Author Topic: Pay down debt or save?  (Read 4108 times)

kateymoo

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Pay down debt or save?
« on: May 12, 2014, 11:57:45 AM »
Hello,  I am working on building up my savings and am at a happy point where I have to decide where to direct my cash going forward...  I am 35 years old,  no credit card debt, no debt other than 80K in one student loan that is (happily) fixed at 2.5% with a further 0.25% interest rate deduction if I make another 6 payments on time.  I am saving 5-6 K per month after maxing out my 403B and Roth IRA (via the back door).  I live in New York City, don't love it but do enjoy the opportunity to earn a good salary.  My long term (10 year) plan is hopefully to move on to part time work with a nice cushion of cash far far away from the concrete jungle.  Here are my dilemmas:

Save or pay off the student loan ( the interest rate is so ridiculously low that I can't imaging speeding up the payments... but am curious to hear what others think)

Keep dumping money into the market (index funds) or put it somewhere safer with a plan to  purchase a condo within a reasonable commute of my work? The mortgage deduction would be nice, paying $2500 per month in rent is sickening.  Buying a place would be at least $600K for a shoebox... and I hope NOT to be here 10 years from now...

Thanks for your thoughts!

Thanks!

MooseOutFront

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Re: Pay down debt or save?
« Reply #1 on: May 12, 2014, 12:12:30 PM »
I couldn't bring myself to pay down a student loan at sub 2.5% interest.  Plus the student loan interest deduction is above the line so that's great unless you're getting phased out on it due to high income.

Not sure what I would do about housing there.  $600k seems kind of not like something I would like to have to plan for.

peter bedpan

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Re: Pay down debt or save?
« Reply #2 on: May 12, 2014, 12:28:03 PM »
Buying a place would be at least $600K for a shoebox... and I hope NOT to be here 10 years from now...



In this case I wouldn't buy.

At the beginning I would put 70% into an emergency fund and the rest into shares. After the emergency fund is built up,  put it into shares, bonds or student loan depending on the interest rate.
Plan it from the end: Think about what your portfolio should look like in the end. As you build it up you rebalance it: If interest rates are low you go into shares, if they are high into bonds. If interest rates are below 2.5% the money goes into the student loan.
The portfolio doesn't have to be well diversified from the very  beginning, but diversification must become better as you built it up.

nawhite

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Re: Pay down debt or save?
« Reply #3 on: May 12, 2014, 12:33:53 PM »
First thing, don't buy the house. You'll pay more in mortgage interest and property taxes (1.1% in NYC alone plus more for NY state) than you pay in rent. And you'll pay transaction fees on both the buy and sell transaction. The clearest calculator for the buy vs rent question is: http://www.nytimes.com/interactive/business/buy-rent-calculator.Html. Since you aren't planning on staying there long term, the transaction costs are going to kill you.

Now for the buy vs save question, my loans are at 3% variable so I pay the loans off. If I had 2.25% fixed, I'd definitely lean more towards the invest option but then it really comes to a market timing question. If you think the market is overvalued then it might not make sense to buy now. If you think medium term (10 year) results will mirror historical averages, then investing is the right move.


Thegoblinchief

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Re: Pay down debt or save?
« Reply #4 on: May 12, 2014, 07:58:32 PM »
Don't try to time the market. Invest it.

Search around for possibly better rentals. See for example:

http://smallthingsgood.com/2014/05/12/my-new-york-city-yard-a-diamond-in-the-rough/

CarDude

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Re: Pay down debt or save?
« Reply #5 on: May 12, 2014, 08:03:01 PM »
As I'
Hello,  I am working on building up my savings and am at a happy point where I have to decide where to direct my cash going forward...  I am 35 years old,  no credit card debt, no debt other than 80K in one student loan that is (happily) fixed at 2.5% with a further 0.25% interest rate deduction if I make another 6 payments on time.  I am saving 5-6 K per month after maxing out my 403B and Roth IRA (via the back door).  I live in New York City, don't love it but do enjoy the opportunity to earn a good salary.  My long term (10 year) plan is hopefully to move on to part time work with a nice cushion of cash far far away from the concrete jungle.  Here are my dilemmas:

Save or pay off the student loan ( the interest rate is so ridiculously low that I can't imaging speeding up the payments... but am curious to hear what others think)

Keep dumping money into the market (index funds) or put it somewhere safer with a plan to  purchase a condo within a reasonable commute of my work? The mortgage deduction would be nice, paying $2500 per month in rent is sickening.  Buying a place would be at least $600K for a shoebox... and I hope NOT to be here 10 years from now...

Thanks for your thoughts!

Thanks!

As I said in a different thread, there are two questions to ask when buying a house if you don't want to end up frustrated or foreclosed.

1. Will I live there long enough to pay off the mortgage?

2. Can I afford it?

You've already confirmed that you don't want to stay there long enough to pay off the mortgage, so there's no need to look at the second question. It doesn't make sense for you to buy.

TomTX

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Re: Pay down debt or save?
« Reply #6 on: May 12, 2014, 08:56:04 PM »
Save/invest and keep renting. Finding a rent-controlled apartment can be a new hobby - or I suppose it's more of the city sport. Either way.

nawhite

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Re: Pay down debt or save?
« Reply #7 on: May 13, 2014, 07:11:09 AM »
Don't try to time the market. Invest it.

I was arguing that choosing to invest vs save is timing the market. You are making the choice that future returns will meet or exceed historical averages. So regardless of how much we all say don't time the market, this choice is market timing.