Author Topic: Reader Case Study - Pay down debt or start investing?  (Read 3969 times)


  • 5 O'Clock Shadow
  • *
  • Posts: 2
Reader Case Study - Pay down debt or start investing?
« on: June 22, 2015, 03:37:52 PM »
Okay Mustachians,

I just discovered the Mr Money Mustache Blog a couple weeks ago and want to join the Badassity but I need some help! My wife and I were living a very anti-Mustachian lifestyle up until the beginning of this year so we're still phasing out some old habits. 

We make, together, around $6,250 after Health Insurance and Taxes (Health insurance is about $340 a month).

Currently have $5,000 in an emergency savings account, earning 1% (That's about two months job loss protection for either of us) So far this year we've paid down almost $10,000 of credit card debt and are now credit card free! However we still have debt as follows:

Mortgage - Current Balance $115k (9 years remaining at 4.46% APR) (About 60k in equity)
Student Debt - Current balance $59.4k (Currently in default, Average Interest/Penalties of 5.2% APR)
2012 Toyota Camry - (I know I know, please don't punch me in the face too hard) - Current Balance ($17,500 6.75% APR) (Bought it used last year)

Recurring Expenses:
$1,350 – Mortgage (Principal and Interest)
$771 – Mortgage (Taxes and Insurance)
$860 – Charities (Non-Negotiable, one of our joys)
$334 – Car Payment
$320 – Groceries
$320 – ChildCare (9 Months a Year)
$300 – Gasoline (Can cut this down more I think)
$200 – Electricity (About $100 in non summer months, About $350 in summer months) (Texas heat Ouch!)
$90 – Auto Insurance (Full coverage on the Camry for both of us, loan requires full coverage)
$80 – Dining
$80 – Water and Garbage
$55 – Pool Service (Okay it's embarrassing now that I type it in, I need to in-source this)
$52 – Internet
$50 – Miscellaneous (Pet Food/Litter/Vet/toiletries/cleaning supplies)
$50 – Fitness Membership
$40 – Heating Gas
$35 – Phone Plan
$20 – Wife's Haircut ($40 once every other month) (I use the universal Men's grooming Device myself)
$9 – Netflix (Got rid of Cable)

Total Recurring: $5,016 (Yucky I know, but we're just happy it's less than we make now. Not trying to justify higher spending but the condensed mortgage and our charity giving make up 60% of our spending)

This puts us at $1,234 in savings left over each month.

I ran some basic numbers on early debt payoff calculators and came up with this rough plan from highest interest debt to lowest:

If paying that savings towards the car, it will be paid off in 15 months. Then we get back the car payment and have a margin of $1,568

If we put that towards the student loans next, they will be paid off in 3.5 more years. So 4 years and 9 months from now.

At that point we will have 4 years and 3 months left of house payments. We could potentially pay it off 2 years early if we put all the money into the house and save about $3,000 in interest. When the house is completely paid off we'll have $2,989 left over each month!

If we cut out the pool service and squeeze another $50 a month out of gasoline we’ll be saving right at 50% of our take home pay!! I know that doesn't sound like a lot by Mustachian standards but that's been our goal since we started our new frugal life!

Additional Details:

I know that MMM believes that owning a home is part of investing and we feel good about getting the shorter loan term even though it's a squeeze in the meantime. We don't have any employer matching in our 401k options. My wife is a teacher so our kiddo will go with her to school when she's old enough. We also drive a old Jeep Wrangler that is on "permanent loan" from a family member for free, but don't want it to be our only vehicle in case they decide they need it back all of a sudden. Our commutes are 10 miles and 15 miles each way in opposite directions so we're kind of stuck there but I moved jobs so that my commute is no longer 70 minutes each way!

Okay that's a lot of background to ask a simple question: Does it make more sense to pay down all this debt before we start investing for retirement? I feel bad about not having my green employees working for me but I know I can get a "guaranteed return" by paying off the debt hole that we're currently in.

Okay my face is ready, please be brutal where you need to be. But a little encouragement is nice too! What do you think?


  • Walrus Stache
  • *******
  • Posts: 7372
  • Location: Sydney, Oz
Re: Reader Case Study - Pay down debt or start investing?
« Reply #1 on: June 22, 2015, 04:02:21 PM »
I think you've got a reasonable plan. Car, Student loans, mortgage. Keep the car for the next 15 years lol, take good care of it and budget for appropriate servicing and maintenance.

$860 – Charities (Non-Negotiable, one of our joys)

Everything is negotiable. $10,000 a year? Can you claim that as a deduction against income when it comes to tax time? Not sure of the rules over where you are, but donations to charities are deductible here.


