Pay off debt before investing?

[DisjointedWallet]

I've been trying to figure out the balance for awhile but I thought I'd get some input. I have two car loans (10k & 15k), and two student loans (19k & 27k) (for my wife and I). No CC debt. Is it best practice to pay off the debts before I start doing any real investing?

I've read before that you can't really build wealth when you have debt.

[JulieAlbright]

Could you clarify what you mean by "real investing?" Are you asking if you should stop funding your retirement plans or are you asking if you should stop investing outside of your retirement accounts.

Also, what are the interest rates on your loans?

[Bob B.]

Post more detail. Monthly income, monthly payment on each debt, interest rates on each debt. Also list other expenses like housing, utilities, food, gasoline, insurance premiums, etc. Get as detailed as you can.

Also, are you and/or your wife contributing to an employer sponsored retirement plan? If so, how much are you contributing each month? Is there a match? Are you maxing out the match?

More detail will help you get a better answer to your question.

[bjl584]

More details would help.

I'd say at a minimum, you should at least take advantage of a company match with your employers' 401K programs, assuming you have one. Don't leave free money on the table even if you do have debt.

What is your income? Are you saving anything now?

[creditcardfree]

You can invest and have debt. It is important to invest early for retirement, so at a minimum you should be investing up to any match your employer provides. For example, an employer might be matching the first 2% of the amount you invest. This matching money is free money, all you have to do is put in the minimum required to receive it.

Tell us a little more about your income and money you have to service the debt. Do you have any investments now? What options are available from your employer?

[Weird Tolkienish Figure]

I've been trying to figure out the balance for awhile but I thought I'd get some input. I have two car loans (10k & 15k), and two student loans (19k & 27k) (for my wife and I). No CC debt. Is it best practice to pay off the debts before I start doing any real investing?

I've read before that you can't really build wealth when you have debt.

Personal preference. I enjoy the lack of stress that comes with being debt-free. To me, living a stress free life (or lowered stress) is as good as gold. Plus I have a tendency to spend more when I know I have a pile of money somewhere.

So to me, keep a small emergency fund and pay off as much debt as possible.

[DisjointedWallet]

Sorry for lack of details:

Household Monthly Income ~8500/mo

Car#1 - 10k - 300/mo @ 1.99%
Car#2 - 15k - 340/mo @ 2.49%

Student loan#1 - 19k - 260/mo @ ~6.8%
Student loan#2 - 27k - 300/mo @ ~6.8%

Emergency fund (not as big as I would like) 5k


We are taking advantage of the full company match which is roughly 3% (standard). A few changes are happening and we will have 3 months of double income from one of us. My plan is to pay off car#1 by August and Student loan #1 by December. Leaving us with only Car#2 and Student loan#2 beginning in 2015.

I keep thinking to myself that it doesn't make sense to invest in something (whatever it might be: stocks, bonds, more in 401k, etc...) if I'm paying 6.8% in interest on student loans. Reason being, if I'm only making 4-5% (which is good growth for investments!) then I'm not making as much of a difference as I would by paying off the 6.8% interest debt.

[bjl584]

The good news is that you have a nice income. I'm not sure what your other expenses are, but from the info you posted you should be able to be debt free in a year or so.

Your definitely going to want to build up the EF. I'd shoot for $15K or even $20K.

[DisjointedWallet]

Thanks for the response. I agree with the Efund... That's the other balancing act, when to fill up the Efund? Do I keep it at 5k till I can pay off my debt, or maybe I pay off part of it, fill up the Efund and then finish off the debt?

I guess the in-between would be to finish off the year by paying off car#1 and student loan#1. Then in January, I begin pumping my efund to 15-20k. Once that's complete i go back to paying off the debts.

[Eagle]

Is there anything you can cut from your budget in the short term? How much did you spend last month May 2014?

Other than getting the 401k company match and possibly looking into a Roth IRA I'd say pay off the debt first.

Perhaps put 50% of what is left over from your budget towards the debt and 50% towards the debt until you reach a number your comfortable with in your e-fund? Say 10 or 20k?

[bjl584]

Thanks for the response. I agree with the Efund... That's the other balancing act, when to fill up the Efund? Do I keep it at 5k till I can pay off my debt, or maybe I pay off part of it, fill up the Efund and then finish off the debt?

