What should we do with our money - student loans vs investing vs mortgage

[cogden11]

2 doctors who know very little about finances…

Summary of current status

• 2 physician household. Each making around $200,000 a year.


• We are 4-5 years out of residency.


• Fully funding 401k.


• Started with $700,000 in student loans.


• Now down to $350,000. We have re-financed/consolidated them. One of the loans is at 4% for about $45k and the rest range from 2.6-2.9%.


• Mortgage at 4.125% - 30 years. It has about $360,000 left. Currently paying PMI. Looking to refinance the mortgage. Hopefully get rid of PMI– right now getting quoted at 3.25 for a 15 yr loan.

Wife and I both have strong feelings around loans and debt. Had family members that were awful with their money and lived with substantial debt and tax troubles all of their lives. We have been hyper-focusing on getting the loans paid as fast as possible, even to the detriment of not maxing out our 401k a few years.

Now that our loans are all in lower interest accounts we are debating how we should distribute our money going forward. Our instinct is to keep throwing money at our loans but we know that might not make the most financial sense. We hear people talk all the time about investing, rather than paying down loans, if your loans are down to a certain rate.

[Hatton]

Great to have paid off 50% of student debt.  I would continue to max out 401k and backdoor Roth IRA.  Start tracking your expenses with mint.  It would be reasonable to take a percentage of the extra loan payment money say 25% and start a taxable account.  As the loans and mortgage go away let your lifestyle inflate a little and funnel the extra to a taxable. You will be financially independent in no time

[fatlittlepig]

max out 401K, I would continue to pay off loans 350K is still way too suffocating in my opinion. when it got down to 100K i would start taxable account.

just my opinion.

 

fatlittlepig

[DMFA]

You're getting into the differences between mathematics and psychology as they pertain to personal finance. You are not ever really *wrong* to eliminate your debt, even if mathematically you would *probably* benefit more from investing in stocks in a taxable brokerage account.

However, your mortgage sounds awful, and depending on how long you plan on staying in the house, it might be worth the cost of refinancing to do so. Once refinanced, your rate on 3.25% fixed in the 33-35% bracket will be like 2.17% after your deduction, so no big rush to pay that off once it's done.

Again, mathematically you would probably benefit more in the long-term from leveraging your low-interest debt against greater gains in the market, but given your very significant debt burden, I think your overall picture would be best served by that following, either in order or a little of each:

1. Maxing tax-advantaged savings, such as your 401(k)s, backdoor Roth IRAs, HSA, +/- 529
2. Refinance your mortgage - 3.25% 15-yr fixed isn't bad
3. Eliminating your moderate-interest (4%) student debt - can you refi this into the 2%s and roll it in with the rest, or just blow it away?

4a. Knock out your low (< 3%) student debt

4b. Invest in a taxable brokerage account

Somewhere in between 1 and 3 is ensuring you have 3-6 months' expenses in cash or easily-liquefied funds as an emergency fund.

Don't panic, don't be intimidated by the numbers (your knocking out half of a 700k debt is awesome, btw), beware of people who will charge you to "manage" your money for you, and always attempt to learn more about how your money is working for you.

[Craigy]

If you're fully funding two 401ks then you're investing way more than most people.  Nothing wrong with paying down debt.

Like DFMA said, refi your home loan and let that ride while you pay down other debt, see if you can refi that as well.

Once your debt is gone, you'll be investing much more than you could with the debt.  And if you're aggressive with the debt, you're only delaying this by a couple years.

[hightower]

DMFA wrote:

You’re getting into the differences between mathematics and psychology as they pertain to personal finance. You are not ever really *wrong* to eliminate your debt, even if mathematically you would *probably* benefit more from investing in stocks in a taxable brokerage account.

However, your mortgage sounds awful, and depending on how long you plan on staying in the house, it might be worth the cost of refinancing to do so. Once refinanced, your rate on 3.25% fixed in the 33-35% bracket will be like 2.17% after your deduction, so no big rush to pay that off once it’s done.

