Author Topic: Taxable account vs debt repayment  (Read 1759 times)

millennialonfire

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Taxable account vs debt repayment
« on: January 18, 2017, 06:38:09 AM »
My spouse and I would like to have a baby in 4-5 years. We have a few debts that are preventing me from quitting my full time job. Once the monthly payments are covered we could easily live off a single income.

Student loans ~ $25K @ 3.5% - monthly payments $250

2 Car loans ~ totaling $30k @ 1.75% - monthly payments totally $650 (about 4 years left). I know mustachian thing to do is get rid of these but spouse won't cooperate.

Mortgage ~ $100k @ 2.875% - 15 year fixed rate.

I can use online debt repayment calculators to realize that with our current savings rate we could pay off all of these debts in about 7 years. However, I would love to be able to stay at home with our new child once they come. With such low interest rates on the cars and mortgage, I was thinking about paying off all the student loans ASAP and then putting all the extra cash that was going to debt repayment into a taxable account. Once I had enough in the taxable account to cover the remaining payments for the car and the mortgage I could quit my job and pay the remaining debts at the current schedule. This plan still might take 5-6 years of saving. Can anyone see anything wrong with investing in taxable rather than paying off debts? We are not maxing every tax advantaged account but my spouse plans on working until 52 when we will get a sizable pension. I feel confident about our retirement savings but just trying to strategically pay for our current monthly obligations.

Laura33

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Re: Taxable account vs debt repayment
« Reply #1 on: January 18, 2017, 07:13:09 AM »
At those rates, I wouldn't be in a hurry to pay anything off, as history suggests that investing your money will provide a greater return (FWIW, I grew up when 9-10% mortgages were standard, and I always prepaid, because that's what my folks did.  But when we refi'd into the exact same mortgage you had, I said, wtf, why would I want to pay this off early?  Because if the market doesn't return better than 2.875% in the next 15 years, we have much more serious problems and I can forget about retiring period!).

That said, if you are cautious, I can't disagree with getting the student loans paid off.  I am all about security, so for me, "what happens if everything goes into the shitter" is a driving question (learned the hard way, a/k/a DH laid off when I was 8 mos. pregnant).  If the worst happens, you can sell your house to pay off the mortgage; you can sell your cars to get out from under the car notes (assuming you're not upside-down); you could even declare bankruptcy if you ran up massive CC debt.  But those student loans are not dischargeable and will stick with you until you pay them. 

So if you were me, I would get rid of the student loans, pay the cars and mortgage on schedule, maximize your tax-advantaged accounts, and throw all the extra at a post-tax account.  Then, by the time you are ready to have a kid, you will have $900 less in current expenses (student loans and car loans gone), and a nice pot of money that can help cover those annual property costs if you need.

Frugalman19

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Re: Taxable account vs debt repayment
« Reply #2 on: January 18, 2017, 07:22:38 AM »
I would pick one or 2 of the loans and just focus on that to get the payment away, but I wouldn't go crazy, have a bunch of cash is a big safety net. What is your income like? It could be a matter of buckling down for a year or so and getting a lot of this cleaned up.

millennialonfire

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Re: Taxable account vs debt repayment
« Reply #3 on: January 18, 2017, 07:40:54 AM »
Our combined income is around $90k We would drop to about $50k if I were to quit. We currently save about 25% of our gross wages. Risk is not the reason I think about paying off debt. I want to pay off the debts because I cannot afford the monthly payments without my income.If we could find a way to cover our monthly expenses and let the market give us greater return than our debt's interest rate I would be very happy. My spouse does not want to retire extremely early so we can live off one income while letting our accounts compound until my spouse turns 52.

yachi

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Re: Taxable account vs debt repayment
« Reply #4 on: January 18, 2017, 08:19:16 AM »
You could write a "Case Study" to see where mustachians can help trim other expenses.  If you'll be in the 25% tax bracket with your spouses' income, your new little one will save you $2,012 in taxes yearly.  I wouldn't fret about paying off the student loans at 3.5%. While it's true you can't get rid of them with bankruptcy, there may be programs for temporary deferment or reduced payments in cases of job loss.
I don't see any problems in keeping a taxable account.
I keep over a year's salary in a taxable account.  It built up faster than I could put it into tax advantaged accounts.  I used it to fund a rental house purchase, then I took out a mortgage on the rental house and refilled the account.  I count on it for my safety fund.  So it can be very flexible.  If you're in a low tax bracket, however, a Roth IRA is a great place to store money.  You can withdrawal whatever you contributed at any time without penalty (not the interest thought, and you'll need records to show what went in, and there is an IRS form to fill out).
The drawback of a taxable account is every time you sell something for a gain, it gets taxed whether the money left the account or not.  You can offset gains with losses but losses have been rare for me.

Frugalman19

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Re: Taxable account vs debt repayment
« Reply #5 on: January 18, 2017, 08:21:30 AM »
Debt is risky, especially when talking about only having one income.

Gin1984

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Re: Taxable account vs debt repayment
« Reply #6 on: January 18, 2017, 10:46:22 AM »
Well if you have a kid in four years, the car would be paid off cutting $250 already.  Could you save up $100,000 in addition in four years? 
Do you have anything else that you could cut that would cover the mortgage payment? 

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