Author Topic: Pay off very low interest student and car loans? Or invest while market is down?  (Read 1541 times)

realizedSomeday

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I would LOVE some opinions on all this...

Current Life Situation:
Single Head of Household. No dependents, no pets. Age 44. Computer Graphics Supervisor/Landlord in California, working 40-50 hours a week.

Life I Want to Live, starting July 2023:
- Have a lot more time to make music and art, especially starting in July 2023. I could postpone to December 2023 as well, but after that I don't think I could because I'm burnt out from a lucrative but high intensity art production job.
- Live off 2-3k between India and a lower of cost living in the US
- Ideally earning an average 2-4k monthly: 1k from rental (conservatively, this could be a little higher up to 1.5k net), and 2-5K/monthly through a lower paying remote teaching job, or higher paying but less time consuming contract job (in other words only 6 months of working a higher paying, short term job).

Current situation from now through July 2023, if I stick to my plan for now:
Current Gross Salary/Wages (not including rental): 165k. AGI 126k for 2021. Would like to quit June 2023. Taxes: 21k - this will probably go up a bit for tax year 2022.
Current Gross Salary/Wages (including rental): 215k  (50-60k...This income started mid-2022 with renting out my house and granny cottage for $5000, before expenses).

I’ve maxed out my pre- and post- tax options for the year 2022: 401k, Roth IRA, FSA.

I have about 30k in liquid non-retirement stocks, and about 8k in cash accounts.  In a pinch or extreme emergency, or if I wanted to use additional retirement savings to kill the debt, I could withdraw up to 34.5K from my ROTH IRA without taxes and fees because that is what I have put into it since 2016.  I could also loan against my 401k while I'm currently employed, up to 18k, which would be a higher interest rate of 6.5%, but at least the interest I'm paying goes back to myself.

Mustachian FIRE note/comment:
With a current networth of 500k (between house equity of 300k and 200k in retirement accounts), I know I am not at FIRE right now on those numbers alone.  But I feel a soul-crushing burden of working so much right now in my current situation. 

PLUS, it also seems like I will have PLENTY in "official retirement age" of age 59.5 and beyond because of:
- Ability to draw down on retirement accounts like ROTH IRA, Traditional IRAs, and 401Ks, if need be, without fees and penalties, or even income tax on the ROTH IRA growth.
- I anticipate at least 2-3k of social security at age 62.5 (obviously higher if I wait until age 65 or 70)
- I anticipate earned income from "choosing" to work even if I don't have to
- In 13 years, by age 56, I would have much more $$$ from the rental with no mortgage.  And if I refinanced into a lower monthly payment in 5-8 years under a longer term, that monthly rental income could increase...but the idea of paying that much interest isn't appealing...but I'm open to feedback from others on this!!
- An inheritance of probably 1 or 2 million in the next 10-20 years.

So I find myself in a situation where I will have plenty of money starting around age 56 - at least 50-60k from a fairly passive job of having a rental property, and my income would only go up from there.

So I want to find a way over the next 10-12 years, to live the life I want to live. 

But in order to do this, I can't decide if I want to, or even really need to, kill the student and car loans.  After all, the income from the rental could cover all of it (5000k gross rental income covers expenses of the rental, my mortgage and my student and car loans).  And then I could invest the $7250 extra monthly income I have now for the 9 to 16 months.  Since I am confident that I would be able to get a lower paying job but less time-consumptive remote teaching job, or have a less time consumptive higher paying job for shorter periods of time starting in July 2023, I could easily live off the 2-3k income from those earned income options, and then I would have the 100k in the stock market versus having used it to kill the very low interest debt. I could also invest now, in the hopes that money earns a little extra in the stock market, and then in June 2023, or December 2023, cash out to pay off the student and car loans to get rid of those monthlies.

So, bottom line questions on my scenario are:
Do I aggressively pay off my student and car loans to free up the additional $1400 monthly payments of those?  I could probably polish these off by the end of 2023 or sooner (total is 100k in loans - see below).  The idea of not having monthlies is amazing, but on the other hand the interest is SO LOW that maybe it makes more sense to invest right now since the market is SO LOW.

Current Loans:
$2930 Mortgage. 2.25% interest. 15 year term. 13 years left. $2300 P&I. $630 taxes and insurance. (354K original balance, 319k remaining)
$831 Student loan 2.95% interest. 10 year term. 9.5 years left. 86k original balance, currently 71k remaining, as I have paid off some extra principle)
$548 Car loan. 2.49% interest. 6 year term. 4.5 years left. 36.5k original balance, 28.5k remaining)
No credit card debt.

____________NET INCOME__________________________________________________
Through June 2023, my net monthly income is (after taxes, rental expenses, and personal life expenses):
$7230

After June 2023, if I decide to work through December 2023, I could either continue at this net income rate or maximize my 401k and Roth or traditional IRA. So my Net income would go down if I max out those retirement accounts (which is probably a good idea so that my tax liability is reduced).  I really don't want to work my current situation past 2023. And obviously if I quit, my net income would go way down.


