Author Topic: Another invest or pay off debt question  (Read 2780 times)

Philociraptor

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Another invest or pay off debt question
« on: October 07, 2016, 10:31:11 AM »
Good morning MMMers!

At the moment my wife and I are paying the minimums on our 2 debts, student loan ($63k) and mortgage ($103k), investing $500/mo into a taxable brokerage (VTSMX), and saving the remaining surplus in a savings account to frontload our IRA's in January. The mortgage is a 7/1 but will not adjust for another 5+ years (currently at 3.625%). The student loan is adjustable, and has just been adjusted up to 4.5%; I expect it will continue to climb each quarter. I would like opinions on what to do moving forward. Our marginal tax rate (after deductions) is 15%, but is very close to the 25% bracket and may spill over next year.

I could continue along our current path and wait until the student loan interest creeps up a bit more. At what point should I take action? Once the student loans are on the radar, should I continue to front-load the IRAs, DCA them, or wait until the last minute instead? Should we still contribute $500 to the taxable brokerage or put that on-hold while the student loans are being focused down? Either way, I plan on contributing enough to the brokerage account that we can convert it to VTSAX and get the savings in fees.

What are y'all's thoughts?

Right now I'm leaning towards adding to the brokerage to get it to a bit over $10k (so VTSMX -> VTSAX), turning off the automatic investments to the brokerage, and setting up the IRA's to autodraft once per month in 2017 ($500/mo each). Keep a $10k emergency fund and funnel any further excess into the student loan.
« Last Edit: October 07, 2016, 11:07:06 AM by Philociraptor »

Mr. Paws

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Re: Another invest or pay off debt question
« Reply #1 on: October 07, 2016, 10:37:39 AM »
If it was me i would probably pay down that adjustable rate loan as quick as possible. I don't like the unpredictability. I may be more conservative than other members though.

boarder42

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Re: Another invest or pay off debt question
« Reply #2 on: October 07, 2016, 10:40:29 AM »
i dont know why you have a 3.625% ARM 7/1 on a house you could have REFI'd to a low 3's on a 30 year 2 months ago.  you may even be able to get your same mortgage rate on a 30 year now.  i'd get out of that arm and moved to a fixed rate.

Philociraptor

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Re: Another invest or pay off debt question
« Reply #3 on: October 07, 2016, 10:58:24 AM »
i dont know why you have a 3.625% ARM 7/1 on a house you could have REFI'd to a low 3's on a 30 year 2 months ago.  you may even be able to get your same mortgage rate on a 30 year now.  i'd get out of that arm and moved to a fixed rate.

Not looking to pay closing costs again, we plan on being out of the house before the rate adjusts.

Thoughts on the student loan / investing part of the question?

Mother Fussbudget

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Re: Another invest or pay off debt question
« Reply #4 on: October 07, 2016, 11:03:26 AM »
You realize VYSMX ($3K minimum investment) will automatically convert to VTSAX once you have a total of $10K in VYSMX, right?

Philociraptor

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Re: Another invest or pay off debt question
« Reply #5 on: October 07, 2016, 11:08:37 AM »
You realize VYSMX ($3K minimum investment) will automatically convert to VTSAX once you have a total of $10K in VYSMX, right?

Yes. We are at $8.5k now, $1.5k to go.

frugaliknowit

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Re: Another invest or pay off debt question
« Reply #6 on: October 07, 2016, 11:21:34 AM »
I like the idea of front loading the IRA in January.  This is very good "bang for the buck" and great risk/return.

I do NOT like the idea of investing in a taxable account versus a "hurdle" on the SL of 4.5% (or potentially higher).  I would take the risk free 4.5% return (paying SL) over the "expected return" of 8% (before tax) on the taxable Vanguard.  I would also look into a "no cost refi" (closing costs built in to the interest rate) on the mortgage.  ARMs are very risky.  What if you lose your job, or your income is reduced, rates go way up and you are unable to refi?

