Which financial mountain would YOU climb next?

[SavinMaven]

We are both 40, with two school-age kids, high earners in a MCOL area. We are recovering from a hair-on-fire debt emergency that was brought on by sky-high student loans, a period of unemployment, a major real estate loss, significant medical bills, and some good old-fashioned spendypants-ness and poor planning. For the past few years, it's been very clear what to tackle next. We vanquished over $100k in private (read: variable interest rate) student loans, and, all consumer debt (including a car loan and $50k of credit card debt). Now, we have it narrowed down to three choices on how to move forward. On any given day, I can talk myself into or out of any of the options. What would you choose?

The background:
We now max 401k contributions, and currently have $321k in retirement.
We have six months' expenses in liquid savings.
We have $70k in 529s for the kids.
We have no debt left other than #1 and #2 below.

Because of our debt snowball, we have $4k extra each month to devote to our next financial goal - which could be:

1) Paying off the mortgage.
We are 3 years into a 30 yr fixed rate mortgage at 4.15%. We owe $390k and pay $2005 a month.

What appeals: paying this off early saves six figures in interest vs paying it off over 30 years.

What worries me: putting extra money toward the mortgage doesn't reduce monthly expenses/improve cash flow until it's paid off in full, which would take over 6 years. Few ways to leverage equity in true crisis: either sell or get a HELOC, the latter is totally unappealing (it's not a real asset if the same size debt is attached - so this seems to 'erase' the value of the extra payments, until we either sell, or, no longer have a monthly mortgage expense and free up funds that way). And, we have already seen how a drop in the market can eat your equity in a few months.

2) paying off a federal student loan
We owe 189k (no typo) at 1.88% fixed. Monthly payment is $1007. Last payment scheduled to be made in spring, 2040.

What appeals: student loan debt follows your every day on earth - not dischargeable in bankruptcy, IRS can garnish wages for it, etc.

What worries me: cheapest money I will ever be loaned - interest won't even keep up with inflation. Someone very smart (and very rich) once told me to pay this off as s-l-o-w-l-y as possible. And if for some reason I don't live to the year 2040, any unpaid balance would be forgiven.

3) saving and building up new assets.

What appeals: gives a feeling of security. Don't know what the future holds with health, job status, etc. and bigger cash cushions can de-stress a lot of life's bumps. Would be nice to switch gears to building up funds instead of erasing debts.

What worries me: I know just enough about investing to set our 401ks to hit $18k/year, put into index funds with tiny expense ratios. This option would require me to branch beyond that, and make decisions about how/where/when to allocate additional funds and there would be at least some risk of loss of principal (even if that means eaten by inflation in a money market account).

[rpr]

SavinMaven -- You have a very big shovel. At the very least start with an IRA (Traditional/Roth/Backdoor Roth). That should bring the extra down to about 3K/month. Personally, I'd be in favor of Option 3) accumulating in a Taxable account. This does require a bit of planning and learning. The easiest is to just open a Vanguard account and do automatic monthly investing. Set it and forget it.

[surfhb]

Just me but Id stop all retirement contribution at this point and pay off that student loan.  1.88% or not!   $189K is insane!    What did you do to deserve that? :)

Other than that ugly monster, you are looking fine.   

[ixtap]

Does your mortgage still require PMI? If so, I would make my next goal to pay it down enough to avoid the insurance.

[SavinMaven]

Does your mortgage still require PMI? If so, I would make my next goal to pay it down enough to avoid the insurance.

No PMI - we paid 20% down upfront.

[Lady SA]

I think the answer to this question is how stable are both your and DH's jobs? AND how easily could you find another job in your area within 2-6 months?

If your professions are ridiculously stable and you basically have guaranteed income for as long as you want it, then I'd go for saving more in assets.

