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Focus? Debt vs. Investing

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  • Focus? Debt vs. Investing

    I am intent on managing my own finances because paying for an advisor does not sit well with me. Therefore, I would love to hear from others re: how they were able to pay off their student loans while investing. Or, did you tackle student loans first then put the monies to investing?
    Thanks.

  • #2
    We're closing in on our student loan payback and have retirement accounts just over $500k. My loans were gone this last summer, right at 5 years out. Wife's will be done within 2 years of her fellowship finishing. We've spent this time maxing our retirement accounts and investing essentially no money outside of those accounts. You could say we've delayed our student loans to invest because we have up to 110k of deferred space each year (some years during her fellowship we were closer to 70k). Outside of retirement accounts I would only consider investing in specific time sensitive events. If your practice is building and you have a one time option to invest, it may make sense.

    If you are thinking about dumping all of your money into the market/real estate/gold with the hopes of better than loan interest rate return I would refer you to your own risk tolerance. Suppose the market crashes and you still owe all of that money? How bad will you feel if you split your money 50/50 for investing vs loan payoff? Our risk tolerance is such that we'll probably make extra mortgage payments even though our interest rate is 2.8% for 15 years and split our investment money 50/50 with the mortgage. Math will tell you one thing. How you sleep at night will tell you another.

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    • #3
      I would for sure invest whatever you need to get a match, if that's a thing at your job. I personally like to do both because compounding- don't want to totally miss out on these early years of investing. But for me personally, I hate debt and sleep better without it so I lean more heavily towards debt pay down. But that's me. Other posters will lean more heavily towards investing. None of us knows what the market will do though so it's all kind of a crapshoot in terms of knowing for certain where you'll get the best return.

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      • #4
        This really depends on a few things but I’ll tell you what I did and why. I was 38 when I finished residency so I felt that I couldn’t delay retirement savings/investing. Had 210k in loans. Lived in a high tax state and city (NYC) so maxed out pre tax retirement accounts (403b,457b) and did backdoor Roth IRAs and then paid extra towards loans. No reason not to do both unless you have really high interest loans or debt. Hopefully you’ll be able to do this.

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        • #5
          We lived like paupers during my training (doing my own repairs on my beater car, going out to restaurants twice/month on coupons, etc.) so we could max out our Roth space every year while we were in the 15% bracket.  So, we put about $29k/year into our IRAs/403b during training and put as much as we could after that towards loans.  Once the stipend/signing bonus checks came, we really started to make headway on the loans.  Got a small inheritance along the way that we put towards them, as well.  We paid off the  last of the loans shortly after my first attending paycheck (and I'm in a lower paying specialty, so don't picture a spinal surgeon paycheck).  With market returns the past 5 years, this decision to prioritize retirement savings has worked out very well for us.

          With the DJIA at all time highs, I think it would be a harder decision now.  After getting your employer match, I would probably put more emphasis on loans vs retirement, assuming your loans are in the typical 6.8%+ territory.  If they sold government bonds with that kind of guaranteed return, everyone would buy them. If you can refinance to <3.5%, the math gets a little harder.

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          • #6
            * invest , or * pay down loans.

            BOTH are correct strategies.  The particulars depend upon loan rates, your pay down psychology and momentum. The only wrong answer is to take on new debt via a home mortgage.

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            • #7




               

              With the DJIA at all time highs, I think it would be a harder decision now.
              Click to expand...


              The markets have been at highs since 2013 and there is no reason why it cant go on, valuation is not a good indicator of near term forward returns (longer term it is).

              In almost any historically accurate situation imaginable, you will have more net worth and money by shifting any excess income into investments for the long term. Then some good year decades into the future you will have gains that will be multiples of your student loan balance when you came out. That is nothing to say of what the cumulative gain will be.

              You can always do some combo of both, just depends on your goals near vs. long term. There are plenty of reasons why you might do loans fist like you are looking to start/buy a practice, etc...that you're trying to get finances top notch for, etc...

              I have been paying almost exclusively to my investments first and only wish I'd done even more, it was the best move by far. I did refinance to shorter, but not less than 10 years terms and still pay a nominal extra payment, but the main focus has been investments, with the goal being decades out, not the loan term, not some random period but decades from now.

              My wife is working now and we will shift our focus with her income beyond taxes, retirement maxing, etc...into any debts so as to make any future changes easier and be ready for the eventual down turn in the economy. This is more important for me as I am at the about pinnacle of economically sensitive dr jobs.

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              • #8
                We focused on investing and took 3-5 years to payoff debt (though this was 15 years ago and our total loan burden was 60-70k).

                Given the exponential nature of compound growth, and very low current interest rates, I feel investing wins out - though maintaining a reasonable lifestyle and living well beyond your means is paramount.

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                • #9
                  Oops - I meant living well within your means... (I would hope everyone on this site would have caught that)?

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                  • #10
                    This is personal. Focus more on how much money you are not spending. Don't leverage in the name of timing the market. But here's what I'm doing:

                    First fill tax advantage accounts (HSA/bdRoth/i401k). Then with leftover shrink refinanced 5yr student loan burden. I don't plan on getting a taxable account until I knock out this cashflow drag hopefully in 2.5yrs (next year). To me using the tax saving space are worth it to accept a guarenteed 3.5% "loss" in loan interest.

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