MDM

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Re: Another invest or pay off debt question
« Reply #7 on: October 07, 2016, 11:42:35 AM »
I would take the risk free 4.5% return (paying SL) over the "expected return" of 8% (before tax) on the taxable Vanguard.
I've been meaning to ask this question in threads of this ilk, so here goes:

Do you have, or know of, an algorithm/equation/rule of thumb/etc. for the difference/ratio at which a certain "risk free" return is equivalent to a higher "expected" return?

Catbert

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Re: Another invest or pay off debt question
« Reply #8 on: October 07, 2016, 11:57:01 AM »
Good morning MMMers!



What are y'all's thoughts?

Right now I'm leaning towards adding to the brokerage to get it to a bit over $10k (so VTSMX -> VTSAX), turning off the automatic investments to the brokerage, and setting up the IRA's to autodraft once per month in 2017 ($500/mo each). Keep a $10k emergency fund and funnel any further excess into the student loan.

I like this plan.

boarder42

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Re: Another invest or pay off debt question
« Reply #9 on: October 07, 2016, 01:34:20 PM »
i never had SL's not sure what its really like and dont exactly know how i would have handled them.  i do know that i wouldnt be putting my money for next year's IRA into a savings account so i can front load.  either dumb that money into your SL's or into the market.

Philociraptor

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Re: Another invest or pay off debt question
« Reply #10 on: October 07, 2016, 01:57:45 PM »
i never had SL's not sure what its really like and dont exactly know how i would have handled them.  i do know that i wouldnt be putting my money for next year's IRA into a savings account so i can front load.  either dumb that money into your SL's or into the market.

I suppose I wasn't clear, the savings account also serves as an emergency fund. So it would be there either way, we simply empty it each January to front-load the IRAs and build it back up over the next few months.

Metric Mouse

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Re: Another invest or pay off debt question
« Reply #11 on: October 08, 2016, 10:01:34 PM »
I would take the risk free 4.5% return (paying SL) over the "expected return" of 8% (before tax) on the taxable Vanguard.
I've been meaning to ask this question in threads of this ilk, so here goes:

Do you have, or know of, an algorithm/equation/rule of thumb/etc. for the difference/ratio at which a certain "risk free" return is equivalent to a higher "expected" return?

Is that a serious question? If it is, you could use (ProbA)(A)/(B) Where A is the 'expected return' and B is the 'risk free' return. If the answer is equal to 1, they are equal. If it is higher than 1, then A would be the better choice.

MDM

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Re: Another invest or pay off debt question
« Reply #12 on: October 08, 2016, 10:19:19 PM »
Is that a serious question? If it is, you could use (ProbA)(A)/(B) Where A is the 'expected return' and B is the 'risk free' return. If the answer is equal to 1, they are equal. If it is higher than 1, then A would be the better choice.
Yes, it is a serious question, although somewhat indirect.

What seems to happen at times is that someone prefers the risk free return simply because it is risk free.  At least, that's how I read some suggestions, and I'm trying to understand if that's what is meant.  Thus the question attempts to find under what conditions a person suggesting taking the risk free return would decide not to take that return, and instead try for something better.

Leaving aside calculation of B in your example, how would you calculate (ProbA)(A) for the two investments shown under "Risk Must Also Be Analyzed" in Risk Must Also Be Analyzed?

Radagast

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Re: Another invest or pay off debt question
« Reply #13 on: October 08, 2016, 10:49:06 PM »
Right now I'm leaning towards adding to the brokerage to get it to a bit over $10k (so VTSMX -> VTSAX), turning off the automatic investments to the brokerage, and setting up the IRA's to autodraft once per month in 2017 ($500/mo each). Keep a $10k emergency fund and funnel any further excess into the student loan.
That is what I would do.

I can't see the point to stockpiling cash, so I add to my/our IRA's monthly.