  • Pencil Stache
  • ****
  • Posts: 570
Re: Reader Case Study - Pay down debt or start investing?
« Reply #2 on: June 22, 2015, 05:29:30 PM »
Agree with the suggestion to cut the charity giving a bit, though much respect for it. Could you cut back on the $$$ and invest more time? It's just hard to see it make up such a large percentage of your pay when you're bleeding from the ears with $60k of student loan debt and a $17k car loan. Also - good work on cutting cable and being a one car family.

I'll hold the face punches, but am somewhat alarmed by that xMortgage debt. My recommendation is to invest just enough to achieve any match and then dedicate all remaining income to getting rid of it. However, does your wife qualify for student loan forgiveness if she remains at her job long enough? If so, I'd just pay the minimum on her loan. Couple ideas on costs

1. Can you sell the car and get something more reasonable? I'd still recommend full coverage as until you eliminate the debt and build savings, a total accident would hurt.

2. Pool service - Potentially the best advice you'll get: - this site will walk you through SIMPLE pool maintenance to dramatically cut costs. Basically, you just use household bleach to maintain chlorine and barring bad weather, PH and alkalinity should stay controlled.

3. Do you need the fitness membership? If you use it regularly, fine, but if it's one of those things that just lingers and you "mean" to use it, I'd ditch it.

4. How far away is work that you need to burn that much gas a month?


  • Handlebar Stache
  • *****
  • Posts: 1950
Re: Reader Case Study - Pay down debt or start investing?
« Reply #3 on: June 22, 2015, 05:57:55 PM »
You are/were donating $10k/year to charities while paying off credit card debt and defaulting on student loans?

It is time to think of yourself as a charity.
« Last Edit: June 23, 2015, 05:55:40 AM by kpd905 »


  • Pencil Stache
  • ****
  • Posts: 570
Re: Reader Case Study - Pay down debt or start investing?
« Reply #4 on: June 22, 2015, 07:24:42 PM »
Oh crap, totally missed the part about student loans being in default! What's the deal with that OP?

Are you not paying it at all? How can you claim to have any "savings" when this is the case? How far away are you from when the government will start garnishing your wages?


  • Pencil Stache
  • ****
  • Posts: 656
  • Age: 42
  • Location: Los Angeles, CA
Re: Reader Case Study - Pay down debt or start investing?
« Reply #5 on: June 23, 2015, 04:02:31 AM »
Are you certain that both of you won't be taken out of work by an emergency? I'd consider getting that emergency fund up a few thousand more.

How's your credit? I would think you could refinance into a 10 year mortgage lower than 4.46%. With that student loan rate, I'd consider doing a 15 year mortgage (or 20 depending on the rate you can get) just to free up more cash for the car and student loans. Your student loan interest and mortgage interest are a tax write-off - the car isn't.

I would absolutely look into your retirement options (especially your wife's) once the car is paid off. Investing vs paying off mortgage is a very personal choice, but at the same time, you have to consider that having everything in real estate (and none in investments) is basically putting all your eggs in one basket. It's not very diversified, IMO.

I think there's a mindset that changes when you shift from getting out debt to wealth building. From a debt perspective, the focus is the money you're losing in interest. From a wealth standpoint, it's about your net worth (even if that means having debt) and compensating through compound interest. There are times when you can leverage your debt (meaning, not pay it off quickly) in order to build up investments. In your case, I don't think it's good to leverage your student loan debt, but it might be worth leveraging your mortgage - especially if you can get it under 4%.


  • Magnum Stache
  • ******
  • Posts: 3053
  • Location: Emmaus, PA
Re: Reader Case Study - Pay down debt or start investing?
« Reply #6 on: June 23, 2015, 04:31:43 AM »
Nobody seems to have said this yet: despite the progress you've made, YOU ARE IN A DEBT EMERGENCY. YOUR HAIR IS ON FIRE.

You have loans that are in default! Even worse, all your interest rates are above 4%. I'm wondering if you're better off with a different car, but these things are extremely clear:
  • You cannot afford a pool service. You may not be able to afford a pool.
  • Given that you have a pool, there is absolutely no excuse for a gym membership, even in Texas summers. You can work out on your own property even when it's 105.

I'm guessing that your credit is bad due to the loans in default, so you won't be able to get a decent refinance. You may be better off selling your house, pouring the $60k in equity into your debts, and renting until you are debt-free. After selling the house you should be down to about $20k in debt - way more manageable.


  • Magnum Stache
  • ******
  • Posts: 3333
Re: Reader Case Study - Pay down debt or start investing?
« Reply #7 on: June 23, 2015, 06:13:25 AM »
First of all, congratulations on paying off the credit card debt!  That is quite a liberating feeling.