If either of your professions are unstable or it would be difficult to find another job in your area if either of you lost your current one, then I would focus on paying down your obligations. Your min payments on your debts are massive and would be pretty scary if something were to happen.
also edit: I can see both sides to the SL issue. That rate is super low and mathematically, you would be insane to pay extra toward it. But if there is any question whatsoever of being able to pay this off (you've still got more than 20 years of payments!), these don't go away. But at the same time, that balance is lower than many mortgages and at a lower interest rate too, and literally the only difference between a mortgage and a SL (generally speaking) is the fact that student debt is not dischargeable in bankruptcy. But if that isn't a concern to you, then I might consider those loans like a REALLY cheap mortgage and avoid paying anything extra on those if at all possible.

You can kind of split your monthly surplus down the middle, since right now all those options seem like six in one hand, half dozen the other. Split your leftover money each month and put an equal amount of extra money toward your three buckets: mortgage, loans, and savings.

edit: just wanted to add that the splitting extra money toward both savings and debt reduction is the route DH and I chose. We max all our tax advantaged accounts and meet the min payments on our SLs. Then we have about $2000 leftover every month, so we split it equally: $1000 extra toward the loans, and then $1000 in a taxable brokerage account. Its fun to see both the loan balance reduce significantly, AND your assets rise at the same time.

[MDM]

3) saving and building up new assets.

What appeals: gives a feeling of security. Don't know what the future holds with health, job status, etc. and bigger cash cushions can de-stress a lot of life's bumps. Would be nice to switch gears to building up funds instead of erasing debts.

What worries me: I know just enough about investing to set our 401ks to hit $18k/year, put into index funds with tiny expense ratios. This option would require me to branch beyond that, and make decisions about how/where/when to allocate additional funds and there would be at least some risk of loss of principal (even if that means eaten by inflation in a money market account).

#3 is reasonable, as described in Investment Order.

But, if your taxable investment will be a money market or even some amount of very safe (thus low interest) bond funds, then it would be better to pay the mortgage.

[dreams_and_discoveries]

At those interest rates, I vote for 3.

[FLBiker]

At those interest rates, I vote for 3.

+1, although with the condition that I'm assuming your job(s) are either stable or fairly easily replaceable.  If not, then reducing debt (perhaps by moving) is what I'd do.

[DS]

Just me but Id stop all retirement contribution at this point and pay off that student loan.  1.88% or not!   $189K is insane!    What did you do to deserve that? :)

Other than that ugly monster, you are looking fine.

Even basic online savings accounts are approaching 1.88%. Some are higher with a few conditions met. And even more likely to see a return higher than this investing in just about any index fund, especially over that time horizon of 23 years.

[lthenderson]

Since it sounds like paying off debts would mean a great deal to you even though they are at low interest rates, my answer would be 4) Put half of your extra towards debts and the other half towards accumulating wealth. It doesn't have to be an either/or decision.

[BigHaus89]

Personally, I would choose #3. Having sizable assets, even with a lot of low interest debt, is something powerful. Your debts will continue to go down, but adding to your assets will compound and you will end up FAR ahead in 10-20 years.

[Catbert]

Another vote for #3 with a slight twist.

 I would put part of it (50%?) in a separate account and earmark it for paying off the mortgage.  I'd treat it just it like any other account as far as asset allocation goes.  When the amount in this account = the remaining mortgage balance reassess the situation.  Likely you'll want to keep s-l-o-w-l-y paying the mortgage, but maybe things will have changed.

By doing this you keep your cash flow flexible, get market returns in the meantime  but give yourself permission to pay it off later.

[Slee_stack]

#3

Wouldn't pay an extra dime on the student loans.  Tough balance, but awesome rate!

4.15% is not super amazing, but my risk tolerance would also invest ever extra dollar elsewhere.

[gggggg]

I personally would do half to mortgage and half to investments. I'd leave the low rate student loan alone, paying the minimum.

[boarder42]

#3 easily.

Those on here talking about job stability as a consideration to pay down loans instead. This is actually counterproductive to the risk youre trying to mitigate.

OP. If you invest the money regardless of how you currently feel about job stability you will have more liquidable capital in the event of a job loss to maintain paying on your debt. Even if the job loss was coupled with a market crash as so many like to bring up.

