investing and debt

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
Lazysundays
Posts: 56
Joined: Fri Jul 04, 2014 1:46 pm

investing and debt

Post by Lazysundays »

What are your thoughts on paying off debt while investing for retirement?

Currently almost 50% of our take home goes to paying off CC, SL, and mortgage debt. With a match, we are putting away around 7% for retirement. Currently, we are snowballing the debt, but with daycare and HCOLA it will take some time. The ccs should be done within a year, the SLs should be done by 2023, and the mortgage in 2027. We have an insane amount of SL. Totally worth it. That is not the topic here. My approach until 2023 will be throw all extra cash at SLs and contribute minimum to max out the employee match. We will free up $ in 3 years when daycare is done, and I expect $5k to go to debt and $5 to go to retirement. In 2023, we will be 45 years old, with probably an extra 35,000 to start throwing at retirement. We will definitely not be early retirees, but we will come out of it with our goal. We are also contributing a small amount to each girl's college fund. I figure in 9 years, again, we will actually be able to pay for their college if we don't save enough.

joint income 150k gross
starter home 325k, still owe 290k
SL- original balance for both >210, now 160k
cc debt 13k- yeah, i know. we were doing great with paying cc in full until medical issue. the issue has resolved but it took our cash flow away for a while. we are climbing out fast.
we are using ynab, so budgeting is optimized.

Anyway, there is talk here about raising retirement funds. If you had debt, how did you juggle it in the beginning? Did you sacrifice early years of compounded interest to pay of the debt or did you pay off debt more slowly to get started on retirement savings?
Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 12:02 pm

Re: investing and debt

Post by Twins Fan »

Depends on who your asking... :D

You will probably get answers from both sides with some saying pay down debt and others saying max tax advantaged retirement space at least. Most will want to know the interest rates on the SL and mortgage and if those are tax deductible. As you know, get rid of the CC balance quickly.

I'm a debt averse type myself. I look at your numbers and see you have 3x 1 years pay in debt. That would scare me, so I say pay down debt is a priority.
Topic Author
Lazysundays
Posts: 56
Joined: Fri Jul 04, 2014 1:46 pm

Re: investing and debt

Post by Lazysundays »

The cc rate is 12.75% for 8k, with 5k of that total 13k being at 0% on a transfer. Will be paid off before full rate kicks in.
SLs around 75k are variable currently at 4.75, the rest are at fixed 6.25.
Mortgage is at 3.25, but there is also PMI on it.
User avatar
Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: investing and debt

Post by Watty »

If you pay off $100 in debt or if you save that $100 either way it will increase your net worth by $100 so even if you are not saving a lot while you are paying down the debt your are still making progress.

One thing I do is to keep a simple spreadsheet where I add up my net worth each year on January 1st so I can see how much progress I have made each year.

You may find that your net worth is significantly negative and even if everything goes well it will not be positive for a long time and that could be a clue that you are really living above your means and need to significantly scale back your lifestyle. Your income is $150K a year so it might be best to look at how families that "only" make $100K a year live and live more like them.
desiderium
Posts: 1264
Joined: Sat Jan 04, 2014 10:08 am

Re: investing and debt

Post by desiderium »

Congratulations on your aggressive approach to improving your situation.

I think your experience with needing medical care illustrates something so many people face, but rarely plan for. Having a high debt burden and lacking sufficient reserves led you to fall into the clutches of the banks and lose even more of your income.

After the CC debt is gone I would suggest accumulating cash savings to buffer unexpected hits to your cash flow. This is an accessible financial asset, unlike your debts.

Look at how far away you are from getting rid of you PMI, and work to achieve that. The bank will not automatically stop collecting it
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Re: investing and debt

Post by DSInvestor »

Stop contributing to the college funds and direct that money to paying down the debt. Do not contribute to college fund until you max out retirement contributions.
Wiki
Topic Author
Lazysundays
Posts: 56
Joined: Fri Jul 04, 2014 1:46 pm

Re: investing and debt

Post by Lazysundays »

Thanks for the advice. I think I reached a level of debt repayment/ investment that I'm comfortable with. When I was evaluating our finances, I reduced the college fund contributions to $25/mo each. I can't bring myself to drop it to zero. And I am still adding $100 extra to mortgage principal to reach no PMI level faster. This is the balance we have reached. Any new income will get evenly divided between debt and increase in retirement.

