Invest vs. pay down my debt

[autoxer]

I'm getting inspired by 'The Money Moustache' and I'm torn with what my next steps are toward financial independence. My cautious side wants to pay down debt, while my logical side wants to invest more in a taxable s&p500 index fund for a better return.

My situation:
Debt

• Mortgage - $190k - 3.875% interest - 15 year loan, 14 remaining
• Automobile - $20k - 1.99% interest - 4 year loan, 3 remaining

The good

• I am contributing the maximum to my 401k
• I have three months income saved in a money market.
• I'm 34 years old, wife is 30 and our retirement accounts are worth more than 1.5 times our income.

I'm no longer eligible for a Roth IRA, so I would have to use a taxable account, but even after long term capital gains tax, I still might come out ahead over just paying down my debt. Part of me wants to really attack the mortgage and attempt to get it paid off in 6 or 7 years, but part of me wants to funnel that money into an index fund. I think I'm okay with the risk, because I'm thinking long term. What would you do?

[bjl584]

I wrestle with this all the time. I know in my case it makes more sense to invest the money, but I really hate having debt hanging over my head.

In your case, I see no problem in paying off the mortgage as long as you plan to live there for at least the next 7 to 10 years.

[Petunia 100]

I'm getting inspired by 'The Money Moustache' and I'm torn with what my next steps are toward financial independence. My cautious side wants to pay down debt, while my logical side wants to invest more in a taxable s&p500 index fund for a better return.

My situation:
Debt

• Mortgage - $190k - 3.875% interest - 15 year loan, 14 remaining
• Automobile - $20k - 1.99% interest - 4 year loan, 3 remaining

The good

• I am contributing the maximum to my 401k
• I have three months income saved in a money market.
• I'm 34 years old, wife is 30 and our retirement accounts are worth more than 1.5 times our income.

I'm no longer eligible for a Roth IRA, so I would have to use a taxable account, but even after long term capital gains tax, I still might come out ahead over just paying down my debt. Part of me wants to really attack the mortgage and attempt to get it paid off in 6 or 7 years, but part of me wants to funnel that money into an index fund. I think I'm okay with the risk, because I'm thinking long term. What would you do?

But you are eligible for a traditional, and there is no income limit to convert a traditional to a Roth.

If you have no deductible contributions sitting in a traditional, a Simple, or a SEP, then it is simple to do and there are no tax consequences, only tax benefits.

If you do have deductible contributions sitting in a traditional, a Simple, or a SEP, it is still worth considering.

[autoxer]

But you are eligible for a traditional, and there is no income limit to convert a traditional to a Roth.

If you have no deductible contributions sitting in a traditional, a Simple, or a SEP, then it is simple to do and there are no tax consequences, only tax benefits.

If you do have deductible contributions sitting in a traditional, a Simple, or a SEP, it is still worth considering.

Thanks for the info, I'm reading about converting a traditional to a roth now. I can't believe it would be that simple to get around the income limits.

[MonkeyMama]

If you are very young and can knock it out in a few years (or 6 or 7), I would probably do that. Because you would still have many decades to invest for your future. I think you are probably enough on the young side. But I don't know enough about your "big picture" to have a strong opinion about it. Not if you don't have any other savings or if you need more capital for near-future goals. If on the fence, why not just do both? 50/50?

Have you considered refinancing? I was just being tempted by 2.5% 15-year mortgages. If you could do a no-cost refi and your credit is very good, you should be able to knock down the interest considerably to help you pay off faster. (& yes, I also just refinanced last year, but HOLY COW to these interest rates).

[autoxer]

If you are very young and can knock it out in a few years (or 6 or 7), I would probably do that. Because you would still have many decades to invest for your future. I think you are probably enough on the young side. But I don't know enough about your "big picture" to have a strong opinion about it. Not if you don't have any other savings or if you need more capital for near-future goals. If on the fence, why not just do both? 50/50?

Have you considered refinancing? I was just being tempted by 2.5% 15-year mortgages. If you could do a no-cost refi and your credit is very good, you should be able to knock down the interest considerably to help you pay off faster. (& yes, I also just refinanced last year, but HOLY COW to these interest rates).

