Author Topic: Need Advice: Stay Invested or Pay Off Low Interest Loans  (Read 3027 times)

PuckDaddy14

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Need Advice: Stay Invested or Pay Off Low Interest Loans
« on: April 07, 2016, 02:52:06 PM »
Hello,

I need some advice as I cannot decide what to do with my current cash. 

I have $38,000 in an investment account
I have $34,000 student loan debt at 3.5% ($800/month)
I have ~$5,000 car debt at 4.0% ($200/month)

Do I off the debt and become debt free (except for a mortgage at 3.0% at $224,000) or do I keep investing since I have been earning more in the stock market the past year and half?  Being out of debt would be fantastic, but I feel like mathematically it is better to keep the money invested in the market.

Other details that may not be pertinent:

36/m
Washington, DC
No kids, not married
$165,000 per year salary
$83,000 IRA (already contributed my 2016 max)
$2,500 Roth IRA
$36,000 401(k) saving 11% per paycheck with 4% employer match

Thank you for helping me to decide what to do.  It is hard to part with the cash when I have such low rates of financing so I would like some objective opinions.

BlueHouse

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Re: Need Advice: Stay Invested or Pay Off Low Interest Loans
« Reply #1 on: April 07, 2016, 03:01:19 PM »
In your shoes, I would not liquidate any of the investment accounts, but I would aim to pay that debt off with your cash flow.  With your salary, you could probably kill that off in 4 months with no major headache.   

SwordGuy

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Re: Need Advice: Stay Invested or Pay Off Low Interest Loans
« Reply #2 on: April 07, 2016, 05:56:28 PM »
Too little info for giving best advice possible!

Mathematically speaking, you should do better with your investments in a broad index fund like Vanguard's VTSAX.   If, instead, you have a shitty investment with big fees, your results could be dramatically different.

How much positive cash flow do you have each month?  Is that before or after cutting out wasteful expenses?    If you are pinching pennies just to keep from going into debt each month because all your income is tied up with monthly expenses, that's one thing.  But if you have a positive cash flow with extra money that could be used to pay down debt or invest, that's different.

And, of course, if your income is tied up in monthly expenses, at your income level, you have NOT optimized your expenses...

nereo

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Re: Need Advice: Stay Invested or Pay Off Low Interest Loans
« Reply #3 on: April 07, 2016, 07:07:20 PM »
Quote
I have $38,000 in an investment account

like SwordGuy said, more info is needed.  However, what is the current function of that $38k?  Is it an Emergency Fund?  If so, what are your typical monthly expenses? How secure is your job?  How much extra money do you have every month?

broadly speaking I would NOT pay down that debt any faster than necessary, but instead save as much as possible and let inflation nibble away at it.  You have enough assets to cover it in an emergency, and your salary is quite high compared to your debt.  Are you maxing out that 401(k)?

Tyson

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Re: Need Advice: Stay Invested or Pay Off Low Interest Loans
« Reply #4 on: April 07, 2016, 07:22:47 PM »
I hate debt, so I'd personally make paying it down a priority.  But do it via your extra cashflow every month - I wouldn't touch the investments you already have in place.

Noahjoe

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Re: Need Advice: Stay Invested or Pay Off Low Interest Loans
« Reply #5 on: April 08, 2016, 08:53:04 AM »
My question for you:

I don't believe you qualify for a tax deductible TIRA contribution. Why aren't you recharacterizing to a Roth?

newton

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Re: Need Advice: Stay Invested or Pay Off Low Interest Loans
« Reply #6 on: April 09, 2016, 06:56:22 AM »
This may not be the best advice but for some reason I hate debt.  I had an opportunity several years ago to invest a lump sum or pay off my house.  I knew the smarter choice would be to invest but I chose to pay off the house.  I don't like debt hanging over me and enjoyed the extra cash flow each month for not having a house payment.  There are days I think I would have been better off investing but am still glad no payment. 

FIRE_Buckeye

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Re: Need Advice: Stay Invested or Pay Off Low Interest Loans
« Reply #7 on: April 09, 2016, 08:13:48 AM »
Do I off the debt and become debt free (except for a mortgage at 3.0% at $224,000) or do I keep investing since I have been earning more in the stock market the past year and half?  Being out of debt would be fantastic, but I feel like mathematically it is better to keep the money invested in the market.
You correctly answered your own question.
Mathematically speaking, you'll likely come out ahead continuing to invest as you are, and just making the regular monthly payments on the debt (given the relatively low interest rates on it). Some people (including a few in this thread it appears) are completely debt averse which there is nothing wrong with, but assuming you aren't, your dollar is better spent earning ~6% annually in the stock market than being used to save 4% on a loan.

GrowingTheGreen

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Re: Need Advice: Stay Invested or Pay Off Low Interest Loans
« Reply #8 on: April 09, 2016, 09:52:33 AM »
In your shoes, I would not liquidate any of the investment accounts, but I would aim to pay that debt off with your cash flow.  With your salary, you could probably kill that off in 4 months with no major headache.

Came here to say this!

randymarsh

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Re: Need Advice: Stay Invested or Pay Off Low Interest Loans
« Reply #9 on: April 09, 2016, 12:02:59 PM »
What did this debt start at? The rate is low and the balance is low for your income, but the minimum is high. I completely understand wanting to get rid of it. You could refinance it to get a lower monthly payment, as long as you keep the rate around 4%. Sort of a compromise, you keep the debt but reduce the monthly obligation freeing up cash for more investing.