How did you guys do it? What made you comfortable?
BigTom
Posts: 209
Joined: Sat Apr 26, 2014 5:43 pm

Re: investing and debt

Post by BigTom »

I vote pay off the debt too . I am currently doing this . And stopped investing .
Jack FFR1846
Posts: 18503
Joined: Tue Dec 31, 2013 6:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: investing and debt

Post by Jack FFR1846 »

Remember that as you get to college time, college funds are available to pay for college, so you are assumed to need that much less financial aid. Retirement funds are off limits. You can have $10,000,000 in retirement funds, take a sabatical and get huge amounts of aid. The guy next door with $50k in 529, underwater and paying a huge mortgage and barely getting by will be far worse off.

Always, always, always totally max out ALL tax advantaged retirement before putting in college money.
Bogle: Smart Beta is stupid
Topic Author
Lazysundays
Posts: 56
Joined: Fri Jul 04, 2014 1:46 pm

Re: investing and debt

Post by Lazysundays »

Interesting point jack. That may be enough to make me stop the additions...
Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 12:02 pm

Re: investing and debt

Post by Twins Fan »

Lazysundays wrote:Thanks for the advice. I think I reached a level of debt repayment/ investment that I'm comfortable with. When I was evaluating our finances, I reduced the college fund contributions to $25/mo each. I can't bring myself to drop it to zero. And I am still adding $100 extra to mortgage principal to reach no PMI level faster. This is the balance we have reached. Any new income will get evenly divided between debt and increase in retirement.

How did you guys do it? What made you comfortable?
That's not exactly "snowballing" the debt like you said in the first post. Throw all extra you have at the CCs for now, making the minimums on other bills, when the CCs are done, do that for the SLs, and so on. That's snowballing the debt... not dividing to some comfort level.

There's plenty about SLs I don't understand (tax deductions, forgiveness programs, etc), so I look at them too simple I guess. But, there's not much out there beating a 4.75% or 6.25% return right now... overall really, but especially guaranteed returns like paying down debt. Get the credit cards done and start attacking those.

I wouldn't worry much about the mortgage right now. The way you say "starter home" and a planned pay off in 2027... I don't think those go together well. My hunch would be you likely won't be in the starter home in 2027. You will have moved by then. I wouldn't even worry about the PMI. Yeah, it stinks. But, what's done is done. Whatever you pay in PMI yearly is probably next to nothing compared to the SLs and interest paid there. By my numbers, you need to get down about another $30k or so to get rid of that anyway. That's going to take quite a while at $100 extra a month.

The comfort level is different for everyone when it comes to this topic. Some are okay carrying debt, investing, and expecting higher returns. Others despise debt and want it gone ASAP. Which are you? That's what you need to decide.
deikel
Posts: 1616
Joined: Sat Jan 25, 2014 6:13 pm

Re: investing and debt

Post by deikel »

Mathematically its a pretty simple equation. You either invest or pay down debt wherever you get the most ROI,

Credit Card debts are a no brainer since usually way above reasonable market expectation, current mortgage rate is more of a discussion since 4% is considered below the 6% average of the market.

For me there is also a littl ebit the question of having cash in hand vs having the need to take out a loan. eg if you have a mortgage already and loose your job, you might have a hard time paying it off, but if you loose th ejob and want to get a mortgage the answer is no way....so there is a difference right there.
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.
HopeToGolf
Posts: 410
Joined: Fri Dec 24, 2010 3:04 pm

Re: investing and debt

Post by HopeToGolf »

To be successful in investing and LBYM you will need to change the way you approach your finances. For example, saving the $25 per month for the college fund does not make sense in your situation. Listen to the good advice offered above.
User avatar
happymob
Posts: 661
Joined: Wed Nov 18, 2009 3:09 pm