I guess the in-between would be to finish off the year by paying off car#1 and student loan#1. Then in January, I begin pumping my efund to 15-20k. Once that's complete i go back to paying off the debts.

I'd do a little of both. Start building the EF and pay down the debt. I'd hate to see you get into a situation where you have an emergency and don't have enough cash to cover it. You will be forced into racking up more debt to pay for it.

[snafu]

$ 8,500. is net income? Is DW onboard and supportive of paying off debt and building wealth? Are you in a high COLA?
At this point I suggest letting your E fund reflect your specific circumstances and experiences. If you feel your income is secure, unlikely to lose employment, I suggest $ 5K although 3 months of basic expenses [mortgage, heat, electric, internet, gas, auto ins., cell] is ideal. I'm alarmed that you have $ 25K in CC debt.

Many of us use a 'pay yourself first' strategy. Aim for 15% each pay which starts with existing deductions for SS and 401K contribution. You might enjoy reading 'Smart CouplesFinish Rich' [D. Bach] likely available at your library as an electronic read [download to e-reader or computer as preferred]

What do you hold in your employer's retirement plan? What are fees and MER [Management Expense Ratio]? How much have you disbursed in interest January to June 2014? If you are willing to post budget categories and average spending you will get better advice. Perhaps we can point out $$$$ leakage that would better go to paying off student loans faster. Do you have stuff that you no longer use, need or fails to serve you? Would you consider selling on your local CraigsList or ebay which ever is most suitable?

[edg126]

I had similar debt levels as you before, along with salary. I lowered my 401k contribution to a small amount to continue to at least put something in. Then really attacked the debt, putting every free cent to it, 100% of any bonus or raise or those 2 months a year if you are paid bi-weekly that don't go to bills.

I think I kept between 2K and 10K at any time in an efund, but we didn't own a house then. There would be moments when I saw the balance of a loan be 4K and decide to just pay it in full.

I'd always be playing with the amortization interest rates (bankrate.com has a good one for mortgages that can be used for any loans that shows for the life how much each month you'll accumulate in interest. Seeing how if you pay an extra 500 this month and 50 each month saves you $3000 in interest over the life of the loan really incentivizes you to pay it off.

It took from 2010 - 2014 to pay it off and save for a down payment on our house.

Now we are debt free except our mortgage (at a 3.85% rate), I save 16% + 4.5% employer match in my 401k and 8% though an ESPP. I was working on paying down the mortgage like with the other debt, but home repairs keep popping up that have put that on hold.

[autoxer]

We are taking advantage of the full company match which is roughly 3% (standard). A few changes are happening and we will have 3 months of double income from one of us. My plan is to pay off car#1 by August and Student loan #1 by December. Leaving us with only Car#2 and Student loan#2 beginning in 2015.

I keep thinking to myself that it doesn't make sense to invest in something (whatever it might be: stocks, bonds, more in 401k, etc...) if I'm paying 6.8% in interest on student loans. Reason being, if I'm only making 4-5% (which is good growth for investments!) then I'm not making as much of a difference as I would by paying off the 6.8% interest debt.

I agree that it doesn't make sense to invest in a risky asset, when you can get a guaranteed return of 6.8% by paying down your student loan debt. Instead of paying off car#1 first, why not just put all of the extra $$ towards the student loans?

If you keep your spending low, then you could have both student loans knocked out within a year from now.

[DisjointedWallet]

$ 8,500. is net income? Is DW onboard and supportive of paying off debt and building wealth? Are you in a high COLA?

Yes, 8,500 is net income and I'm in a low cost of living area. That income is new as there was a job change recently, it was 7,500 before.

Also, yes. DW is better at money management than me and has more of a saving mindset than I do. I'm a jedi in training so to speak.

These are rough numbers (including the net income)

Car #1 300
Car #2 300
Cell 120
Car Insurance 120
Gas 30
Power 100
Water 35
Internet/Cable 120
Donations 38
Food 600
Fun 200
Gas 300
Student Loan #1 261
Student Loan #2 342
Mortgage 1385
Total: $4,251

Left over each month ~$3,000