____________NET MONTHLY INCOME DERIVED FROM THESE NUMBERS________________
GROSS INCOME THROUGH AT LEAST JUNE 2023:
$8200 (from job, earning 165k yearly, already maxed out pre and post tax accounts - I could keep this up through June 2023)
$5000 (from rental)

Monthly Personal Expenses
$1800 housing (only renting through June 2023, starting July 2023, I anticipate spending less than $800/month on housing through a shared living situation).
$170 Phone, internet, EV charging
$250 food
$300 miscelleneous (repairs, surprise expenses, fun)

Monthly Rental expenses
2950 (2.25% interest. 15 year term. 13 years left. $2300 P&I)
$500 (utilities $45 trash, $80 water, $150 gas/electric, $55 wifi, $52 pest control, miscellaneous)
4k cash reserve for emergencies

THANK YOU FOR READING AND CONTEMPLATING AND SHARING!!!

dandarc

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On the 401K loan - your interest rate is not the interest that you pay back to yourself. It is the investment return you lost while those funds were out of the market. Which obviously cannot be known with any certainty in advance, but depending on how you're invested might reasonably be estimated to be in the 8-10% range with a typical stock / bond ratio.

The extent to which you can make the cash-flow work for you does have bearing on what you decide to do regarding the loans, but personally I'd do everything I can to hold on to under 3% interest rates loans as long as I could. Taking money out of investments, whether something like withdrawing from your Roth IRA or taking a 401K loan, or by funneling "new money" to those loans vs. your investment accounts is going to cost you a lot of money over time. See the "Don't Pay Off Your Mortgage" thread for more of the math on this.

dandarc

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Also on the 401K loan - you have to pay it back in full upon separation from the employer. When you're contemplating leaving the job in under 18 months, that can be a big deal.

nereo

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I’m having a very hard time understanding why you would want to get rid of sub 3% loans given your situation and the current economic environment. There’s no cash flow risk, these loans aren’t likely to be obtained again in the near future. Why pay to get rid of these gems?

realizedSomeday

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Thank you for your replies!

Good feedback about the cost of the borrowing against the 401k being the cost of the growth.  Yes, I'm aware of needing to pay those loans off if I walk away from the job.  Plenty of cash to pull from other areas if I do that...The idea behind that was that at least I wouldn't be paying the interest to someone else. I'd be paying it to myself, able to knock out the car loan between the 18k loan and my cash reserves in a matter of weeks.

The only financial reason to pay off the loans would be to free up 1.4 cash flow if I go to a lower paying job.  Also, if I aggressively pay off the sub 3% loans, that would save me about 15k in interest over the next 10 years.

The only "mental" reason is to feel free-er from debt.  Somehow I have a feeling that any debt is bad.  But this might be an error in my thinking and attitude that I need to shake off.  I will read the don't pay off the mortgage thread.


Villanelle

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Thank you for your replies!

Good feedback about the cost of the borrowing against the 401k being the cost of the growth.  Yes, I'm aware of needing to pay those loans off if I walk away from the job.  Plenty of cash to pull from other areas if I do that...The idea behind that was that at least I wouldn't be paying the interest to someone else. I'd be paying it to myself, able to knock out the car loan between the 18k loan and my cash reserves in a matter of weeks.

The only financial reason to pay off the loans would be to free up 1.4 cash flow if I go to a lower paying job.  Also, if I aggressively pay off the sub 3% loans, that would save me about 15k in interest over the next 10 years.

The only "mental" reason is to feel free-er from debt.  Somehow I have a feeling that any debt is bad.  But this might be an error in my thinking and attitude that I need to shake off.  I will read the don't pay off the mortgage thread.

Look at it this way.  You have $1.  That dollar can either save you 3%, if you put it toward a loan, or it can make you--on average--7% in the market.  So, which is better, 3%, or 7%?  This is a bit of a simplification, but it's why I'd invest and keep the loans.

nereo

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The only "mental" reason is to feel free-er from debt.  Somehow I have a feeling that any debt is bad.  But this might be an error in my thinking and attitude that I need to shake off.  I will read the don't pay off the mortgage thread.

Yup. Classifying any debt as “bad” is generating an emotion to something that should be evaluated objectively. Using debt constructively can generate wealth. Using (or getting rid) of it poorly and it can be a needless financial anchor.

JAYSLOL

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So for me, with the exception of a mortgage*, I avoid all debt**, because adding the allure of easy payments to something I could just save up and pay cash for like a new set of couches, or a car or even (debatably) college, opens up the possibility that I’m going to spend a lot more than I actually needed to because easy payments don’t hurt like writing a check or paying cash.  Since your debt is pre-existing, the decision has already been made and there’s no longer a good reason to pay that off early if it’s a low interest rate, investing everything above those payments will in all probability be the best financial move. 

(*because of the sheer size of the purchase, as well as the fact that it’s an appreciating asset not a depreciating one)
(**I don’t count using a credit card that gets payed off every month as debt, I do use credit cards.)

realizedSomeday

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super. Thank you all for your input!  Helped me reset my thinking.

 

Wow, a phone plan for fifteen bucks!