Re: investing and debt

Post by happymob »

Twins Fan wrote:There's plenty about SLs I don't understand (tax deductions, forgiveness programs, etc), so I look at them too simple I guess. But, there's not much out there beating a 4.75% or 6.25% return right now... overall really, but especially guaranteed returns like paying down debt. Get the credit cards done and start attacking those.
I could see an argument for funding a Roth (backdoor, if necessary) before paying extra on the SL. As you say, there is no guaranteed way to get that return, but given the gains on Roths are tax-free, one will likely be able to get 4.75%. And since Roth space is gone if it's not used... well, if I were comfortable with the stability of my income, I think I would fill Roth space before paying down the SLs, which I would pay down before any taxable, after match 401k, or 529 investing.
Topic Author
Lazysundays
Posts: 56
Joined: Fri Jul 04, 2014 1:46 pm

Re: investing and debt

Post by Lazysundays »

I've thought about reducing the 529s to zero, and I love the argument about fafsa, but in the end I'm not going to take a sabatical, so we will use that $. And the extra $100 to mortgage. I Like the argument about not being a forever home, but that's exactly why I'm choosing to add a small amout to debt repayment. When we refinanced the house, mortgage and escrow went from $2750 to 2400. I'm adding $100 because it gives us extra $ for next home down payment and we don't feel it bc we still save vs pre-refi. With an income that can vary ~$100 per paycheck, I just treat these small bills as auto pay leave it and forget it.
Topic Author
Lazysundays
Posts: 56
Joined: Fri Jul 04, 2014 1:46 pm

Re: investing and debt

Post by Lazysundays »

Snowballing doesn't have to be all or nothing rice and beans DR style. I took our extra income and pay extra month to month until paid off (ie$1000/mo). When that is done we take the minimum monthly payment for next bill and add it to previous amt and pay monthly until paid off (ie $1000+ $50). When that is paid off, move on to next bill and add previous amt to min payment and pay that monthly (ie $1000+$50+$150). If ynab has unspent excesses in categories, I can add some of that to snowball.
Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 12:02 pm

Re: investing and debt

Post by Twins Fan »

Nobody said anything about beans and rice. You just described snowballing the same as I did earlier. Although it still doesn't include $100 here or there and future income increases divided between....

You change like the winds... Is the $100 at the mortgage to get rid of PMI or is it to make for more money your way when you sell? Either way, it should be going to other debts now.

As said, this decision comes down to what one is comfortable doing. Seems you have your mind made up, so not sure why you asked for advice??
User avatar
Abe
Posts: 2572
Joined: Fri Sep 18, 2009 5:24 pm
Location: Earth in the Milky Way Galaxy

Re: investing and debt

Post by Abe »

There are two kinds of debt. One is what I call consumer debt (credit cards, etc). In other words borrowing money to buy things you consume. The other kind of debt is borrowing for investment or borrowing money to make more money (using leverage, etc). To me consumer debt is the worst kind of debt. We probably shouldn't borrow to buy consumables unless we have too, and if we have to then we should pay it off as soon as possible. If it were me, I would pay all the consumer debt I could starting with the highest cost debt first (credit card, etc). After paying off this debt, I would keep putting the money away so that I could pay cash the next time I needed a consumer item.
To answer your question: "Did you sacrifice early years of compounded interest to pay of the debt or did you pay off debt more slowly to get started on retirement savings?" Time is your friend in investing. The sooner you can get money working for you the better, but if you are paying high interest on debt, then I would say it's better to pay it off first.
Slow and steady wins the race.
TravelforFun
Posts: 2799
Joined: Tue Dec 04, 2012 10:05 pm

Re: investing and debt

Post by TravelforFun »

I'd invest just enough to get the company match and throw everything at debts that have interest rates of 4% or higher because there is no risk-free investment that would give you that kind of return. Then I'd focus on the mortgage and pay it down as quickly as possible until I can eliminate the PMI. Then I'd raise my retirement investment to 15-20% level. Kids' college education fund comes last.
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: investing and debt

Post by Rob Bertram »

