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Investing vs Paying Down Debt in My Current Situation

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  • Investing vs Paying Down Debt in My Current Situation

    I'm looking for some advice in my current situation:

    38 year old with family (wife and 2 kids) and sole income - approx $350k
    Student loan (already refinanced): Principle - $290k @ 2.75%. Monthly payments - $2024.92 x 177 months left
    401(k) w/employer match and HSA with max contributions
    Rest of investments currently at $176k

    Question: pay down the student loan ASAP vs minimum payment toward student loan vs a mix contributing more aggressively towards one against the other?

    I'd greatly appreciate any advice on this. Thank you all very much in advance.

  • #2
    Set aside at least 20% of gross compensation towards retirement. Have a game plan to pay off student loans within five years maximum. Pay your taxes, don't incur other debts, and spend the remaining funds any way you and your wife see fit.

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    • #3
      It’s a personal decision. Mathematically, investing is probably the right decision but emotionally, paying off the student loans may be the best decision. As mentioned, make sure are are maxing out all tax-advantaged space first.

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      • #4
        Originally posted by Z099269 View Post
        I'm looking for some advice in my current situation:

        38 year old with family (wife and 2 kids) and sole income - approx $350k
        Student loan (already refinanced): Principle - $290k @ 2.75%. Monthly payments - $2024.92 x 177 months left
        401(k) w/employer match and HSA with max contributions
        Rest of investments currently at $176k

        Question: pay down the student loan ASAP vs minimum payment toward student loan vs a mix contributing more aggressively towards one against the other?

        I'd greatly appreciate any advice on this. Thank you all very much in advance.
        Let's get a little more specific with your particular numbers.

        To save 20% of gross compensation towards retirement, you're looking at $70K per annum in IRAs, 401(k), and taxable accounts. Since you have an employer match, you could add that to both the numerator of retirement savings and the denominator of gross compensation to get a number a smidgen above $70K per annum. Call it $6,000 each for his and hers IRA contributions, leaving $58K plus for 401(k) and taxable contributions towards retirement. Currently you're allowed $20,500 of employee contributions per annum into a 401(k), so matching contributions, after tax 401(k) contributions, and your taxable brokerage account contributions towards retirement will have to make up the other $37,000+ per year. That's more than $3,125 per month, but your employer is paying part of that through matching contributions. You also are deferring taxable compensation, so the IRS doesn't get their pound of flesh on these traditional pre-tax qualified account contributions quite yet.

        Paying off a $290K debt at 2.75% interest within five years will take about $4,465 per month for five years. (Play around with a few calculators, but that's about what you'll have to pay.) That's $53,580 per year towards debt service, which includes a considerable amount towards principal each month. Add on $70K+ towards retirement and $7,300 to maximize your HSA contributions and you have about $219K left over for taxes, housing, food, and all other expenses. That's $18,260 per month in a country where the median household gross annual income is less than $70K. Easy peasy.

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        • #5
          Yeah I'd put 20% to retirement each year from here on out, plan to get rid of the loans in whatever time frame would make sense so you could then buy a house. Unless you already bought a house and can't afford to pay more than the current amount on your loans and put 20% to retirement. But you're behind on retirement so really need to prioritize getting caught up.

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          • #6
            invest. no hurry to pay off 3% debt. but most importantly control your spending. you’re not rich

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            • #7
              Originally posted by Hank View Post

              Let's get a little more specific with your particular numbers.

              To save 20% of gross compensation towards retirement, you're looking at $70K per annum in IRAs, 401(k), and taxable accounts. Since you have an employer match, you could add that to both the numerator of retirement savings and the denominator of gross compensation to get a number a smidgen above $70K per annum. Call it $6,000 each for his and hers IRA contributions, leaving $58K plus for 401(k) and taxable contributions towards retirement. Currently you're allowed $20,500 of employee contributions per annum into a 401(k), so matching contributions, after tax 401(k) contributions, and your taxable brokerage account contributions towards retirement will have to make up the other $37,000+ per year. That's more than $3,125 per month, but your employer is paying part of that through matching contributions. You also are deferring taxable compensation, so the IRS doesn't get their pound of flesh on these traditional pre-tax qualified account contributions quite yet.

