Author Topic: I still can't decide  (Read 6573 times)

Everything in Moderation

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I still can't decide
« on: December 11, 2013, 12:03:45 PM »
I have been going back and forth on this question, and I still can't decide. 

Should I pay off my student loans early or not?  I would normally say YES, but the rates are so low. 

$18,650 at 3.21% fixed
$10,500 at 2.1% fixed

I hate debt, but my money could be doing so much more for me.  I could invest it or put it in a retirement account and make more interest. 

A little background: 
*our jobs are high paying and really secure
*the past year we have paid about $25,000 off of higher interest student loans.  Ya!
*only about $15,000 in retirement. 
*31 years old
*$20,000 savings in cash (having our first baby in a few months).  Adding about $4,000 to that each month. 

I keep changing my mind and could use other's opinions. 


gimp

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Re: I still can't decide
« Reply #1 on: December 11, 2013, 12:28:23 PM »
I wouldn't. Keep the flexibility and mobility. You'll get better return by investing, anyways.

Dicey

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Re: I still can't decide
« Reply #2 on: December 11, 2013, 12:38:31 PM »
Congratulations on your good decisions thus far.

First, max out all available retirement savings options. Young money saved is worth so much more than money saved when you're older, due to the amazing magic of compound interest.

Then, start a 529 for your new baby. Read The Tightwad Gazette to keep baby costs in line.

Finally, tackle the student loans last. Even though the rates are low, the interest continues to accrue until you pay it off, no?

You didn't mention an EF. I'm assuming you have one at a level you're comfortable with.
Good luck to you and your new family!

marty998

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Re: I still can't decide
« Reply #3 on: December 11, 2013, 01:56:20 PM »
You didn't mention an EF. I'm assuming you have one at a level you're comfortable with.

*$20,000 savings in cash (having our first baby in a few months).  Adding about $4,000 to that each month. 

Is that not an EF?

Everything in Moderation

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Re: I still can't decide
« Reply #4 on: December 11, 2013, 02:09:32 PM »
Yes, the $20,000 in savings is our current emergency fund.  Once I get through maternity leave, I don't plan on keeping that cash on hand.  I will put it to work in some way. 

clutchy

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Re: I still can't decide
« Reply #5 on: December 11, 2013, 02:43:21 PM »
no thanks on payoff.

dadof4

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Re: I still can't decide
« Reply #6 on: December 11, 2013, 02:45:31 PM »
As Diane mentioned, first max out all tax privileged accounts. For a high paying job, this is an extreme no-brainer.
After that, it depends if you are more of an analytical or an emotional  investor.  I'm a little of both - I get very emotional if I make analytically wrong decisions :)

On average, you will do better paying off the minimum on those low APR SL's, and investing the rest. You'll also have much better liquidity in case you need it.
For some though, the emotional strain of debt is not worth it.

AccidentalMiser

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Re: I still can't decide
« Reply #7 on: December 11, 2013, 02:48:01 PM »
Great problem to have!

What Diane said.  I have a similar situation.  I'd just keep paying on them and re-evaluate once per year.  Your money will make more for you than 3%.  The interest is also tax deductible, correct?

Everything in Moderation

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Re: I still can't decide
« Reply #8 on: December 12, 2013, 06:58:41 AM »
Yes, the interest is tax deductible. 

"first max out all tax privileged accounts."  This question shows that I am completely new to investing…do you mean 401k or Roth IRAs? 

Thanks. 

Acadian

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Re: I still can't decide
« Reply #9 on: December 12, 2013, 10:26:12 AM »
Either way (pay off loan or invest), you are making a good choice as it moves you in the right direction.

The only thing you should NOT do is delay implementing one of the options. Just pick one and go for it. You can always change your mind.

Good luck!

dadof4

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Re: I still can't decide
« Reply #10 on: December 12, 2013, 10:48:59 AM »
"first max out all tax privileged accounts."  This question shows that I am completely new to investing…do you mean 401k or Roth IRAs? 
 
Yes. :)

Max them both if you can afford it. You're saying you're adding 4k in savings a month. If those were in 401k, it would be 5-6k in savings (up to the max of 17500, or 35k for a couple).
Except for a small emergency fund, You'll also probably want most of post-tax savings invested. Getting them in Roth IRA's will allow them to grow tax free. Same idea on a smaller scale with a 529 for your child.

Over time, those small changes will make a HUGE difference to your total equity.
« Last Edit: December 12, 2013, 11:35:53 AM by dadof4 »

gimp

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Re: I still can't decide
« Reply #11 on: December 12, 2013, 11:09:00 AM »
The interest is tax deductible if you're itemizing instead of taking the standard deduction, IIRC. Play with the number to see if it makes sense, but very few people are better served by itemizing.

Heart of Tin

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Re: I still can't decide
« Reply #12 on: December 12, 2013, 11:41:59 AM »
The interest is tax deductible if you're itemizing instead of taking the standard deduction, IIRC. Play with the number to see if it makes sense, but very few people are better served by itemizing.

That's the mortgage interest deduction. Student loan interest is subtracted from income on Line 33 of Form 1040 as an adjustment to your AGI rather than on Line 40, where you choose either itemized deductions or the standard deduction. Actually, adjustments to AGI (everything before Line 37) are some of the most powerful tax tools since lowering your AGI can increase your eligibility for further deductions and credits.

Edit: Everything in Moderation, your family may have enough income that you won't qualify for this deduction. Check before you use the tax credit in your decision making.
« Last Edit: December 12, 2013, 12:04:34 PM by Heart of Tin »

willn

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Re: I still can't decide
« Reply #13 on: December 12, 2013, 11:52:08 AM »
Here's an easy way to decide: 

Ask yourself, if you were debt free, would you go borrow 30K to invest for the next 7 months?  That's effectively what you're doing now.  If the answer is no, your risk meter kicked and you should pay it down asap.

Personally I lean towards paying off the debt.  I think it represents risk and an emotional drag.  Low interest rates mean you might make more in interest by keeping the money invested which is what every math and finance geek wants.  But let's say you own your own business, or otherwise have a slightly higher than average risk of losing your income.  In that case, the risk premium is higher, paying it off will statistically may be the winning choice.  If you have 4k excess / month you're only 6 months from knocking this down and being free of it forever.

Emg03063

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Re: I still can't decide
« Reply #14 on: April 03, 2014, 11:09:02 AM »
On the pure numbers, the answer is probably no-- max out your tax privileged investments first (and then invest in non-tax privileged accounts), but if it makes you uncomfortable, you can always split the difference and just pay off the one with the higher rate.

nawhite

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Re: I still can't decide
« Reply #15 on: April 03, 2014, 11:24:24 AM »
2.1 Fixed?!?! Wow thats an awesome rate! Who is your lender? My SL interests rates are a little higher (~3%) and I max the tax advantaged accounts and then pay off the debts. Seems like a decent compromise for my analytical brain.