Lazysundays wrote:I've thought about reducing the 529s to zero, and I love the argument about fafsa, but in the end I'm not going to take a sabatical, so we will use that $. And the extra $100 to mortgage. I Like the argument about not being a forever home, but that's exactly why I'm choosing to add a small amout to debt repayment. When we refinanced the house, mortgage and escrow went from $2750 to 2400. I'm adding $100 because it gives us extra $ for next home down payment and we don't feel it bc we still save vs pre-refi. With an income that can vary ~$100 per paycheck, I just treat these small bills as auto pay leave it and forget it.
One thing that I haven't see discussed is your emergency funds. It sounds like some of your CC debt was due to unexpected medical expenses. Are you rebuilding your emergency funds? I would recommend putting that $100 towards your EF until it is back to a safe level. If you want, put it into a Roth IRA and keep it in short-term bonds.

I agree with everyone else, don't put another penny into a 529 until you can max your tax-advantage retirement accounts. In most cases, you can tap your retirement accounts to pay for school.

Pay down the CC debt as soon as possible. That is an obvious choice. Once your mortgage is to the point where the PMI falls off, I would stop paying extra. The rest should go to beef up your EF and Roth IRA. Money in a Roth IRA is significantly more accessible than home equity. I dislike debt as much as the next BH, but I really dislike needing to go into debt. A large EF will help and will also give you a lot more freedom.
MtnTraveler
Posts: 230
Joined: Thu Jun 12, 2014 7:32 pm

Re: investing and debt

Post by MtnTraveler »

While I'm not the OP this thread has helped solidify that I'm doing the right thing in regards to debt. I was finally able to get the 401k up to get the full matching (had to go below the full matching for 4 months) and am throwing everything extra at the highest debt which is at 7.55%. Come this time next year the only debt will be the mortgage. While I always knew I should have an emergency fund I am now funding it with $50 a week. Not a huge amount but it's a start. Once the debts start to be paid off I'll start putting more into the EF and the 401k. Learned the hard way that you never know what life will throw you.
Topic Author
Lazysundays
Posts: 56
Joined: Fri Jul 04, 2014 1:46 pm

Re: investing and debt

Post by Lazysundays »

I created $1000 EF before starting the snowball. Using ynab, I am creating a one month buffer. A whole month buffer is essentially a whole month's in expenses EF. I am currently 2/3rds buffered. I am expecting full buffer in August with extra paycheck of $2800 (love extra paycheck months :)
MoonOrb
Posts: 1506
Joined: Thu Jan 24, 2013 5:58 pm

Re: investing and debt

Post by MoonOrb »

I'd put every single extra dollar into paying off the CC debt. Close it out totally. Then invest up to your employer match in your 401k, then put additional money into a Roth, which you can use as a quasi-emergency fund as you can withdraw your contributions penalty-free.

I'm not as debt-averse as most people on BH, so I would probably not pay down the student loans and mortgage in lieu of making retirement contributions. Especially since these debts are partly subsidized by favorable tax treatment. But what I would do is focus my efforts instead of putting some money here and some money there.

One reason I don't love paying off mortgage/student loan debt as an alternative to retirement funding is because there is a behavioral component to it that can make quite a big difference: the "return" you get from paying down debt is a reduction in future expenditures. It's not the same as cash in hand or a balance in your retirement accounts. So, supposing you do pay off your student loans early and have an additional, say, $1000/mo available, you really only reap the benefit of the early paydown if you turn around and commit all $1000 to retirement investing. For those people who can predict with accuracy that they will in fact do this, then the decision comes down to guessing whether you will get a greater return from paying down the debt or investing the funds during the same time period; but for those people who might pay off their student loans/mortgage and then invest only a portion of their now greater amount of disposable income to their retirement accounts, they would have had a greater net worth if they had contributed toward retirement accounts rather than prepaying debt.

The tl;dr version of my argument is that when you are paying off debt with a short time horizon, paying down debt is maybe the best thing. But when you're doing it over a decade and a half, there are behavioral concerns that you should be thinking about carefully.
Post Reply