              Paying off a $290K debt at 2.75% interest within five years will take about $4,465 per month for five years. (Play around with a few calculators, but that's about what you'll have to pay.) That's $53,580 per year towards debt service, which includes a considerable amount towards principal each month. Add on $70K+ towards retirement and $7,300 to maximize your HSA contributions and you have about $219K left over for taxes, housing, food, and all other expenses. That's $18,260 per month in a country where the median household gross annual income is less than $70K. Easy peasy.
              Whoaa! Just refinanced for 177 months, that’s a 15 year term at 2.75%.

              * save retirement as you say. Hit the 20%. Pay your taxes.
              * $290k debt and $350k income.
              * Wife and 2 kids
              That is all I know. No clue about a budget or goals. The big unknown is housing and cars.
              * The point is manage total debt, limit it to 2x comp $350x2=$700k-290= $410k.
              Behaviorally, pay cash for cars , keep mortgage at $410k or less and no other debt.
              Generally, the tendency is to view debt as SL’s paying off in 5 years and mortgage limited at 2xcomp. That SL rate is attractive as long as you limit the mortgage.
              Last edited by Tim; 04-01-2022, 11:50 PM.

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              • #8
                Good morning,

                A big thank you to all of the responses so far. It's so much appreciated that you all would take the time to give advice. I'd say this is already giving me more clarity on how to budget.

                Just a bit more information:
                -Both vehicles we have are paid off
                -Our mortgage is down to roughly $150k with monthly payments (principle+interest+property tax+home owners insurance+HOA) of approx $1020. Nota bene: bought in 2014 at $192.5k. Now worth between $450-500k (Florida's housing market is out of control).
                -We tithe above the standard deduction, but can just say $25,100 for now.
                -In addition to the $176k investments we have $46k in our 401K currently with maximum contributions. (We had moved $46k to our other investments 2 years ago when one was allowed to draw from it penalty free due to COVID; this is why it appears to be lower than what one could anticipate with max contributions)
                -Lastly, a confession with an excuse: we have $144k in our checking account and are ready to use it wisely. Mea culpa. This accrued relatively quickly in the past 1.5 years. There was a lot of uncertainty during this period for us. I wasn't sure if we were going to be staying in our current location and either changing jobs or starting my own practice and wanted to have a good chunk of money at my disposal for either down payment of a home and/or starting a practice. This is not of great likelihood at this time.

                Once again, thank you all for taking the time to help. Many blessings.

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                • #9
                  Depending on your religious beliefs and what your house of worship expects, consider putting two or three years’ worth of tithing into a donor advised fund and alternating between the standard deduction and itemized deduction. Your place of worship gets the same amount of money and you pay less in taxes. Contribute highly appreciated stock from your taxable account rather than cash to avoid capital gains tax.

                  Covid-19 taught people to keep a sufficient emergency fund. Inflation is telling people not to hold onto too much cash. Strike a balance you and your spouse can live with and deploy the rest of your cash towards other financial goals. 3 to 6 months of living expenses should be fine. Other people feel more comfortable with a full year of living expenses. Use a high yield savings account, laddered CDs, or I-bonds.

                  Make sure you have sufficient high quality term life insurance and own occupation disability insurance in place. Your wife and kids are depending on you.

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                  • #10
                    I assume you have adequate life and disability insurance set up. If you do not this is critical.
                    What is your spending? I would sit down and figure this out. That number will allow you to figure how much emergency fund you need. As Hank said usually 3-6 months is all you need.
                    After you clarify your emergency fund then I would take 50% and invest it and 50% to student loans.
                    I would try hard not to upgrade the house until the student loans are destroyed and the retirement fund is caught up.

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