The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: canisius on May 06, 2021, 12:41:20 PM
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So, following off someone else's post on student loans, it made me think my own investment order. Years ago when I was , I transferred debt to a credit card with a lifetime 6.9% interest and 0% fee. I have about 5000 left on it with a minimum payment of $100 a month. I ignored it before the Pandemic because it was still less than the ten year treasury rate + 5%, then during the Pandemic we were cutting our budget when my wife had to leave her job. Now that we're stable again, I have funds to pay it off, but I'm unsure if that's a good decision financially. The treasury rate is currently about 1.6%. We're earning .5% in our Ally Savings Account, and about 28% in our Roth 403b / Roth IRAs. So what's your suggestion? Stick to the investment order like it's gospel, or realise it's at the margins with a .3% difference and let it be, unless treasury rates crash.
Thanks!
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First and foremost: "Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules)."
Also note "the assumption that your alternative is "all stocks" or a "fund of funds"
(e.g., target retirement date) that provides a blend of stock and bond returns. If you wish to consider separate bond funds, compare the yield on a fund
with a duration similar to the time remaining on the loan, and put your money toward the one with the higher after-tax interest/yield."
To the latter point, you might want to leave an emergency fund untouched, but if you have "excess cash" then paying a 6.9% debt instead of leaving the money in savings is a good idea.
The choice between investing in tax-advantaged accounts vs. paying down a 6.9% rate is debatable - just what one should expect from a reasonable "rule of thumb". ;)
But given current rates, although still not a guarantee, paying down a 6.9% debt instead of taxable investing is likely a good choice.
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Given how close the numbers are, I'd probably err in favor of paying it off. You might choose the opposite, depending on your tolerance for debt and what else you might do with the money (investment vs savings account). I tend to prefer having as few open accounts as possible, all else being equal.
Neither choice is a bad one. The investment order is a guideline, not a rule, so feel free to take the leeway to make your own choice based on your risk factors and preferences.
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Uh... pay it off. That’s investment order #2 debt. Guaranteed 6.9% return is a no-brainer. Even more so if your excess cash is otherwise in that savings account earning .5%
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Pay it off.
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It's unsecured debt, not an appreciating asset, right? Listen to @RWD.