PuckDaddy14

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Re: Need Advice: Stay Invested or Pay Off Low Interest Loans
« Reply #10 on: April 12, 2016, 08:23:00 PM »
Thank you for your advice.  I see people said they needed more info so I have copied the format for the case study that is in the sticky of this section of the forum.  Below are additional details and answers to the questions posed.  Thank you in advance for your advice and analysis.

Topic Title: How should I use $38,400 I have in cash right now? What other changes can I make to get to FI more quickly?

Life Situation: IRS filing status is single but have a serious girlfriend, no dependents, living in Arlington, VA just outside of Washington, DC. 

Grew up in a maximum spending upper middle class family.  Did not understand the concept of enough or saving really.  Just started reading the blog about a month ago and am really trying to wean myself down. 

The expenses below are after some major changes if you can believe it.  I know I am nowhere near you guys but I’ve changed a lot already to reduce my spending and continue to save. 

I had a gambling issue in my mid-twenties and then went to grad school as well so I started at 31 with nothing saved.  Most of my savings have come in the last year and a half.  About $100k.  I wish I was ten years younger and had found this blog and not gotten into online poker, that is for sure. 

Gross Salary/Wages: $165,000 per year.  My salary history has been chaotic and I am unsure how long this salary is sustainable so I want to maximize investing and saving.  I got an 18.5% bonus this year on last year’s salary of $140,000.  I have a retention bonus due 12/31/16 of $65,000 and 12/31/17 of $135,000.  After that, I don’t know what I will do next for work but I want to be as FI as possible so I have lots of options (including starting a new career, business, or be semi retired)
2002 – $33,000
2003 – $40,000
2005 to 2009 – $44,000 to $70,000
2010 – $40,000 for four days and week while in grad school
2011 – $60,000 in career switch to consulting. No 401k at this company.
2012 – $80,000 finishing grad school
2013 – $100,000
2014 – $100,000
2015 – $140,000 job change. 4% 401k match at this company. Commuter benefit.

Pre-tax deductions:
401(k):  11% 401k at $756.36 per paycheck with 4% match.  That should max me out since I took 11% of my bonus that was paid in this year into the 401k
FSA:  $104.17 which should max the FSA out at $2,500.  I thought I would need this $2,500 but now don’t think I will.
IRA:  IRA contributed $5,500 max to a traditional IRA last two years but I make too much for the tax deduction.  Note I am not eligible for a Roth contribution at my income level.  Maybe I do not understand the recharacterization rules?
Health Insurance: dental insurance is $2.02 per paycheck, 11.20 medical, and $0.30 vision

AGI: ~$94,500

Other Ordinary Income: Sometimes I drive uberX for a couple hundred dollars.  I like it because I can see parts of the city I wouldn’t normally go to and meet new people.

Qualified Dividends & Long Term Capital Gains: Capitals gains in 2014 = $(6,020), 2015 = $16,479, 2016 = $2,104

Taxes: Medicare $98 per paycheck.  Social Security $419 per paycheck.  Federal Income $1,222 per paycheck.  State income $325 per paycheck

Current expenses:
Mortgage    $1,387 ($242k at 3%)
Condo Fee    $350
Food      $600
Student Loan   $800 (refinanced to a 5 year loan about a year ago.  Original balance was $60 something in 2011)
Car Payment    $243 ($5,785 at 3.2%.  Original loan was around $10,000.  2006 Volkswagen Passat)
Gas      $60 (Take dog to dog park every day for about 7 mile round trip)
Cell Phone    $65  (Switched to Sprint recently to get 50% off Verizon plan)
Electric      $50
Cable/Internet   110   (Hockey is a passion of mine.  I have tried every way to find a way to watch it without cable.  I cancel the cable in the non-hockey months)
Gym      $50
Hair Cut   $20
Dog          $60

Vacations and clothing can be large-ish purchases once a quarter.  Say $200 to $500 clothing and $500 to $3500 vacation.  Definitely have cut back on clothing.  Working on planning smarter vacations but love to ski and living east and skiing west is expensive. I play in an adult hockey league which runs about $450 2 x per year.

Assets:

I have $38,000 in an investment account.  It is currently in cash. 
$85,000 IRA (already contributed my 2016 max)
$2,500 Roth IRA
$36,000 401(k) saving 11% per paycheck with 4% employer match

dess1313

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Re: Need Advice: Stay Invested or Pay Off Low Interest Loans
« Reply #11 on: April 12, 2016, 08:52:01 PM »
Look at this as an idea.  A lot will tell you to invest.
Im still new to it all and debt makes me stressed.  I know what youre thinking of when you ask about reducing debt. Esp with a finite job horizon.
Keep a 2- 4 month emergency fund back.
Your surplus cash could easily take care of your car loan
This would free up an aditional $200( from your former payment) a month that could go to your student loan or mortgage as you choose.
That alone would take several years off either loan. 

After this it depends on your risk tolerance.  You can also do a bit of both its not just one way that is right or wrong. 

You have a good income, with some planning you should be able to save up quite a bit with some work.  Your bonuses alone sound awesome.  Those could make some dents or remove the student loan entirely, while you invest slowly monthly.  If your bonus went to the student loan, it would free up $800 a month to do something else with, invest or save depending on how your life changes in the next couple years