Undecided on how to allocate funds i.e. debt, invest, both.

[EchoStache]

Grab a cup of coffee and a snack; I couldn't figure out how to present this in 100 words or less. 

I've been devoting a lot of mental energy lately on how to allocate our excess income for the near future or perhaps even all the way out to retirement.

I like to have a very clear plan.  In the end, I suspect that it won't matter greatly in the grand scheme of things, and that any path that I outline below will have good results.  Regardless, I have found it difficult to land on a particular path that I feel great about, with conviction.  Therefore, I thought perhaps I might get some input or responses, or perhaps even just a perspective on the situation, that might help me lock onto a plan I can feel content with.

The goal, as with most(all?) on this board who have not yet achieved it, is FIRE.  My best estimates on a timeframe for FIRE are 6-8 years which will be age 57-59 years old.  So I have a late start and time is of the essence.  Wife is 1.5 years younger.

We max our over 50 pre-tax retirement accounts so:
$60k/year 401k
$15k/year tIRA

Current stache is ~$215,000.

We have $25-$50k/year left to invest in after tax or pay down debt.

Here is my dilemma:

Assume you are in my shoes, and you pay ~$390/month total for gas for both cars, and electricity for your house.  Excess income is all invested into after tax brokerage.

Here comes the monkey wrench. Now let's assume that you replace that $390/month fuel and electricity cost, with a solar loan that provides all the electricity needed for both your house and cars.  The loan is for $34,000 10 years @6.75% interest.

Option A: continue to pay $390/month for ten years on the solar loan with no electric bill($15) and no fuel cost for cars.  Invest all extra income.

Option B: Pay down the loan as fast as possible(perhaps 6 months), earning an after tax return of 7.94%, but sacrificing $34,000 of brokerage investing this year in the process.  Also, have *only* eliminated a $390 payment, which is a pretty typical monthly bill for gas(energy) and electric for folks that have to drive a lot.  Math says take the ~8% guaranteed after tax return.

Option C: 50/50....half brokerage, half solar loan.  I both love and hate this option.  I like to laser focus on a goal to accomplish it quickly rather than spreading myself thin and taking longer to accomplish any one thing.  Not sure I'd be content with this route.

Eliminating the solar loan before retirement reduces retirement spending and hence withdrawal requirement by $4680/year.  By the time we get to FIRE, solar loan balance will be fairly low after paying it down for 6-8 years.

This is the main issue I am trying to get myself on the right track with.

Compounding factors:  We both despise debt.  We are likely ok with making a slightly mathematically non optimal decision that leans towards debt reduction vs investing.  This assumes that the outcomes are reasonably close. 

We have a $35,000 loan on one of our cars @ 0.9% interest.  I can't make myself pay this off as the rate is too low, especially with MMF paying 4.75%.  I'm semi ok with holding this until payoff especially since it's only 4 years.

We have $30k in student loan debt that we've put on the back burner to see if cancellation happens.  If so, it would be completely cancelled.  If not, its debt that we have to handle.

Added all up, this is $100k of debt.  Focusing all of our resources on paying this down will take ~2 years best case scenario.  That's a lot of time to *not* invest in brokerage if we are 6-8 years out from FIRE.  But also WAY more debt than I want to have.

Last but not least.  I have some concerns about how much longer my wife will be able to work full time.  Her job is stressful and it detracts significantly from her quality of life.  This also makes the decision harder and not easier for me.  If she stops working or cuts way back in 2-3 years, will I be glad I paid off all the debt quickly, significantly reducing our living expenses and allow us to continue to invest even with a lower income, or will I wish I had dumped 100% of our available resources into investing as much as possible as quickly as possible to build the stache.  We can live comfortably on my income, perhaps even if I continued maxing retirement contributions.  Wife *may* be able to keep working full time 6-8 years.  Or maybe cuts back to half time in a few years.

Without the benefit of any input, suggestions or ideas, my tendency is to aggressively pay off the solar loan with all available resources and move on with a bit more freedom to invest for as long as wife can work full time.  However, I know the student loans *could* become due around the time the solar loan is paid off.  Then we have another $30k to work through.  And it bothers me a lot to NOT invest in brokerage.  ARRGGGH!

[RWD]

Have you looked at the Investment Order post? It looks pretty close to a toss up, but leans towards paying off the loan. My recommendation is focus on paying off the solar loan then let the other loans ride as long as possible.

[mastrr]

Personally, I'd just pause all investing an eliminate all debt.  You can do it in under a year.  Go into FIRE free as a bird.

[Finances_With_Purpose]

Have you looked at the Investment Order post? It looks pretty close to a toss up, but leans towards paying off the loan. My recommendation is focus on paying off the solar loan then let the other loans ride as long as possible.

This.  Why give up an 8% guaranteed return?  Especially over a short timeframe.  Market rates take market timetables - which may be a decade or more, easily, and time you may or may not have to be flexible with.  Meanwhile, you have a rare opportunity: a guaranteed 8% return.  Take the return, or psychological reasons as much as any other.

