Reader Case Study- To pay off loans or just ride it out

[tycanis]

Basics:
Single income family, supported by Husband (age 36).

2 dependents ages 4 and 1
Stay at Home Mother (age 33), no extra income.
Located in Iowa.
Plan is to home-school children through college age.
Current Savings- 160,000 between two checking accounts
In response to questions: We have moved twice in the last three years.  Once to a house we bought outright, and the second time selling said house.  My husband only started to get into the Mustachian ideals after we bought that house, so we were still investigating our best investment options when we moved again.  Since then we've had our second child and been adjusting to a new area so are only just now trying to decide how best to make our money work for us, whether in paying off loans or investing outright.  The main goal of following the mustachian principle is early retirement, so we can live a more homestead like exsistence (growing most of our own food, working if we choose at what we choose).

Income: Per Pay period(twice monthly)
     Gross Salary-3076.33

Pretax Deductions-
     401k-92.29
     Dental-16.10
     Medical-34.00
     Vision- 3.52
          Total=145.91

Taxes-
     Fed Withholding-322.51
     Fed MED/EE- 43.86
     Fed OASDI/EE- 187.55
     IA withholding- 163.00
         Total=716.92

Net Pay-2213.50

Current Expenses:
Student Loan-
     Current Balance- 8,411.92
     Interest Rate- 4.750%
           Monthly Payment-160.05

Mortgage Loan-
     Original- 96,800
     Remaining-94,655.67
     Escrow-1,236.05
     Interest Rate-4.375
          Monthly Payment-725.36
                Principle-137.71
                Interest-345.60
                Escrow Tax- 120.33
                Insurance-118.17
                Overage/Shortage-3.55

Household Expenses:(approx/average, monthly)
     Groceries-400
     Utilities-180
     Gas(for cars)-100
     Cell Phones-25
     Misc-200

The Big Question:
Our big question is, since we have the funds to pay off both the student loan and mortgage to our house, should we?  One of our main reasons for considering this, is to lower monthly expenses so that Husband (who is getting burned out after 10+ years at current job) will be able to change jobs if he wants and have the flexibility to search out a job offering lower pay, without it vastly affecting our current lifestyle. However we are unsure if this would be a wise course of action, or merely a short term gain.
We do not have currently have any significant investments (1000-2000 in Thrivant, and Wife's turned over pension from previous work), nor any additional income.  As you can see with our current bank account balances we could feasibly pay off both the student and home loans and still have approx 50,000 to work with. We are not the type to spend a lot of frivolous money, but prefer to take advantage of the many free activities offered in our area so having lots of disposable income is not a major concern for us.

[AZDude]

Pay off the student loan definitely. 4.75% is a decent guaranteed return. The mortgage is up to you. Whatever you do, do not just leave that big pile of cash "under your mattress". Invest it somewhere.

[notactiveanymore]

How much is the house worth?

What is your long-term financial goal? Do you want to retire early or just be financially independent early? Do you want to fund your children's college expenses?

What is your current reason for having so much cash sitting in a bank account as opposed to putting it in the market? Did you get an inheritance or do you just have really low risk tolerance?

WHAT I WOULD DO IF I WERE IN YOUR POSITION:

1. Pay off student loan - easy, get rid of payment, achieve the better cashflow you've said you would like

2. Fully-fund two Roth IRAs for 2016 (you can do the 2016 Roths until March 1 I think) - cost is $11,000 from current cash

3. Possibly refinance house if you have enough equity to be able to get that interest rate down. look for a no-cost refinance and to get your rate under 3.5%

4. Start tracking your spending to see what you actually spend in a month. Your current list of expenses doesn't include insurance, so I'm thinking it is not a complete reflection of things. Until you know how much you need each month, you can't really figure out how much of a pay cut your husband could take to still cover things.

5. Fully-fund two Roth IRAs for 2017 - cost $11,000 from current cash

6. Until your husband makes the move, add more to his 401k deductions. if he has an HSA, add more to that. I'd max this out if you can do so while still covering everything else. you don't need to save any more cash, so you might as well stockpile for retirement while his salary is still so high.

7. Have a conversation about how much of an emergency fund you want (I'd say 6 months of expenses is fine so long as your husband has employable skills, but you could probably do 9 months even after 22k for Roths and still have money left over above that). anything above that amount I would direct towards a couple 529 plans or mutual funds.

[Ryland]

Crush that student loan.

The mortgage is up to you. Here's what to consider:
-Does having $200k locked up in your home value, make you feel at peace. Or does having the $200k on mortgage still feel okay, knowing that you could invested else it where?

Some will say, I want to pay that off immediately because I hate having the money on loan. Other's will say the feel comfortable and would want to use the opportunity cost to reinvest in index funds.

Worth considering the very high Schiller PE ratio of stocks right now, if you are leaning on "not paying back" the mortgage route. Might be something more worth doing when stocks go on sale.

Here's an article about that: http://www.mrmoneymustache.com/2011/06/09/how-to-tell-when-the-stock-market-is-on-sale/

Here's an article about the 'negatives' of home ownership. Worth a read and consideration for sure: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

Good luck! Keep us posted!

[JoJo]

OP... you put alot of personal info in your post you don't need out there on the internet.  With your job, home town, description of kids it's not impossible to identify you and you've listed some very personal info (like your salary to the penny).   You might want to edit to edit out your company name and hometown.

I will say I posted things about a situation about my condo of 20 units and later had another homeowner come up to me and say they were reading my posts.  We had never talked about MMM before so you never know who else might be on here.

[AMandM]

How long are you planning to stay in this house?  If your husband were to switch to a lower-paying job, would that involve moving?

Assuming you're in this house to stay, I would pay it off as well as the student loan.  From the remaining $55,000, set aside an emergency fund (6-9 months of total expenses) and start investing the rest.

If the number you gave are accurate and complete, that would put your monthly expenses at much less than half your twice-monthly take-home. So you'd be looking at adding over $3000 to your investments every month until your husband changes jobs. 

[MDM]

The Big Question:
Our big question is, since we have the funds to pay off both the student loan and mortgage to our house, should we?

Because you get to deduct the SL interest but (based on the numbers in your post) not the mortgage interest, your effective interest rate is higher on the mortgage than on the SL.

See Investment Order for some thoughts on your question.  You might be best served by getting more money into tax-advantaged accounts rather than paying down the mortgage (again, if you pay down either loan it should be the mortgage not the SL).

[cincystache]

Because you get to deduct the SL interest but (based on the numbers in your post) not the mortgage interest, your effective interest rate is higher on the mortgage than on the SL.

See Investment Order for some thoughts on your question.  You might be best served by getting more money into tax-advantaged accounts rather than paying down the mortgage (again, if you pay down either loan it should be the mortgage not the SL).

+1
As others suggest, max out IRAs for 2016 and 2017 (total of 22,000), then set aside enough cash to max out your husband's 401k and HSA (if available) for 2017.

If your goal is early retirement I would strongly advise MDM's link to investment order. Basically, only pay extra on debts at those interest rates AFTER you have maxed out all of your tax deferred space.

[clarkfan1979]

Pretty much what everyone else said.

1) pay off student loan

2) invest in Roth IRA

3) Max out 401K


Instead of paying off the mortgage, I would put 20% down on a rental property.

[Metric Mouse]

Pretty much what everyone else said.

1) pay off student loan

2) invest in Roth IRA

3) Max out 401K


Instead of paying off the mortgage, I would put 20% down on a rental property.

Would I be the 6th person to agree to this basic plan?

And MDM's investment order is clearly a must-read.