I'm 34 years old, and don't plan on moving anytime soon.

I just refinanced last year, but it was under the HARP (Home Affordable Refinance Program). I had to use this program to waive the appraisal, because I don't have enough equity for a traditional mortgage. I won't be able to get the super low rates until I have more equity.

[pennrj430]

Since you already have a nice amount of investments working for you already, I would take a break from that temporarily, and knock out the car debt. You can probably tackle than in just a couple of months. If you don't qualify for a roth, that means you make a nice income. You can probably wipe out your mortgage in just a few years while still contributing to you 401k. You could be completely debt free including your house before you're 40.
That's what I would do.

[autoxer]

Since you already have a nice amount of investments working for you already, I would take a break from that temporarily, and knock out the car debt. You can probably tackle than in just a couple of months. If you don't qualify for a roth, that means you make a nice income. You can probably wipe out your mortgage in just a few years while still contributing to you 401k. You could be completely debt free including your house before you're 40.
That's what I would do.

I've been thinking about that, but also that a better position might be to still have low interest debt, and a big pile of liquid assets to balance it out. If I go after the automotive debt first, that would be an emotional decision, not a logical one. If I pay off the truck right now, that would reduce next months interest cost by $33. If I use that same amount of money ($20k) to pay down my mortgage, that would reduce next months interest cost by $64. If I invested it in a fund and earned the historical average of 8%, then after paying long term capital gains tax I would earn $113 per month. I know that is more risky, but I think I'm comfortable with that.

I have been paying extra on the mortgage, but I just cancelled the automatic principal payment. My current plan is to fund both my wifes and my traditional ira and do a roth conversion, and beyond that I will open a taxable s&p index fund.

[MonkeyMama]

I just refinanced last year, but it was under the HARP (Home Affordable Refinance Program). I had to use this program to waive the appraisal, because I don't have enough equity for a traditional mortgage. I won't be able to get the super low rates until I have more equity.

This seems to be significant motivation to pay more on the mortgage. A mortgage with some decent equity and the ability to refinance and sell at will is some nice leverage. I would personally want to get myself in that position before I invested more. Investing might get you there faster, but it might also slow things down - it comes with risks.

[LivingAlmostLarge]

Roth Conversion are only below $100k of income.

[autoxer]

UPDATE: I decided to invest instead of paying down debt aggressively. I set up an account and an automatic transfer of 4% of each paycheck gets diverted to the S&P 500 Index Fund. I am still putting 14% into my 401k, and will probably try to do a Roth conversion before the end of the year.

I listed my truck for sale. When that sells, I will get a cheap, efficient car to eliminate that debt. Then I will increase my automatic investment some more.

[Petunia 100]

Roth Conversion are only below $100k of income.

This rule changed a few years back. Currently, there is no income limitation whatsoever to do a conversion.

[cardtrick]

My take on this is that if your loans are at low rates, you're better off just paying the minimum and investing the rest. Yes, it's risky, but even if you assume 6% returns on your investments, you're much better off. Again, this depends on your appetite for risk. I have a 30 yr mortgage at 3.725% with no escrow, so I don't plan on ever making any extra payments towards it. Over the long run, I think I can comfortably beat that rate.

Rates at some point will go up and savings accounts will yield 4% or more. Then, you'll be ahead without taking on any risk.

[cardtrick]

Now, I do have a second mortgage at 8%, so I'm working on paying that off ASAP. I will probably have it all paid off within the next 2-3 months. So, 8% is too much to be paying on a loan, IMO. 4% is super cheap money. I wish someone would lend me $1,000,000 or more for 30 years at 4%. At that rate I would borrow all that I could get.

[smk]

institutional investors such as insurance companies also face the question of whether to borrow money and invest in stocks. their regulators settle it for them. if they do it in any material sense, they are closed down due to safety and soundness reasons. there is a reason why regulators do not allow this sort of thing. it is not safe.

as for roth vs trad ira, the trad ira is a tax arbitrage. if you have high tax rates not and expect them to fall in retirement, keep the trad ira. if your tax rates fall in a bad year, convert then. check the time value of money formulas with the tax effects for each type of account (i can supply if you need) to verify the right approach. don't go by rules of thumb because they may not apply to you.