Author Topic: Student loans? House? Investments?  (Read 637 times)

Tnwhit

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Student loans? House? Investments?
« on: September 01, 2013, 05:14:54 PM »
Any advice appreciated!
Income= $96K yearly
Expenses = $30K yearly
Situation = 32 yo clinical psychologist, 32 yo husband pastor, kids 5 and 1, small town
Debts = $17K student loans 2.1 interest; $120K house 2.8 interest

We are maxing out Roth IRA ($20K already there), have $30k invested in stocks, and do 529 for college.

We just sold our second car thinking we would pay off the rest of my loans, but are now considering just investing it instead. We currently both enjoy our flexible and fulfilling jobs as well as the community we live in.  What would be most beneficial to do with the $20K car profit and the $4K monthly income extra?

Thanks!

ioseftavi

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Re: Student loans? House? Investments?
« Reply #1 on: September 01, 2013, 07:52:16 PM »
We just sold our second car thinking we would pay off the rest of my loans, but are now considering just investing it instead. We currently both enjoy our flexible and fulfilling jobs as well as the community we live in.  What would be most beneficial to do with the $20K car profit and the $4K monthly income extra?

This one is tougher.  Your debts total 137k, but they are extreeeeeemely low interest, which is excellent. 

If you're going to pay off debt, pay off the mortgage.  There is no reason to pay off debt accruing at 2.1% when you could be paying off debt accruing at 2.8%.  It sounds almost silly because both of those debts are low interest rates, but you should pick the one with the higher interest rate, which is the mortgage in your case.

If you want to invest the money instead, the question becomes, "Do I think I'll realize a rate of return higher than the 2.8% guaranteed return that I could earn by paying off my debt?"  Over the long haul, stocks give you a return of somewhere in the range of 6-8% per year, so normally the answer would be "You should invest."

HOWEVER.

HOWEVER, HOWEVER, HOWEVER.

Stocks don't do 6 or 7% a year consistently.  That is the average, and historically that can include some ghastly losses - things on the order of -20% or -30% or even -40%.  Just in case that isn't enough to give you pause, the stock market has been on a tear as of late.  Any major US average has basically gone nowhere but up for 5 years, and particularly in the last 12 months.  This may mean nothing, or it may mean that we're due for the market to correct and let off a little steam.  Personally, I feel not that great about equities, but I also know that market timing isn't a winning strategy.  So I grit my teeth and invest in my retirement accounts every month anyhow. 

If you are the kind of person who would be OK with the possibility of short-term volatility in the pursuit of higher long-term returns, then the stock market makes sense, given your low-interest rate debt.  However, if a big decline in the stock market is likely to make you sell your $20k of new investments at a low point (say, when they are worth $13.5k) because you want to "stop the pain", then investing in stocks may not be the best choice for you, despite the good chance of making more than 2.8% over the long haul.

Personally, I would be willing to stomach the possibility of some short-term losses (say, the possibility of a 30% loss in the next year or two) in order to realize an average of 6-8% over the next 5-10 years.  Truthfully, I know it comes with the territory when you hand the stock market your money; it's the price you pay for higher long-term results.  But if that kind of volatility makes you sick, or worse, makes you irrational and likely to sell your investments at a loss?  Pay off the mortgage.

A440

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Re: Student loans? House? Investments?
« Reply #2 on: September 01, 2013, 09:58:46 PM »
Do you have access to any other tax-advantaged savings like a 401k?

I would consider maxing all of those prior to doing a 529 for the kids.

Tnwhit

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Re: Student loans? House? Investments?
« Reply #3 on: September 02, 2013, 04:58:51 AM »
No 401k employer options. We would be fine with market changes but also find reducing monthly expenses via paying loans appealing

If we invest, I was assuming I would open a vanguard. Thanks for the ideas.

matchewed

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Re: Student loans? House? Investments?
« Reply #4 on: September 02, 2013, 05:22:17 AM »
Any advice appreciated!
Income= $96K yearly
Expenses = $30K yearly
Situation = 32 yo clinical psychologist, 32 yo husband pastor, kids 5 and 1, small town
Debts = $17K student loans 2.1 interest; $120K house 2.8 interest

We are maxing out Roth IRA ($20K already there), have $30k invested in stocks, and do 529 for college.

We just sold our second car thinking we would pay off the rest of my loans, but are now considering just investing it instead. We currently both enjoy our flexible and fulfilling jobs as well as the community we live in.  What would be most beneficial to do with the $20K car profit and the $4K monthly income extra?

Thanks!

What do you need the money for? What are your goals?

If these goals are long term (5+ years) then equities are the best bet. If you don't have any goals then you may need to formulate some so that you have a plan to follow.

And -
If you want to invest the money instead, the question becomes, "Do I think I'll realize a rate of return higher than the 2.8% guaranteed return that I could earn by paying off my debt?"  Over the long haul, stocks give you a return of somewhere in the range of 6-8% per year, so normally the answer would be "You should invest."

HOWEVER.

HOWEVER, HOWEVER, HOWEVER.

Stocks don't do 6 or 7% a year consistently.  That is the average, and historically that can include some ghastly losses - things on the order of -20% or -30% or even -40%.  Just in case that isn't enough to give you pause, the stock market has been on a tear as of late.  Any major US average has basically gone nowhere but up for 5 years, and particularly in the last 12 months.  This may mean nothing, or it may mean that we're due for the market to correct and let off a little steam.  Personally, I feel not that great about equities, but I also know that market timing isn't a winning strategy.  So I grit my teeth and invest in my retirement accounts every month anyhow. 

If you are the kind of person who would be OK with the possibility of short-term volatility in the pursuit of higher long-term returns, then the stock market makes sense, given your low-interest rate debt.  However, if a big decline in the stock market is likely to make you sell your $20k of new investments at a low point (say, when they are worth $13.5k) because you want to "stop the pain", then investing in stocks may not be the best choice for you, despite the good chance of making more than 2.8% over the long haul.

Your last paragraph I quoted ioseftavi; that's why any body who is investing or giving advice about investing (even in a super casual setting like a forum), would always mention that the idea behind investing is to not sell when the market is low and to not let emotions rule your investment decisions.