Again, mathematically you would probably benefit more in the long-term from leveraging your low-interest debt against greater gains in the market, but given your very significant debt burden, I think your overall picture would be best served by that following, either in order or a little of each:

1. Maxing tax-advantaged savings, such as your 401(k)s, backdoor Roth IRAs, HSA, +/- 529
2. Refinance your mortgage – 3.25% 15-yr fixed isn’t bad
3. Eliminating your moderate-interest (4%) student debt – can you refi this into the 2%s and roll it in with the rest, or just blow it away?
4a. Knock out your low (< 3%) student debt 4b. Invest in a taxable brokerage account Somewhere in between 1 and 3 is ensuring you have 3-6 months' expenses in cash or easily-liquefied funds as an emergency fund. Don't panic, don't be intimidated by the numbers (your knocking out half of a 700k debt is awesome, btw), beware of people who will charge you to "manage" your money for you, and always attempt to learn more about how your money is working for you.

Click to expand...

I second everything DMFA wrote, except for a couple of points.  1. I don't personally believe a 15 year mortgage is necessary or that its even necessary to refinance immediately.  You could refinance to a better 30 year mortgage if the PMI is bothering you.  Maybe wait until you've paid down some more debt.  That will give you the ability to pay down your debt even faster.  Even at 4.125% for 30 yrs, you're still only going to have an effective rate of like 2.5% after tax savings.  Still so low that there's no rush to pay it off.  But, if you must refinance check out Chemical Bank if you need someone that can get you a good mortgage with no hassle.  I refinanced through them last year (Shawn Huss was the agent, he's great).  And no, I have no financial or personal ties to that company.  I just think they were great to work with.

2. I would focus on getting rid of your student loans.  350k is still an insane amount, even with the 400k you're pulling in each year.  You've done a great job so far getting rid of the first 350.  It won't take you long to get rid of the rest.  I personally have a 100k at 2.6 fixed still that I'm not paying off quickly. So, I don't see anything wrong with leaving a little for the long haul if you'd like to start funding a taxable brokerage in addition to your retirement accounts.  But, 350 seems like too much.  Get it down to 100 or less and you'll be in great shape.

[DMFA]

hightower wrote:

DMFA wrote:

You’re getting into the differences between mathematics and psychology as they pertain to personal finance. You are not ever really *wrong* to eliminate your debt, even if mathematically you would *probably* benefit more from investing in stocks in a taxable brokerage account.

However, your mortgage sounds awful, and depending on how long you plan on staying in the house, it might be worth the cost of refinancing to do so. Once refinanced, your rate on 3.25% fixed in the 33-35% bracket will be like 2.17% after your deduction, so no big rush to pay that off once it’s done.

Again, mathematically you would probably benefit more in the long-term from leveraging your low-interest debt against greater gains in the market, but given your very significant debt burden, I think your overall picture would be best served by that following, either in order or a little of each:

1. Maxing tax-advantaged savings, such as your 401(k)s, backdoor Roth IRAs, HSA, +/- 529
2. Refinance your mortgage – 3.25% 15-yr fixed isn’t bad
3. Eliminating your moderate-interest (4%) student debt – can you refi this into the 2%s and roll it in with the rest, or just blow it away?
4a. Knock out your low (< 3%) student debt 4b. Invest in a taxable brokerage account Somewhere in between 1 and 3 is ensuring you have 3-6 months’ expenses in cash or easily-liquefied funds as an emergency fund. Don’t panic, don’t be intimidated by the numbers (your knocking out half of a 700k debt is awesome, btw), beware of people who will charge you to “manage” your money for you, and always attempt to learn more about how your money is working for you.

Click to expand…

I second everything DMFA wrote, except for a couple of points.  1. I don’t personally believe a 15 year mortgage is necessary or that its even necessary to refinance immediately.  You could refinance to a better 30 year mortgage if the PMI is bothering you.  Maybe wait until you’ve paid down some more debt.  That will give you the ability to pay down your debt even faster.  Even at 4.125% for 30 yrs, you’re still only going to have an effective rate of like 2.5% after tax savings.  Still so low that there’s no rush to pay it off.  But, if you must refinance check out Chemical Bank if you need someone that can get you a good mortgage with no hassle.  I refinanced through them last year (Shawn Huss was the agent, he’s great).  And no, I have no financial or personal ties to that company.  I just think they were great to work with.

