Author Topic: Pay off debt or save for investing?  (Read 1575 times)

JordanOfGilead

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Pay off debt or save for investing?
« on: November 23, 2015, 11:46:35 AM »
I currently have 3 sources of debt.
1- Car loan (before I discovered fiscal responsibility) - 1.9% APR
2- Student loans - ~5% APR (the interest rates are divided into individual loans from each semester I attended school, but are lumped together by my lender under the umbrella of one account. The weighted average APR is about 5%)
3- Personal loan (also before I discovered fiscal responsibility) - 2.99% APR

I am in the process of getting my debt situation under control by maintaining 0 balance on my credit card and making minimum payments on the car and personal loans while dumping all monthly surplus into my student loan. This plan has me on track to be debt free exactly 4 years 11 months from when I graduated from college.

My question is what to do with (un)expected surplus income. An example would be a potential annual performance bonus offered at my company. I have a 401k that I am putting the minimum to get the full company match into and an IRA that I put 10% of my net income into, but I don't have any real savings or investment beyond that since I've been focusing on paying off my debt.
Would it make more sense to take the bonus and put it toward my debt, or to open an index fund account with vanguard?

I'm not sure what kind of returns I should expect on index funds in the next couple years, but my thinking is that they would have to be greater than 5% after inflation to justify investing over paying off my debt sooner. Since there has been a lot of talk of the market taking a dip soon/the fed inevitably increasing their rates, I am leaning toward holding off on investing until I am debt-free.

-Edit-
I intentionally left out the size of the loans. They are both embarrassing and irrelevant since I am putting a set amount toward paying them off monthly and this amount has already been calculated into my budget.
« Last Edit: November 23, 2015, 11:49:10 AM by JordanOfGilead »

Alex321

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Re: Pay off debt or save for investing?
« Reply #1 on: November 23, 2015, 11:53:57 AM »
The answer is "Yes."

Do whichever. Or both. But I will say that there is always talk of the market taking a dip soon. People expect the Fed to raise rates, so it's already "priced in." They raise rates when the economy is doing relatively well. That's a good thing.

TheOldestYoungMan

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Re: Pay off debt or save for investing?
« Reply #2 on: November 23, 2015, 12:07:53 PM »
I am not debt free and have significant savings.  It's a little over ten years since I finished college, and I went the route of making minimum payments on reasonable interest debt, and saving/investing the rest.

Mathematically, I am best off because of this.  That's just how it works out, the return on investments has beaten the interest I've paid on debt.

However.

The difference is minimal.  I estimate I'll be able to retire as much as 27 days earlier by doing this instead of paying off the debt first and then investing.

So for an extra 27 days of not working I'll have endured the weight and stress of debt for the last ten years plus another 15.

Your mileage may vary, but when it comes to achieving a certain net worth, paying down debt has all sorts of risk-adjusted benefits over chasing hypothetical returns.

If I had it to do over again, I'd eliminate the debt as quickly as possible, to the point of cutting down lifestyle/working extra jobs to make crazy progress.

Exflyboy

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Re: Pay off debt or save for investing?
« Reply #3 on: November 23, 2015, 12:14:38 PM »
Yes I feel the same way.. I paid off the mortgage at about 5% back in 2003.

Sure I could have made more but the "sleep at night factor" was very comforting. I mean what if I had lost my job and the market had just tanked?