The market returns on avg 11% a year. You will come out miles ahead keeping the loans to term.

[gobius]

Knowing what I know now, I would probably put most of that into the most tax-efficient investments and pay the minimums on the debts.  Maybe $1K/mo or $1500/mo toward debts just to get them lower.  I don't know your personal job situation though.

In my early 20's I had a decent size student loan (much smaller than yours though) and put all my money toward paying it off.  It was during the recession and my job was relatively stable so I should've been maxing a 401k at least.  In my defense, I didn't like my job at the time and was trying to lower my obligations in case I wanted to bail. 

[sisto]

You should really check out this thread:

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

[Lmoot]

I would not pay off the student loan. There are two-year CDs beating that rate and, as someone earlier mentioned, there are online savings that are approaching 1.88%.

If you want to mix-and-match investing strategies and hedging against the future by lowering expenses without compromising investment opportunities,  I would keep paying the student loan off as slowly as possible, save up and make a lump payment towards the mortgage, then refinance if you can find a lower rate, or recast it. This would lower your payment, which might be something you want to do by the time the kids get into college, if the 579 is not sufficient, and also save on interest. Then let the remaining mortgage ride after that, and focus on building wealth.

[Goldy]

Option 3

I’d invest for a couple years then you should have over 100k saved in the investment account at which time you could either make lump payments to the mortgage or use your EF as a payment since you will have plenty of money in your investments

[Villanelle]

Assuming your jobs are even fairly stable, #3.  If that's too uncomfortable for you, put a small amount part of that $4k ($500?) toward the mortgage, but only if it's going to make you crazy not to. 

[boarder42]

Assuming your jobs are even fairly stable, #3.  If that's too uncomfortable for you, put a small amount part of that $4k ($500?) toward the mortgage, but only if it's going to make you crazy not to.

Again how does everyone here fail top understand how an unstable job should lead to investing not mortgage pay down. If you say number three with stable jobs then it's definitely none 3 with anything less stable than that. And your recommendation of 4k a year doesn't accomplish any extra safety in the event of job loss

[Villanelle]

Assuming your jobs are even fairly stable, #3.  If that's too uncomfortable for you, put a small amount part of that $4k ($500?) toward the mortgage, but only if it's going to make you crazy not to.

Again how does everyone here fail top understand how an unstable job should lead to investing not mortgage pay down. If you say number three with stable jobs then it's definitely none 3 with anything less stable than that. And your recommendation of 4k a year doesn't accomplish any extra safety in the event of job loss

Um, not sure where you got that I don't understand that.  If their jobs aren't stable, I'd beef up emergency funds more, then invest.   Assuming they are, I agreed with investing.  If jobs aren't stable, putting all the money in the market might not be the best move, because if job loss coincides with a market crash, he's screwed.  So in the case of unstable jobs, something like a CD ladder or emergency fund might make more sense than dumping it all in stocks.

And I wasn't recommending 4k/yr.  That's the amount per month he has to put somewhere, and what he was asking for advice about.  I said that it mentally he (or she) can't bring himself to invest it all, then putting a small portion of the monthly dollars somewhere else might scratch that itch, but the bulk should still go to investing. 

[Retire-Canada]

I would invest the extra $4K/month. It will take you a weekend to come up with a simple 1-3 low cost index fund investments plan you can then automate. An extra $200K in investments and a $300K mortgage makes me feel far better in terms of financial security than $0K extra in investments and a $100K mortgage. You can default on the mortgage with $50K left if you hit a crisis and had to burn through your EF for other expenses and don't have any additional liquid savings.

[SavinMaven]

Thanks for the advice, I really appreciate it.

Seems like job security should help guide next steps - I would rate that as medium. There's no reason to question either of our jobs right now - but several years ago I would have said the same thing, and suddenly found myself out of work for 7 consecutive months, so I feel like you can never really be sure.

[Villanelle]

Thanks for the advice, I really appreciate it.

Seems like job security should help guide next steps - I would rate that as medium. There's no reason to question either of our jobs right now - but several years ago I would have said the same thing, and suddenly found myself out of work for 7 consecutive months, so I feel like you can never really be sure.