In addition, you're motivated to kill the debt (I can relate to that), so that is likely to push you farther faster.  It's a lot like Dave Ramsey's snowball method.  That doesn't always make perfect financial/mathematical sense, but it does make perfect psychological sense and motivates people more - which people in debt need.  You may well do better than expected that way since you're more motivated (making the work seem easier). 

So go for the debt. 

[former player]

You are investing $75k into tax-advantaged funds this year and are not proposing to change that.  Your question is whether some or all of your remaining room for investment should go into paying off the solar loan at a solid 8% return or put it into after-tax investments with a likely but not certain return over the years of 7%.  That seems to me to favour paying off the solar loan.

Your uncertainty is over your wife's continued ability to work at her current rate.  You should have an emergency fund to cover any immediate problems that might arise?  As long as you have an appropriate emergency fund, which I think you do, then that should take care of any issue over using income to pay off debt.  After that, given your income and savings rate then that would affect your future savings rate but you would still have enough income to cover your expenses and invest something.  So it would slow down your progress to FIRE but not be a catastrophe for your financial security.

At your higher rate of after-tax investing (50k a year) you would still have after-tax money to invest in the next year even if you also pay off the whole of the $34k solar loan, but at the lower rate of $25k it doesn't cover the whole of the solar loan.  So you might have a look at what is causing a potential $25k a year fluctuation in what you have available to invest after-tax, given that it is such a big variable.  Is it down to changes in what you earn or to changes in what you spend?  You are well set up now with house, furniture and cars so I would have hoped that your expenditure was pretty well dialed down by now: if it isn't then that is where to look to keep your investment level up.

[EchoStache]

Income fluctuation is the reason for variable investment funds of $25-$50k.  We are traveling healthcare workers.  Assignments are typically 13 weeks in duration and rate of pay varies.

[daverobev]

Risk vs reward, isn't it?

Loan: 8%

Stock market: maybe 10%, maybe 20%, maybe -5%, maybe -30%. But over time likely to be ~10%.

'Don't time the market' sure but... also don't take risk you don't have to take.

Which makes you sleep better at night? You can always pay the solar loan faster now while stock prices are high (yes yes don't time the market) and switch if there is a crash. Then you have a win-win.

[wageslave23]

Pay the solar loan first, then invest. Ride the low rate loans as long as possible.  You have too low a stache to be going for psychological benefits, it needs to be cold hard numbers decisions from here on out.

As a side note, how much would your electric bill be without the solar panels? Not gas cost, because you don't have gas vehicles, but electricity cost for your cars and house?

[RWD]

Why give up an 8% guaranteed return?

the solar loan at a solid 8% return

Loan: 8%

The loan is 6.75%. The OP's 8% estimate is taking some taxes into account. I'm not quite sure how they came up with this number and you may be able to deduct solar loan interest on your taxes which would swing the ROI in the other direction. In any case, 8% is probably not the right number to use for general ROI comparison purposes.

I still agree with paying it off though. The investment order recommends paying off debts above 6.7% (based on current 10-year treasury note yield) if you've already maxed all tax-advantaged opportunities. 6.75% is only just barely above 6.7%.

[EchoStache]

Yes solar loan is 6.75.  Federal tax rate 12%, 3% state, so 15%.  6.75/.85 ~8%

Electric bill runs $200-$250/month.

[RWD]

Yes solar loan is 6.75.  Federal tax rate 12%, 3% state, so 15%.  6.75/.85 ~8%

If you're in the 12% tax bracket for income then the tax you would pay on long term capital gains in a taxable brokerage is actually 0%. So you should definitely not be using 8% for comparison purposes.

[index]

How sure are you the solar will replace all of your electric needs? Utilities usually have a connection fee that applies regardless of use. Also, solar companies are quick to extrapolate peak performance. You very well could still have an electric bill.

[wageslave23]

Yes solar loan is 6.75.  Federal tax rate 12%, 3% state, so 15%.  6.75/.85 ~8%

Electric bill runs $200-$250/month.

Have you already locked in to the solar contract? What are the consequences of default? You are paying $35k with 6.75% interest in order to save $200-250 a month?!  The interest is about $200 a month itself.  It will never pay for itself.

[EchoStache]

Solar cost is $31k.  I took out a little extra to cover patio expansion(didn't need it).

Solar is $21,700 after tax credit.  System will produce a little more than we use, which will be refunded to us.  Excess solar production refund results in a 9% rate of return based on net solar cost.  Price is $1.67/kW.  We get $0.15 per kW of excess production.  So whatever excess we generate, we get .15/1.67 or ~9% rate of return on excess electricity.  It's why I erred on the side of caution and upsized a bit.  We also get ~$600/year or so in SREC's.

$21,700 for lifetime household electricity and energy for cars works out quite well financially, especially when that cost is further reduced by SREC's and net metering refunds if we conserve.  Also one of those things where, even if it were just break even/no net savings...it's a worthwhile endeavor IMO.  But again, I'm confident this will be a tremendous value for us especially as rates continue to climb, and the peace of mind of being almost energy independent.

Base fee for being connected to the grid is just under $16/month.