Author Topic: Investment Order vs Emergency Fund Vs Low Interest Debt - what would you do  (Read 1404 times)

joe189man

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to start here is the link to the recommended investment order

https://forum.mrmoneymustache.com/investor-alley/investment-order/

we have ~$25k sitting in a savings account (emergency fund)
401ks are maxed out
No debts over 5%
HSA's are maxed out
No IRA - i think we make to much
We have ~$50k in super low interest debt (two student loans, ~$7k and ~$25.5k and a car note at ~17k) The debt interest per month is ~$50-60 total
no taxable or 529 plans set up yet

My question is, in your opinion, is it better to have the cash available in the EF or use it to pay off the debt as quick as possible?

our jobs are stable, in demand and high paying

we have one kiddo starting kindergarten in the fall freeing up at least $800 a month in Daycare, the other has two more years and the first will likely still have after school care

i am torn between paying off the car and/or smaller student loan or some combination there of and keeping the cash there if needed.

we probably have more than the EF available to us on $0 balance CCs

Paying of the Car would free up the most cash to debt snowball the student loans and still leave ~$7k

we are ~39-40 y/o with ~$430k in 401ks and HSAs. we have quite some time before we retire due to our late start, guessing 10+ years

what would you do?


RWD

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Why not open a taxable brokerage account?

SimpleCycle

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You'll see a lot of different theories on emergency funds.  My opinion is if you don't have other liquidity (taxable investment accounts, Roth IRAs with withdrawable contributions), you should keep a cash emergency fund with 3-6 months of expenses.

What are the debt interest rates?  If they're below 3% I wouldn't pay them off faster than required, and funnel your "extra" into a taxable brokerage account and/or a backdoor Roth IRA.  Backdoor Roth is actually #4 in the investment order, even before maxing your 401k.

joe189man

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Why not open a taxable brokerage account?

i have considered this and think its a good option for some of the cash

You'll see a lot of different theories on emergency funds.  My opinion is if you don't have other liquidity (taxable investment accounts, Roth IRAs with withdrawable contributions), you should keep a cash emergency fund with 3-6 months of expenses.

What are the debt interest rates?  If they're below 3% I wouldn't pay them off faster than required, and funnel your "extra" into a taxable brokerage account and/or a backdoor Roth IRA.  Backdoor Roth is actually #4 in the investment order, even before maxing your 401k.

i think the car is 1.9% with ~3 years left (~$660 a month), the larger student loan is at 0% now due to covid, and normally sub 3%, the $7k student loan is 4.75%

we never started an IRA and now make to much, but i admit i know little to nothing about the back door roth IRA ladder stuff other that it takes a few years to get going, maybe i can look into that

maybe pay off the 4.75% student loan then ~$8k to a taxable then keep ~10k for EF?


MDM

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we never started an IRA and now make to much, but i admit i know little to nothing about the back door roth IRA ladder stuff other that it takes a few years to get going, maybe i can look into that
"back door Roth IRA ladder" would make a good Jeopardy "Before and After" answer, because it combines two different things.  See Backdoor Roth for the one applicable to you.

Quote
maybe pay off the 4.75% student loan then ~$8k to a taxable then keep ~10k for EF?
That could work.

cool7hand

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Whatever the mathematically correct answer is, the right answer for you is based on your own psychology. Will you get more out of paying down the debt? Or with the brokerage account? We got a lot out of paying down our mortgage debt, but that was many years ago when rates were still in the 4% range. What would feel better? The certainty of knowing that your debt is steadily ticking down? Or the likelihood that your investments will perform better than the debt hit from the interest rate? I've heard that Dave Ramsey has some talks that help folks figure out what's right for them, although I'm allergic to his ability to smuggle religion into his presentations.

joe189man

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to cap this, we are planning on keeping ~$20k in the EF and use the rest to put toward smaller student loan and use a little to start a taxable brokerage account, thanks for the recommendations

Kayad

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“maybe pay off the 4.75% student loan then ~$8k to a taxable then keep ~10k for EF?”

That sounds reasonable.  I generally agree with the school of thought that my assets are my emergency fund.  See, e.g., https://earlyretirementnow.com/2018/04/18/emergency-fund-in-stocks/

ryan_themoneyguy

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I think it's a great idea to keep about $20k in your emergency fund and then knock out that smaller student loan. Taxable brokerage account is a smart move, though you might also want to chip away at that auto loan, too. Good luck!

SwordGuy

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... though you might also want to chip away at that auto loan, too.

And consider not spending that that much on a car going forward.  That's double what you need to spend to get a nice, reliable car.   That $300 a month at 7% real growth works out to about $50,000 in todays' dollars after 10 years and $150,000 in 20 years.  :) 

Good luck, you're in great financial shape.

joe189man

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... though you might also want to chip away at that auto loan, too.

And consider not spending that that much on a car going forward.  That's double what you need to spend to get a nice, reliable car.   That $300 a month at 7% real growth works out to about $50,000 in todays' dollars after 10 years and $150,000 in 20 years.  :) 

Good luck, you're in great financial shape.

Thanks, I saw this pop up and figured i would give an update, we are down to ~$35k between the car and two student loans, the car and smaller SL are ~$5k each. My taxable brokerage is up to ~$4,500.

Since February when i posted this we have had some interesting career happenings, DW almost left her company, when they found out theny gave her a $20k bonus to stay and an instant $20k raise, and she will make partner next year effectively adding another $75k to her salary starting January 1, 2022. So these debts will be gone conservatively speaking with in 1 year if not 6 months. i would like to fund some IRAs this year too. 529s may start after debts are done, or just plow cash into brokerage.

We are doing a cash out refi also, i should probably turn this all into a case study to get the MMM brain trust  recommendation on how to best manage this crazy scenario.