Author Topic: Paying off Student Loan vs Investing (or saving up for down payment)  (Read 3237 times)

Mercury

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Dear friends,

After reading through practically all the MMM-blogs (which are phenomenal and inspiring!), some doubt lingers on paying of a debt vs investing.

After slimming down an already reaonably frugal spending pattern and with no outstanding debts apart from a student loan, I end up with about 600 bucks/month at my disposal for:

1. further attacking the principal on my student loan (currently remaining at 20K @ 2.45% interest, fixed for 5 year periods, next period 2015-2019 expected at 2.00%)
2. starting to invest in index stock, potentially delivering a larger profit than the loss on the loan
3. saving up for a down payment on a house

Or of course a combination of all of the above.
My basic attitude (debts are bad, m'kay?) would suggest going after the student loan first, but I would hate to make an irrational mistake should that not be the most optimal strategy in this case.

EDIT: In the Netherlands (where I live), most employees contribute to a pension plan through their employer  pre-tax. Pensionplan money deducted from the Gross, so doesn't even touch my bank account, no temptations there! Also no 401K type of deals therefore.

I would very much value your thoughts! Wishing everybody here happiness and health in their (financial) life, Best,
Mercury
« Last Edit: March 26, 2014, 11:00:37 AM by Mercury »

schimt

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Re: Paying of Student Loan vs Investing (or saving up for down payment)
« Reply #1 on: March 26, 2014, 07:21:30 AM »
Is that 2.45 intested rate adjustable or fixed? If fixed it really comes down to how set you are on buying a house, and when. Not sure what you are paying for rent now, but in many cases you are better off renting, so if you have your heart set on buying soon, it is important to save for a downpayment and closing costs so you do not have to pay PMI!

I would say, at least make your 401k contribution to get the maximum employer match and save the rest for the house.

If you are not planning to buy a house soon, and that 2.45% rate i fixed, i would personally invest the balance of you dispoable cash in 401k and an IRA, and let the student loan ride on minimum payments.

Read the 2 posts from MMM's buddy, Jim L Collins about buying a house or not. Highly suggest his stock series also if you haven't read it already.

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

rocksinmyhead

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Re: Paying of Student Loan vs Investing (or saving up for down payment)
« Reply #2 on: March 26, 2014, 07:31:18 AM »
what country are you in?

Thegoblinchief

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Re: Paying of Student Loan vs Investing (or saving up for down payment)
« Reply #3 on: March 26, 2014, 07:33:24 AM »
Don't prepay the SLs unless the rate is variable. Even if it is, typically they can only tick up so fast, so you're still better off investing the money.

If in the US, the Roth is a great vehicle for liquidity and tax savings over medium term investing.

Don't just blindly save for a house down payment unless home ownership is to your benefit. Otherwise, the money won't be working as hard as it can for you.

rocksinmyhead

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Re: Paying of Student Loan vs Investing (or saving up for down payment)
« Reply #4 on: March 26, 2014, 07:37:06 AM »
Don't prepay the SLs unless the rate is variable. Even if it is, typically they can only tick up so fast, so you're still better off investing the money.

If in the US, the Roth is a great vehicle for liquidity and tax savings over medium term investing.

Don't just blindly save for a house down payment unless home ownership is to your benefit. Otherwise, the money won't be working as hard as it can for you.

+1 to all of that!

if you are in fact in the US (sort of guessing not since you specified "my country" and didn't mention a 401k), some folks on this board totally blew my mind and changed my strategy a few months ago by pointing out the significant advantage of maxing out a traditional 401k vs. paying down student loans if you're in a higher tax bracket, even for higher SL interest rates (mine are >5%). but if not, that is probably irrelevant info since I don't know what your tax situation is or if there are tax-advantaged investment/retirement accounts available to you :)

Mercury

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Re: Paying of Student Loan vs Investing (or saving up for down payment)
« Reply #5 on: March 26, 2014, 08:43:23 AM »
Thanks for the intial reactions guys, I've edited the original post to clarify some of your questions.

mh1361

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Re: Paying of Student Loan vs Investing (or saving up for down payment)
« Reply #6 on: March 26, 2014, 08:47:53 AM »
Given that the rate of the loan is fixed, and will even go down, I wouldn't worry about paying that off early. I wish my student loans were from the Netherlands! When are you hoping to buy a house? You'll still have to figure out where you want to keep that money while you're saving for a down payment. I'd also recommend Jim Collins Stock Series. Investing in an index fund is probably the way to go, if you can handle the volatility.

Mercury

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Re: Paying of Student Loan vs Investing (or saving up for down payment)
« Reply #7 on: March 26, 2014, 09:07:32 AM »
@mh1361

Thank you for the recommendation mh1361! Planning to buy a house in about 5 years (first off for an overseas job)

As for the Netherlands student loans: there are up and downsides! On the one hand, higher and progressive taxes here in the Netherlands than you are probably used to in the US, meaning that more than average earners pay higher taxes). On the other, brighter, side: comprehensive healthcare and cheaper education/student loans (payed for by those higher taxes). And a basic social security safety net for everybody losing a job or having little or no pension fund available.