earning year for your retirement account; do not take that year away.

You cannot logically choose one option over the other since both choices are crucial to your overall finances.

[mortgage-wiz]

PAY your debt! improve your credit score. Invest with your own money later own.

[jpg7n16]

PAY your debt! improve your credit score. Invest with your own money later own.

It would actually help his credit score to keep the debt as long as possible while making consistent payments on it. Doing the best for the debt score doesn't always mean doing the best for your finances though.

Why not figure out how much you need to live on (say 5k a month - including the minimum payment) and then determine how much will be left over. Then just do half to each. They are both good goals and both have advantages/disadvantages. So just do half/half.

Advantages of Saving for retirement:

• The sooner you start the habit, the easier it will be to keep.
• The longer the money is invested, the more money you will ultimately have. (hopefully)
• You can probably earn a higher long term ROI on investments than the debt is costing you.
• In a retirement account (401k, IRA, etc), it would save you current income taxes.

Disadvantages of Saving:

• There are no guaranteed rates of return.
• You may actually lose money.
• If in a retirement account, you will be unable to access the money if needed w/o penalty.
• Eventually, you'll be taxed on all gains one way or another.

Advantages to paying down debt:

• Increases future cash flows for investing.
• Guaranteed rate of expense saving (if you pay off a 6.5% debt, you are guaranteed to save 6.5%)
• Student loans are not bankruptable, so if you lose your job, you can't get rid of them except by paying them off
• While student loan interest is usually tax deductible, your income is above the phaseout, so this tax advantage does not apply to you (you make over 70k)
• See->Tax Topics - Topic 456 Student Loan Interest Deduction - for more info

Disadvantages to paying down debt:

• You may earn more in a retirement account than it costs you in interest.
• You would not have as many assets on hand if you lost your job.
• Once it's paid, you can't get that money back.

[jIM_Ohio]

Disadvantages of Saving:

• There are no guaranteed rates of return.
• You may actually lose money.
  
• If in a retirement account, you will be unable to access the money if needed w/o penalty.
  
• Eventually, you'll be taxed on all gains one way or another.

Advantages to paying down debt:

• Increases future cash flows for investing.
• Guaranteed rate of expense saving (if you pay off a 6.5% debt, you are guaranteed to save 6.5%)
• Student loans are not bankruptable, so if you lose your job, you can't get rid of them except by paying them off
• While student loan interest is usually tax deductible, your income is above the phaseout, so this tax advantage does not apply to you (you make over 70k)
• See->Tax Topics - Topic 456 Student Loan Interest Deduction - for more info

Disadvantages to paying down debt:

• You may earn more in a retirement account than it costs you in interest.
• You would not have as many assets on hand if you lost your job.
  
• Once it's paid, you can't get that money back.

I want to focus primarily on the red replies

[*]If in a retirement account, you will be unable to access the money if needed w/o penalty.
[*]Eventually, you'll be taxed on all gains one way or another.

I appreciate there are few guaranteed returns with investing. A Roth IRA will make both comments above in red be false. One additional point is that in all situations above, cash flow is taxed and was not pointed out.

[*]Once it's paid, you can't get that money back.

Not true if the loans are secured (car loans, house loans). I believe the context of discussion was other debt (student loans, credit cards). I would not consider paying down a credit card debt to have the con of "once you pay, you cannot get money back", considering a credit card lets you "get object now without having any money".

[jpg7n16]

I appreciate there are few guaranteed returns with investing. A Roth IRA will make both comments above in red be false. One additional point is that in all situations above, cash flow is taxed and was not pointed out.

Kind of. Yes, ROTHs escape taxes, if you don't withdraw until after age 59.5. Also, if he's had the money in the ROTH over 5 years, he can withdraw contributions tax free - true. But if he needs to withdraw into the earnings, all the earnings would be taxed both with ordinary tax and an additional 10% penalty if he doesn't make a qualified withdrawal. (Under age 59.5, etc.) See figure 2-1 and the list of exceptions listed shortly below the figure (at the link provided - about 3/4 the way down). And ROTH would take away advantage "reduces current income tax liability"

Publication 590 (2009), Individual Retirement Arrangements (IRAs)

Not true if the loans are secured (car loans, house loans). I believe the context of discussion was other debt (student loans, credit cards). I would not consider paying down a credit card debt to have the con of "once you pay, you cannot get money back", considering a credit card lets you "get object now without having any money".

Agreed. My comments were specific for his student loans, since that was the issue he wrote that worries him the most. That statement was short for: "Once you pay down a student loan and have finished school, that type of credit is no longer available to you, so it's as though that money is gone - ie. you can't reborrow it if you need it for living expenses."

It was just a list of advantages/disadvantages for him to think through. Maybe some adv. are more important to him than disadv, and then he should choose the option that gives him those.

I'd personally split my excess between the two and get a little of the best of both worlds as those considerations are about equally important to me. Obviously, you would choose a higher portion to retirement because certain disadvantages aren't as weighty to you as they are to me. No big deal

[christine quast]

My advice would be to do a little bit of three things: pay of debt quicker, start investing for retirement, and to build up an emergency fund. I would pay more than your minimum for your loans so you can pay it off quicker. Then start a 401k or a ira, if your employer will match your contributions then that might be the way to go then there is a ira that you can max out at $5,000 a year. If you at least start one of these choices it will be better then nothing, then you can add to your contributions as you make more. You also need to have an emergency fund, this is important to your finances because there is always the possibility that you can lose your job or have another major emergency. Try to start this fund and build it up so you can have at least 6 months worth of expenses, including your loan payments, in this. While building up for your future is essential to a good financial plan, it is nice to be debt free. There is no stressing over the payments and when it comes time to make major purchases this debt will not be hanging over your head. So i would try and do a little of each but maybe if you can try to add more to your debt payments.