Pay off debt before investing?

[DisjointedWallet]

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.

The only reason I wanted to pay off the car#1 is because I am still building my saving/money management skills and need a quick "adrenaline" rush. Basically, I just want to get one debt off my back so then I can start pounding out the others. I know it doesn't make sense from a interest perspective but that's why I'm going to leave car#2 alone after I pay off car#1 so I can then tackle the student loans. It will also free up $300 a month that I can then throw towards the student loans.

[autoxer]

Gotcha, Don't forget that your mortgage is also a debt. People that are very risk averse usually pay down their mortgage before investing, but I think that is an unhealthy extreme.

If your goal is to build wealth, then you might want to start tracking your net worth and use that for motivation. That will continue to motivate you, long after your debts are paid off.

Good luck with your plan!

[parafly]

Personally, I would take a balanced approach. You have $3000 leftover every month, I would generally split it up like so:

$900 - Roth IRA's for you and your wife
$1000 - Emergency fund until it's funded up to 6 months of expenses
$1100 - Pay down debt: $400 extra on each student loan, $150 extra on each car loan

[snafu]

I totally agree with knocking off a car loan to get a quick feeling of accomplishment. You could use poster paper tacked to the back of the bedrm door with bar graphs showing your progress on each category payment, by payment by payment. What changes are you willing to make to free up more money to pay your down debt faster? Would you be willing to reduce your cable plan by one tier at least for summer when we're out too much to bother with TV. Would DW accept a challenge to reduce food costs to $ 400. a month? It's remarkably easy with a meal plan which concentrates on foods already at hand. Do you each take lunch from home? Taking snacks with you is so much healthier and less costly than unplanned, impulse treats. A bottle of soda is so much cheaper at the grocery chain than at 7/11 for example.

Would you be willing to check out free/nearly free entertainment in your community to nearly slay entertainment spending? If you combine auto & house insurance and pay it as an annual lump sum, to should generate a discount. It means an extra stop but saves money to buy non edibles like paper goods, cleaners, detergents and hardware from discount stores or liquidators and paid from a home maintenance category. I'm suggesting this because non edibles are the biggest profit margin items for grocery chains.

Gas prices are zooming just now so it's a good idea to plan errands to mesh with planned travel. Going to furthest out and returning home trying to reduce driving. There are thousands of on-line sites offering ideas for small reductions which over a year, add up significantly.

[jackmiller]

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.

Yes and you should start with the smallest loan and go to the largest. Roll the smaller payment into the next largest once paid off. I know others will say to stack them by interest rates but I feel that that the avg person (myself included) needs to have victories along the way.

[feh]

How I would prioritize things:

1) emergency fund to appropriate level
2) invest in 401K up to full company match
3) pay off student loans
4) more money toward retirement

The interest rate on the cars is low enough that I wouldn't pay them off early. In the future, save for them ahead of time so you don't need to borrow money to buy them.

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.

[jackmiller]

It's okay to have debt and make an investment

I would not be so quick here- some debt (i.e. mortgage) is more than acceptable and not terribly dangerous to have as long as the debt to equity and payment are reasonable. Yet, credit card debt and other are very dangerous and as the data shows the average American cannot manage properly. I think most folks would be better if they manages their expectations and started to say no to those "nice to have" but not "need to have purchases".

[jasonandrick]

Recently I had to make the same decision and chose to pay my debts. I wasn`t sure myself at the beginning but I am glad I did. It feels much better to go asleep with no one who is after your money. If you are not sure you could also just wait a few month more to see if your new investment is profitable enough.