2. I would focus on getting rid of your student loans.  350k is still an insane amount, even with the 400k you’re pulling in each year.  You’ve done a great job so far getting rid of the first 350.  It won’t take you long to get rid of the rest.  I personally have a 100k at 2.6 fixed still that I’m not paying off quickly. So, I don’t see anything wrong with leaving a little for the long haul if you’d like to start funding a taxable brokerage in addition to your retirement accounts.  But, 350 seems like too much.  Get it down to 100 or less and you’ll be in great shape.

Click to expand...

True, very reasonable point. My line breaks didn't get carried over to the post so idk if the point got lost in those, but a 30-yr conventional may also not be a bad idea if you can get a favorable rate.

Again, mortgage principal is another means of leverage. You're choosing to have debt for the sake of paying other debt or greater earnings in equities (ideally). If you're going to have that sort of debt, it may as well be simple, tax-deductible, low-rate (<1% real) debt like a mortgage.

It's a similar principle: do I want to eliminate my mortgage debt, or so I have other debts I should prioritize, or let it slide and try to out-earn it in the market? This is what Hightower is saying: if you have to allow one of your debts to linger, it should be the mortgage since student debts are at a higher rate and are not mitigated by the tax deduction. In a more "ideal" situation, should you be able to afford it and were you already maximizing tax-advantaged investments (401k, 403b, 457, IRA, HSA), then less debt for less time at a lower rate (i.e. 20% down on a 15-yr fixed) is a winner.

[adventure]

I'd start by getting rid of PMI. Perhaps a refinance over 30 years. No rush to pay it off. You can always pay it off more quickly.

Also, you should have an emergency fund.

[StarTrekDoc]

You're on a good track no matter what you do -- paying down debt, so splitting hairs now.

This would be my order of money $ stretching --

TaxDeferred accounts:  Make sure every opportunity to decrease your Income level is fully utilized.  every $ is 33% savings.  Nothing can touch that.

PMI:  http://www.bankrate.com/finance/mortgages/removing-private-mortgage-insurance.aspx -  20% equity?  Ask them to remove.  Refi is expensive route and break even is several years for PMI - Closing costs since the rate is about the same (if doing this, do 30year fixed if you're in home for 3+ years).  Would NOT do anything refi if moving out of home <3 years.

Student loans: payoff ASAP.  money out without any benefit.  pure interest lost.

529:  kids are expensive.  start factoring that in and funding.

Lastly even everything else is done and funding the emergency fund and above -- CONSIDER paying off the mortgage if you like to carry on the traditional american dream of home ownership.  I wouldn't do this for quite some time.  We're FI but still holding 500K in mixed bonds/TE instead of paying off the mortgage as a virtual insurance since we live in CA and fire/earthquake prone area.   $1.4M house is a lot of booty to sit on in single location.

 

 

[cogden11]

Appreciate the great comments so far.

Sounds like the advice is, regardless of how aggressive we are with our students loans, to make sure we are fully funding our HSA and 529 (just had our first kiddo late last year), right? Wife and I have been debating whether or not this is as important given that we have the two 401Ks.

In terms of the HSA, is that something that we can withdraw from in the future for non-healthcare expenses?

[HandFellow]

The HSA is valuable for a few reasons.  First is the triple tax benefit: tax free going in, growing, and coming out.  Getting money out for non-healthcare expenses isn't really the goal of the account.  IF you manage to have a funded HSA when you get to age 65, it is treated as an IRA, meaning taxed coming out but not penalized.

If you want to get money out of the HSA, you can either pay for your medical expenses with it (like having your baby), or save your receipts and get the money out at a later time by essentially reimbursing yourself for your expense.

For tax purposes, the HSA is more valuable for federal taxes than is the 529.