Finish the debt off in one fell swoop?

[cdnmustachegrower]

My primary financial goal for the year has been to kill of my main student loan which started the year at $13k (5%), my other is tiny and only 2% so I'm in no rush there. 

I started using YNAB part way through this year and I've been buffered since I started.  I've done pretty well with the goal of killing my loan this year, I've brought it within reach at $2.5k with an additional $600 payment budgeted this month.  All while maintaining my healthy but not quite mustachian-yet retirement contributions, going on vacation, and saving for a big trip to Africa next year.  It's been a pretty good year!

So here's the question and if you're familiar with YNAB it might help.  I have one months pay (~$2800) buffered through YNAB.  (The idea with YNAB is to live on last month's income) Between the $600 I have budgeted in December, my buffer, and a few raid-able budget categories I could have the debt wiped out with about 1/3rd of my buffer remaining.  Then I'd just have to work to replenish it in the first quarter of 2014 instead of the loan. 

So what do you think, should I be patient with what's worked for me and wait until ~march to kill the debt or raid my buffer and FINISH IT?  Mathematically it's a bit better to pay the loan now since I'm not getting much interest sitting in my bank account but 5% isn't a terrible rate and I realize it's a bit of a toss up.  Would love to hear opinions on the most mustachian way to handle this. 

https://www.youtube.com/watch?v=_hHDxlm66dE  (?)

[daverobev]

So 3 months is the question, on 2.5k?

3 months is 1/4 of a year, so appx 1.25% of $2500 = $30, there abouts.

Toss a coin? :)

[Another Reader]

I like the debt-killing fervor in the Annihilate Student Loans thread started by KatieSSS.  I say go for it, and pat yourself on the back for finishing the loan off in 2013.  In your shoes, that's what I would do.

[cdnmustachegrower]

I like the debt-killing fervor in the Annihilate Student Loans thread started by KatieSSS.  I say go for it, and pat yourself on the back for finishing the loan off in 2013.  In your shoes, that's what I would do.

I wish I had seen that post 12 months ago when I started the same journey!  Thanks for sharing.
I'm leaning towards finishing it, just needed a sanity check.  I think that thread just did it for me. 

[Empire Business]

Buffers will be back in place and then some in a big hurry if you take the income you had been sending to the loan and keep adding it to your stash just as vigorously.  Congrats!

[davisgang90]

Nuke it from orbit, it's the only way to be sure.

[Another Reader]

Be sure to take your victory lap and post the win in the Annihilate Student loans thread!

[cdnmustachegrower]

Be sure to take your victory lap and post the win in the Annihilate Student loans thread!

I'll post my chart when it's down to zero.  It's pretty awesome and it will only be more so when it's at zero!

Thanks for the encouragement folks, 12-0 in favour of finishing it, that's pretty decisive!

[arebelspy]

Wow.

I was the 15th vote, and the first to say steady as she goes?  We're now at 14 finish and 1 steady?

I voted the way I did because with rates that low, I'd be investing any surplus money you have, and paying the minimum as long as possible.

To back that up: I practice what I preach.  I just dropped to under $1000 left of student loans, and I have over six figures in the bank.  It would take less than 1% of my cash to pay off my loan.  NO THANKS.  I will mourn when my student loans are paid off, no more super cheap money.

Obviously it depends on your situation, of course, and it is a more aggressive approach, better obviously if you're young and in a stable job situation, but I say invest over paying off cheap money!  Guess I'm the only one though.  :)

[dude]

Yep, I'd go all Cobra Kai on that shit and "Finish him!!!!" (or it, as the case may be)

:-)

[sibamor]

I'm another vote for steady as she goes. I just paid mine off a few days ago (final 5K payment). I caution because you stated you are doing the 1 month reserve methodology of bill payment. You did not mention if you have a emergency fund above and beyond this.

If you have at least a separate 2K emergency fund then I'm all aboard MK that debt, if not I would spread it over the next 3-4 as originally planned.  Surprise emergencies do happen. And don't think of it as the traditional water heater/car repair/emergency room type. It can be "grandma past this weekend and you have to fly last minute across the country" and that reserve is needed (happened to me in July).

[SunshineGirl]

I'd pay it off, definitely!

[Another Reader]

The pennies you might lose by waiting a couple of months and investing cannot compare to the exhilaration and sense of power and control you will feel by killing the loan.  Victory is yours!

[DTown]

Finishing it off might feel better, but you'll come out ahead monetarily if you stick to the plan. The interest is quite low so you would be better off if you took your time with the loans and put your extra cash in something with a higher return.

If you don't have any other investments/resources that could serve as an emergency fund, definitely take your time with the loans.

