The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: cyclohexane on April 26, 2021, 11:30:56 AM
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My wife and I have finally had enough with paying interest on every sort of debt there is and we just need some advice on how we should go about doing things because we want more financial freedom.
Small backstory: The first few years of our marriage, I had my wife use all of her paycheck while we lived in a 1 bedroom apartment (that I financed) in order to pay off her credit cards that were 17%-20%. She was not very finessed in finances so it was a good time for me to explain how I had done things to end up where I was (with only student debt). It was a great feeling to have that lifted off. We bought a home and now 7 years later we are where we are. She’s finally got that feeling again of hating debt (I’ve found personally I cannot push her into money issues so I patiently wait for prime times to spring) and wanting to be more FIRE.
Here’s the scenario/stats:
Her income is 72k, mine is 84k.
Between the both of us we have 65,000 total in cash savings.
Her debt is in the form of student loans in the amount of: 41000 and 11000. As well as a family member loaned her 20000 (0% interest, will be taken from inheritance if not paid off).
I have student loans in the amount of: 7000.
We will own our house in about 14 years, $169k later.
This may seem sort of duh, but what should our choice of actions be? My initial thought is the 7000 and 11000 can leave just outright. The 41000 is still in deferment at 0% because of covid relief things. The 20000 is in no hurry as the family member would “get their money back” in some form. Savings would then be around 47000. I don’t like having less than 10000 personally in my bank account because things happen (our roof blew off last year, luckily for insurance it was only 7k to replace everything we needed). So maybe this is sort of a short term deal instead of all right now, maybe across a year and half?
The other factor in this is she would like to go back to school to get her DNP (Doctor of Nursing Practice) which her salary would bump up to 6 figures no matter where she works (and skies the limit as far as being a 1099 NP on the side). This degree will cost $88,000 over the course of 4 years. She will continue to work while she pursues this so income will be coming but we will need about 22,000 a year to pay as we go. We don't want to keep this cycle of debt going.
It seems like if we can just get to that point of radically reducing our debt to income ratio, as well as start making the money we have for us we should be able to do achieve the goal of no student debt and her likely doubling her income to our family with her doctorate.
Tell me what you would do in my situation. I know it might seem like I’m taking it in the chops in finances in our marriage because I was more financially sound in my 20s and she was not, but I believe ultimately removing these barriers and expanding our capabilities as a unit is the ultimate reward in all of this.
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It's hard to tell exactly what you're asking about. The "financial freedom" part has me concerned you're shooting for something like ridiculous living (https://www.realtor.com/news/celebrity-real-estate/dave-ramsey-selling-tennessee-estate/).
Your payments shouldn't be too much to handle with your income, but I don't see anything going into tax-advantaged accounts. I also don't see any mention of interest rates.
With incomes that high, I would want to be maxing out both 401(k) plans to reduce taxes. If you aren't maxing out your 401(k) plans, you're losing at least $8,360 per year to taxes! That likely overshadows any interest on your student loans.
The investment order sticky has good information for where your money should be allocated to get the biggest return and maximize tax benefits: https://forum.mrmoneymustache.com/investor-alley/investment-order/ (https://forum.mrmoneymustache.com/investor-alley/investment-order/)
In your shoes, I would also look into 529 plans (I don't know what benefits your state has) since you've already identified school costs that are on the horizon. In my state, I can deduct the 3.07% state income tax from 529 plan contributions.
By the way, I'm considering paying off our school loans too. A combination of the Covid interest deferral, and not having details on possible upcoming forgiveness plans has me waiting. But we've been out of college 14 years, and our 'stache is built up to $1.5M. We've had the loans tagging along for a while now.
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Great job getting rid of your credit card debt.
I second the recommendation to read the Investment Order post. Also take a look at the JL Collins stock series (https://jlcollinsnh.com/stock-series/), another much-cited reference around these parts.
Are you guys contributing at all to your work retirement accounts (401ks, TSP, etc?) If not, start doing that now, contributing at least enough to get any matching contributions from your employers. I'd also open a Roth IRA as well. Even if you don't have enough to fully fund it, opening the account and starting to regularly put something in will establish good habits for after your debt is gone. The Investment Order post has more details.
I will say that my overall reaction to your post was that I'd be tired by thinking of so many things going on at once in my financial life. Three big student loans, the background shadow of a big personal loan from family, newly saving for retirement, paying for a four-year degree, AND paying off my house, all at once? That's a lot to keep track of (and also, again, makes your paying off of the credit cards a big accomplishment). Keep up that momentum in pursuit of your goals! I'd want to knock out some more obligations as soon as possible, "debt avalanche" or "debt snowball" style. Would there be any shame/guilt/drama if your wife declared to her relative that she'd prefer to be released of the $20k loan obligation in exchange for a smaller inheritance? I am unclear on the logistics of this, as well as why this hasn't happened yet if there'd really be no hard feelings about it, but if it's feasible, that's instantly one less thing to worry about.
No mention of interest rates on the various student loans you have, or if they are private or federal loans, so I'm not sure what to make of those. I know there's COVID payment freezes at the moment for federal loans but I assume those will go away eventually. After putting so much household effort into paying off your wife's credit cards, maybe it's time to focus on clearing YOUR financial house and wiping out your $7000 loan? Again, not sure how the numbers would run on that relative to your other debts, but that might be a psychologically satisfying next step for you.
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Tough to give specific advice without knowing the interest rates on these student loans, but it sounds like you're responsible and committed enough to use something like the debt avalanche method to chip away at those debts. The added costs of your wife's DNP might seem overwhelming, but if you're able to knock out one or two of the smaller student loans now, it should be manageable, especially with higher incomes. If interest rates are similar for all 3 student loans between you and your wife, it might make the most sense to start with paying off your $7k loan. Best of luck!
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The DNP is probably worth it, and it sounds like the question is how to finance it without financial crazy-making.
How much equity do you have in your house? If possible, I'd be tempted to do a cash-out refi to pay for the degree. The interest rate would almost certainly be better than a Grad Plus loan (currently a fixed 6.28%) or whatever you could get on the private market.
I'd use the cash to pay off as much old debt as possible, effectively consolidating your debt in your mortgage. The terms are likely to be better than a bunch of unsecured notes, and it makes things simpler, both practically and psychologically.
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Is this relative really ok with being delegated to the lowest priority?
It was really great they helped out with 0% loan, it would be a shame to take advantage of that.