Getting started - student loans or investing?

[AnneLynn]

I've read a lot on the 'paying debt vs investing' question, but since I'm a newbie I'm hoping for some advice on my particular situation.

After my husband and I spent our 20s racking up credit card and student loan debt, making only minimum payments, and promptly spending any extra cash in our checking account, I found the MMM blog at 29 and saw the folly of my ways. We spent the last 2 years paying down the credit card debt while I maximized contributions to an employer-matched 401k.

Now the credit card debt is gone and I'm wondering what to do next. We have 22K in a 401k and 96K in student loans (30K at 5%, 33K at 4%, and 33K at 6.8%). I recently opened a Roth IRA for my husband with $1000 - he has no employer retirement benefits. We have no other savings, investments, or debts. We do have a line of credit, albeit at 12%, that we could use for emergencies.

My income ($2868/mo) is fixed whereas my husband works for a small business and his hours fluctuate (max $2706/mo). We live fairly cheaply and have an extra $1000-2000 per month that previously went to paying off credit card debt. In my newly found MMM zeal, I trimmed the fat from my expenses, although our savings rate could become higher as I try to slowly convert my husband to a more mustachian lifestyle. Neither of us expect to increase our income very much into the future - we both LOVE our jobs, and consciously choose to keep them instead of trying to make more money and retire earlier. However, I want to be strategic in how we pay down debt or invest, and hopefully make up for the sins of our youth.

I'm tempted to use the extra money each month to maximize contributions to Roth IRAs for myself and my husband, and then apply whatever is left over to paying down the 6.8% loan. I've heard that money invested can grow over a longer time period and have a higher rate of return than money paid towards student loans. However, the 6.8% interest is guaranteed to accrue each year while our investments (80/20 mix of low-cost stock/bond index funds) have been sluggish in 2018. Alternatively, I've heard that we should instead try to sock away 3-6 months of savings before doing anything else, but it seems inefficient to me to have that money sit in a savings account at this stage of our lives. Any advice would be greatly appreciated, thanks!

[Paul der Krake]

Welcome!

You should study your taxes to determine whether further contributing to your 401(k) or traditional IRAs may boost your savings rate by more than your highest interest loan, because by lowering your AGI even further you can maximize tax goodies like the savers' credit.

Tax-advantaged space is precious because you only get a fixed amount per year and there's no catching up. Run the numbers.

[AnneLynn]

Thanks for this advice - I hadn't been aware of this credit. You're right, it seems that by maximizing our IRA contributions we can qualify for the 10% savings tax credit, which would make this strategy better than paying down our highest student loan. Assuming we have some extra money after we maximize IRAs, would it be better to put that towards the debt or invest further?

[Raenia]

I recommend you read this thread if you haven't already.  The short version follows:

0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA deduction, swap #4 and #5)           
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account and/or fund a 529 with any extra. 

You mentioned a 401k, so I hope you are at least contributing up to any employer match that's available.  Matching is an instant 100% return on investment.  The 6.8% loan is right around the level where it's worth paying off quickly, so I'd do that next, especially if you can do it while contributing to an IRA (Roth or trad, whichever you like).  The 4% and 5% loans can wait until after you're using all the retirement account space.  Good luck!

[AnneLynn]

Thanks for the link, it's very helpful. I'm already maxing out employer contributions to my 401k.