I'm paying off some 6.8% loans and am getting close to finishing, so I know how tempting it is just to be done with them. I've been doing a 50/50 split between paying off the loans and investing because while I want to see my loans gone, I will likely get a higher return on the investments.

[cdnmustachegrower]

Finishing it off might feel better, but you'll come out ahead monetarily if you stick to the plan. The interest is quite low so you would be better off if you took your time with the loans and put your extra cash in something with a higher return.

If you don't have any other investments/resources that could serve as an emergency fund, definitely take your time with the loans.

I'm paying off some 6.8% loans and am getting close to finishing, so I know how tempting it is just to be done with them. I've been doing a 50/50 split between paying off the loans and investing because while I want to see my loans gone, I will likely get a higher return on the investments.

I've been contributing about 15% to a combination of Pension/RRSP/TFSA so that's not an issue.  Once this is gone the loan payments will be going to these accounts as well.  :)

[smalllife]

From a YNAB perspective if you've never operated non-buffered that might offset the benefits of any savings you would get by paying off the loan, especially if you have to raid rainy day funds to do so.  There are so many more things to think about - is there money for rent?  Can I pay the bill before the next paycheck or do I have to wait? I would opt for slow and steady simply because the ease of budgeting when buffered would be worth the three (could you make it two? or one?) months of payments left to me.  You are so close that banking on three months of no crises (you don't mention an emergency fund) doesn't seem right to me.

[cdnmustachegrower]

From a YNAB perspective if you've never operated non-buffered that might offset the benefits of any savings you would get by paying off the loan, especially if you have to raid rainy day funds to do so.  There are so many more things to think about - is there money for rent?  Can I pay the bill before the next paycheck or do I have to wait? I would opt for slow and steady simply because the ease of budgeting when buffered would be worth the three (could you make it two? or one?) months of payments left to me.  You are so close that banking on three months of no crises (you don't mention an emergency fund) doesn't seem right to me.

A few of you have made the emergency fund point.  I'll still have one paycheque worth of buffer (~1400) plus a few places I could raid - $3500 in my vacation fund for a trip to africa next year (I'm 26, gotta travel when you're young!), as well as $5k in my TFSA that I wouldn't want to raid but could fall back on in case of emergency. My job's pretty secure, I'm not concerned but it's always best to be prepared.

I'm going to continue to think it over (and read your Mustachian comments) but I'm thinking that as soon as I get my first pay in December I'll FINISH IT.  That'll make something to talk about at Christmas!

[Mazzinator]

Wow.

I was the 15th vote, and the first to say steady as she goes?  We're now at 14 finish and 1 steady?

I voted the way I did because with rates that low, I'd be investing any surplus money you have, and paying the minimum as long as possible.

To back that up: I practice what I preach.  I just dropped to under $1000 left of student loans, and I have over six figures in the bank.  It would take less than 1% of my cash to pay off my loan.  NO THANKS.  I will mourn when my student loans are paid off, no more super cheap money.

Obviously it depends on your situation, of course, and it is a more aggressive approach, better obviously if you're young and in a stable job situation, but I say invest over paying off cheap money!  Guess I'm the only one though.  :)

Rates that low? 5%

Is 5% really considered low? I ask because a) i value your opinion Spy and b) i have some at 4.75% and wasn't sure because it seemed to be in some sort of grey area.

Thanks!!

[cdnmustachegrower]

Wow.

I was the 15th vote, and the first to say steady as she goes?  We're now at 14 finish and 1 steady?

I voted the way I did because with rates that low, I'd be investing any surplus money you have, and paying the minimum as long as possible.

To back that up: I practice what I preach.  I just dropped to under $1000 left of student loans, and I have over six figures in the bank.  It would take less than 1% of my cash to pay off my loan.  NO THANKS.  I will mourn when my student loans are paid off, no more super cheap money.

Obviously it depends on your situation, of course, and it is a more aggressive approach, better obviously if you're young and in a stable job situation, but I say invest over paying off cheap money!  Guess I'm the only one though.  :)

Rates that low? 5%

Is 5% really considered low? I ask because a) i value your opinion Spy and b) i have some at 4.75% and wasn't sure because it seemed to be in some sort of grey area.

Thanks!!

I'm with you - 5% is high enough i consider it with prioritizing despite the fact is might get higher in market.  Depends on 6 risk tolerence i suppose.

I have another 2.5k loan at 3% and that one I'll be paying the minimum on until it's gone.

[arebelspy]

Wow.

I was the 15th vote, and the first to say steady as she goes?  We're now at 14 finish and 1 steady?

I voted the way I did because with rates that low, I'd be investing any surplus money you have, and paying the minimum as long as possible.

To back that up: I practice what I preach.  I just dropped to under $1000 left of student loans, and I have over six figures in the bank.  It would take less than 1% of my cash to pay off my loan.  NO THANKS.  I will mourn when my student loans are paid off, no more super cheap money.

