Hello!
I'm a 26 y/o professional and budding Mustachian wondering about the value of paying off my student loans v. making contributions to my Roth IRA account. I generally understand the principle of paying off high interest loans, but I think I need help understanding the math and calculating where I should be putting money to make it work for me best.
Student loans: $12,077 at 6.8% fixed
I was paying minimum $125/month but realized I should pay more like $500, so I recently dumped a couple thousand into the payments and also increased my monthly payment.
Roth IRA (value): $2,611
I contribute $300/month, which just over 10% of monthly take-home income
I have $111 in returns since inception - February 2014, so approx $2500 is my own contribution. I work for a nonprofit; no contributions are matched and there is no 401k program.
Question: Should I redirect all $800 (student loan payment + retirement contribution) into my student loans to be debt free faster?
I wasn't sure how to figure this out, so I made an excel sheet and played out paying $500/month for 1 year versus paying $800/month for the same period. Paying $500/month: at the end of one year, my principal was reduced $5815.77 with actual payments totaling $6000. Paying $800/month: at the end of one year, my principal was reduced $9849.13 with total payments totaling $9600.
I know that paying more will result in significantly lower total at the end, but is there more data I should be playing around with? Is there a net "gain" I can see from paying off loan faster? At a loss for useful math, I thought it would be interesting to see the difference in the amount of my payments used against the principal in either scenario, so I divided each ending principal by the amount paid over 1 year, which gave me a percentage of the payments that was actually paid against the principal, but it was a (seemingly) negligible 96.9% (in the $500 scenario) versus 97.47% (in the $800 scenario).
I'm also not sure how to compare all this against my Roth IRA, which does not have a fixed interest rate by which to calculate growth. I know that the stock market is variable, but can I use rough 4.4% interest in a calculation? (111 in gains /2500 purchases). If so, what calculation might I make?
I guess my overall question is: if I have $800/month to put toward reducing my student loans or growing Roth IRA, how should I use that money?
Other context: I want to reduce debt so I have good debt-to-income ratio to buy property. My credit score is currently around 750. I have no other debts, and a car worth $2500. I have money saved for 6 months of expenses. I haven't addressed saving for a down payment, because I figured getting out of debt was more important. But I'm also thinking about how buying property would also redirect money from rent into (hopefully small!) mortgage, which means saving that down payment should also be a goal.
Subquestion: If the right answer to above question is throwing all money at student loans, is there also a sweet spot at which the difference might be negligible (as student loan interest accrual decreases each month), and I could start putting money back into investments/savings?
Thanks for any help/insight!