Beyond that, you probably won't like what I have to say. I agree with ShoulderThing that you are in a hair on fire emergency.

Also, I have a general concern that some of your bills are reported exactly (mortgage, internet), but many others are rounded.  For example. you say you spend $320 on groceries and $80 on dining out.  I spend $357 on groceries, so I can't throw stones at your number there.  But is your grocery number even a real number? How long have you tracked it? Oh, and you can't afford to be eating out right now . . . at all!

You need to be paying down the student loans. Period. I will say you need to sell the car and get something for about 1/3 the price.

Why are you even talking about paying off your mortgage early when you have NOTHING saved for retirement!? I agree with Spondulix that you need to work on a slightly larger cash cushion to avoid falling back into credit card debt (especially since you own and home and could have a giant bill if something like the AC goes out.) If you don't have children, I agree that selling the house to kill the debt and start fresh might be your best option, but I don't really have enough details about that to make a decision. If your credit is really shot, then it might be difficult to requalify for a mortgage for a long time, in which case I say stay in the house but definitely FORGET ABOUT paying it off early right now. I've done the math: paying off the mortgage is your lowest priority right now.

You should each also pay yourself first a small amount every month in your respective employer retirement accounts . . . go with an equal amount for each of you in your two separate accounts.  That is TAX DEFFERED BENEFIT that you are giving up!  Even without any company match, it's still a great benefit to you financially.

Good luck!


  • 5 O'Clock Shadow
  • *
  • Posts: 2
Re: Reader Case Study - Pay down debt or start investing?
« Reply #8 on: June 23, 2015, 08:02:54 AM »
Thanks very much for all the input!

I appreciate all the ideas, here is some more information:

On a few items I'm willing to give them up but I'm trying to convince the wife they need to drop. (Fitness membership is hers, she is having a difficulty giving up dining altogether, professional haircuts)

I have a gym membership I use four times a week, my company reimburses me so the impact is zero. The gym is right across the street from my job so no extra mileage on the car. Actually may be saving me money considering I take all my showers at the gym before work.

Yes with our mortgage interest and charitable giving we save some money on taxes because we itemize our deductions. But that's not the purpose of our giving, it's more to aid people that are in far worse situations than we are. We don't mind delaying our Financial Independence if some kid gets to eat tonight because of us.

I've paid off about $6k in student loans that were government loans. The other loans cannot garnish my wages since the debt has crossed the statute of limitations in Texas. I was saving up a chunk and paying off individual loans one at a time since they have been in default so long most will not accept a payment plan. They are all mine so no debt forgiveness options available. (If I had known then what I know now I never would have picked an expensive college.)

As far as rounding my numbers. Those are the "thou shalt not cross this budget" numbers. With the exception of electricity which is hard for me to pinpoint. I've been tracking Groceries for the past six months. Family of 3 here but we can consistently get under the $320 number ($80 a week) so I'm fairly confident we can stick to it. We cut out a lot of processed food and alcohol and our bills have been even lower recently.

With the home, that's kind of a sticky situation... It's my wife's childhood home and we bought it from her parents. So selling it is really out of the question. Also, I'm not sure I'm calculating the equity correctly. The original mortgage was $176k but for example the "zestimate" is $250k and the Tax Assessed value is $210k. Refinancing at this point with our bad credit is not really an option. Thankfully I've convinced the wife that after we're done having kids at home we can move to a smaller home WITHOUT a pool. Thanks for several people mentioning that investing is a higher priority than paying the house off early.

Honestly I haven't tracked Gasoline in a while. It might be lower now. I traded in an old gas guzzling full size van when we got the Camry. Mixed feelings about trading in a paid off vehicle but the repairs were starting to be more expensive than the van was worth. Now I realized I should have spent a lot less on a replacement vehicle.

We do make a little more money actually, I usually get a few hundred dollars as a bonus once or twice a year. She does educational camps in the summer and might make between $1-2k a summer. It's not a lot but that's what we put into our "emergency fund"

Things I can do immediately:
Drop the pool service
Squeeze the dining budget further
Track my gasoline this month and see what our new level is at.
Find out what my actual averages are for groceries/dining/electricity/gasoline I suspect they are better than the numbers I threw out there since those are budget numbers we stay below.

Some of you guys are inspirational! I'm still flexing my baby frugality muscles. More extreme stuff is hard for me to sell to the family but I'll seriously consider some of the more intense suggestions!


  • Magnum Stache
  • ******
  • Posts: 3053
  • Location: Emmaus, PA
Re: Reader Case Study - Pay down debt or start investing?
« Reply #9 on: June 23, 2015, 08:19:42 AM »
Can you break out your student loan balances? People might have some more ideas based on that.