Obviously it depends on your situation, of course, and it is a more aggressive approach, better obviously if you're young and in a stable job situation, but I say invest over paying off cheap money!  Guess I'm the only one though.  :)

Rates that low? 5%

Is 5% really considered low? I ask because a) i value your opinion Spy and b) i have some at 4.75% and wasn't sure because it seemed to be in some sort of grey area.

Thanks!!

It depends on your opportunity cost, risk tolerance, and view of investing.

Historically, yes, it's quite low.

Whether or not you can beat that going forward remains to be seen, but it's a great inflation hedge - when rates go up, and prices shoot up, and your payment is at sub-5%, it'll be a nice feeling.

For some people though it's not about the math or optimal solution, but the emotions and feelings, and I can understand that.

I don't want to be debt free, ever, because that means I'm being inefficient - in the same way I don't want to own a giant SUV.

But plenty of people drive them based on emotion, and I'm okay with that (the sub 4%s though I think are crazy - if you're planning to ER and have a 3-4% withdrawal rate, but you're paying off a sub 4% loan, you are automatically saying your ER will fail - if you're paying it off, you're saying that you can't beat that rate with your investments going forward over the next 30 years, and if that is the case, you're saying you can't ER -- I think anyone who can get sub 4% money right now or has it should keep it as long as possible, especially if they're ERing.).

YMMV, obviously, and there's lots of reading on the forums on both sides of the "pay off mortgage or invest" debate if you do a search.  :)

[Another Reader]

Oh, come on.  We are talking about $2,500 here.  I paid off a $2,200 car loan balance at 2.9 percent a few months ago because I was tired of looking at it.  Yes, it was cheap money but it was also another item to cross off the list of annoying things that needed to be tracked.  60 days of lost growth on $2,200 is insignificant in the big picture. 

The emotional satisfaction of slaying the $2,500 student loan debt for someone who is just starting out is worth the trade-off.  Reinforcing the idea that you control your money rather than your money controls you is a darn good investment.

[arebelspy]

Oh, come on.  We are talking about $2,500 here.  I paid off a $2,200 car loan balance at 2.9 percent a few months ago because I was tired of looking at it.  Yes, it was cheap money but it was also another item to cross off the list of annoying things that needed to be tracked.  60 days of lost growth on $2,200 is insignificant in the big picture. 

The emotional satisfaction of slaying the $2,500 student loan debt for someone who is just starting out is worth the trade-off.  Reinforcing the idea that you control your money rather than your money controls you is a darn good investment.

(Emphasis mine.)

Ah, see, I agree with this last statement, and that's why I lean towards steady as she goes.  If you have the discipline to pay the minimum and invest the excess, that's control of your money rather than money controlling you, in my mind.

I've been tempted to pay off my various low interest debts just to be rid of them, but I have the control not to.

I agree with the emotional satisfaction part as well.  It may be a boost someone needs.  And thus why I said the decision may be emotional, rather than mathematical or logical.  But if someone does have the discipline to invest what they would use to pay off the debt, that may give them more satisfaction, being in control and making that choice (and then seeing their investments grow, all while their debts are shrinking anyways due to the normal payments).

As I said, it really depends on the person, but you and I are advocating the same end, just getting there through a different method.

[Pixelshot]

Kill it! Nuke it! Whatever you call it, pay it off.

As a person who has a lot of student debt, I relish the day I can see the finish line like you can. I understand the "steady as she goes" approach, but just the time savings alone in not having to calculate it any more is worth it. Not to mention the power of the victory lap.  If you don't do it for yourself... at least do it for me. :)

[Nancy]

I would have also said pay the minimums and invest the money.

Mathematically it's a bit better to pay the loan now since I'm not getting much interest sitting in my bank account

However, if the choice is between keeping the money in a low yield bank account or paying off the loan, I would pay off the loan.

But if someone does have the discipline to invest what they would use to pay off the debt, that may give them more satisfaction, being in control and making that choice (and then seeing their investments grow, all while their debts are shrinking anyways due to the normal payments).

+1
I was adamant about paying off my loans quickly, but once I realized the errors (IMO) in my particular way of viewing debt/investments/my money as a whole, I changed my mind. This is not a prescription since situations vary, but it worked for me.

[arebelspy]

Mathematically it's a bit better to pay the loan now since I'm not getting much interest sitting in my bank account

However, if the choice is between keeping the money in a low yield bank account or paying off the loan, I would pay off the loan.

Agreed.  I vote steady as she goes and invest surplus over emergency fund, but paying off the loan is better than the surplus above emergency fund amount sitting idle.

As someone calculated above though, it's a matter of $30 or so (I didn't check their math, so taking their word), so probably not a big deal either way.  :)