In that case, I'd likely add another couple months to the EF, and then invest.  I'd probably do that by investing $2k/mo and saving the rest, until you reach that goal, then putting the whole $4k into the market.

Where do you currently have your 6mo. EF? 

[COEE]

First a big congrats on killing over 100k in debt.  Very impressive!

I agree with most people's advice to invest the $4k a month.  Low-cost index funds.  Eventually (and quickly) you will realize that it is an emergency fund of sorts in addition to any cash reserves.  You'll also find that you have enough saved to pay off your house and school loans if you wanted to, but you won't want to probably.  It's always better to have liquidity and not know what to do with it than to have put the money into something and realize you wish you had the liquidity.

If you still can't decide what to do, you can send me a monthly $4k check and I'll decide what I can do with it!  :D

[gaja]

We are in a very similar situation, and are having very similar discussions. So I will share some of my reasoning, and you can see if any of it fits your mentality. Most of the folks on this forum are like my husband; run by logic and math. After doing this money thing for a while, however, I've found out that I'm ruled by emotions. (It was a weird discovery, since I usually score as a clear INTJ). If I can find something that motivates me, I will reach the target much faster. Properly motivated, we can cut spending and increase earnings to leave us with up to $5-6k in surplus a month. Without the extra drive, we often only reach 3-4k. That is a much larger difference than the difference in interest between a cheap loan and a good index fund.

Our mortgage is set up similar to a HELOC, with 2.45% interest, and 220k as the upper limit. With the emergency fund, and extra savings for a large renovation that is coming up, we have saved up 70k in that account. This way we are avoiding paying interest on that part of the mortgage, while leaving the money acessible. Our conundrum now is whether to continue "paying down" the mortgage, increase index fund investments, or get rid of a 30k student loan at 2.168 %.

We will probably increase the liquid savings to 100k, to make sure we can cover all renovations we ever want to do on the house (and simultaneously getting the mortgage down below 1 million NOK). After that, I want the student loan gone, while DH wants to put more into the index funds. It doesn't make any financial sense to get rid of the student loan, except that it is annoying me.

Are you ruled by math, or do you feel more motivated by getting rid of some loan, or maybe increasing the savings?

[Dicey]

Number THREE all the way baby!

For reinforcement of the affirmative variety, run your loan amounts/interest rates through an inflation calculator. You'll be pleasantly surprised.

People often fail to realize the value of paying off fixed rate loans with inflation adjusted dollars. If you do not know what that means, Google it until you do. It is powerful knowledge.

[Proud Foot]

I am in agreement with everyone above who said #3 particularly with the reasoning given by Boarder42 and Dicey.

With regards to job safety, think of it this way: You lose your job in 2 years and no longer have an income. You still have your monthly debt payments totaling $3k whether you have been paying extra or not as neither one is paid in full. If you have instead been saving that 4k per month you now have enough to cover those debt payments for a long enough period of time for you to be able to job search and not have to take the first one you come across. 3 months of saving $4k is equal to 4 months of debt payments.

Does your 6 months expenses include the debt payments?

[rpr]

Another vote for #3 with a slight twist.

 I would put part of it (50%?) in a separate account and earmark it for paying off the mortgage.  I'd treat it just it like any other account as far as asset allocation goes.  When the amount in this account = the remaining mortgage balance reassess the situation.  Likely you'll want to keep s-l-o-w-l-y paying the mortgage, but maybe things will have changed.

By doing this you keep your cash flow flexible, get market returns in the meantime  but give yourself permission to pay it off later.

We do something like this. After maxing out all tax advantaged options, we started a taxable account and dump as much as possible into this. I look at this as flexibility money. This gives us more options such as:

1. If we ER before being able to tap retirement accounts, then this could be used to live on while we setup the Roth ladder.

2. If ER after being able to tap retirement accounts, then this could be used to buy another property if we chose to move.

3. Or payoff mortgage if balance is small then.