How to prioritize paying down loans vs. savings

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ssihvone
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Joined: Sat Jun 16, 2018 1:12 pm

How to prioritize paying down loans vs. savings

Post by ssihvone » Sat Jun 16, 2018 1:53 pm

I'm a first time poster who found the forum by reading the boggleheads book. I entered a dual income household through marriage 1 year ago. We both pursued higher education degrees and as a result entered the workforce at 27 years old. We married at 28 and are now 29 years old with no children. My spouse brought about $100,000 of student loan debt into the marriage and I have none. I have been contributing to my 401k with work at 11% of my income for two years. I also have a Roth IRA that I haven't contributed to in a year or so. My spouse has no retirement accounts at all, but does contribute 3% income into stocks. My first financial goal has been to grow our rainy day fund to cover 3 months of expenses. We will hit that goal in the next couple of months, so I'm trying to figure out what to do next. I'm wondering how to prioritize retirement savings against student loans against saving for a house. Our current annual pretax income is about $130,000. Is it possible to think about this question in terms of % overall income? If so, what percentages should I be aiming for.

delamer
Posts: 6267
Joined: Tue Feb 08, 2011 6:13 pm

Re: How to prioritize paying down loans vs. savings

Post by delamer » Sat Jun 16, 2018 3:20 pm

One factor should be the interest rate on the loans and their length.

ChinchillaWhiplash
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Location: Colorado

Re: How to prioritize paying down loans vs. savings

Post by ChinchillaWhiplash » Sat Jun 16, 2018 3:22 pm

Need more info to help. Please list loan amounts and interest rates. Any debt like car payments, etc. Tax rate etc. Hard to give you answers without this info. You probably should pay up to 401k employer match if you have that at a minimum. Anything else depends on your debt/expenses vs income coming in. If you have any debt above 6%, make that a priority for sure before working on retirement. Your wife should put that money into a tax deferred account instead of taxable or use that to pay down debt. She should be elegible for a Roth or standard IRA.

TwstdSista
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Re: How to prioritize paying down loans vs. savings

Post by TwstdSista » Sun Jun 17, 2018 3:51 am

I'd contribute enough to work place retirement accounts to get any matching contributions from your employers. Then I'd pay off high interest rate loans -- anything over 5%. Then I'd save every penny I could for a house.

Create a plan re: the loans and how much you will need for a 20% down payment in your area, plus closing costs, plus some money to immediately sink into said house (lawn mower, snow blower, rakes, shovels, furniture, etc.), plus an emergency fund that includes your future mortgage payment and house obligations.

Also, see: https://www.bogleheads.org/wiki/Priorit ... nvestments

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FiveK
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Re: How to prioritize paying down loans vs. savings

Post by FiveK » Sun Jun 17, 2018 6:43 am

If the student loan interest rate is already low enough, or you can refinance to make it so, with that combined income you should be able to fill all the normal tax-advantaged investment space: see Investment Order.

ssihvone
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Joined: Sat Jun 16, 2018 1:12 pm

Re: How to prioritize paying down loans vs. savings

Post by ssihvone » Sun Jun 17, 2018 8:49 pm

Hi All, Thanks for the replies so far. The student loan debt is with 13 different loans. Only one loan has interest rate below 5% most of them are 6.55%. The average interest rate is 6.95%.

ssihvone
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Joined: Sat Jun 16, 2018 1:12 pm

Re: How to prioritize paying down loans vs. savings

Post by ssihvone » Sun Jun 17, 2018 8:55 pm

Also we have no debts other than the student loans.

Jablean
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Joined: Sat Jun 02, 2018 2:38 pm

Re: How to prioritize paying down loans vs. savings

Post by Jablean » Mon Jun 18, 2018 12:02 am

Does your company match your 401k? Up to what percent?

Your spouse puts 3% of their income into a regular (not tax differed) account? Why? Why not pay those student loans and make a guaranteed 6.5% return?

You are still a couple of months from emergency funded?

My suggestions.

Your 401k up to match only - if no match then do an IRA.

Emergency Fund
Your IRA or 401k to match (fill IRA if still room)
Student Loans
Spouse IRA
Save for House

delamer
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Joined: Tue Feb 08, 2011 6:13 pm

Re: How to prioritize paying down loans vs. savings

Post by delamer » Mon Jun 18, 2018 9:18 am

Jablean wrote:
Mon Jun 18, 2018 12:02 am
Does your company match your 401k? Up to what percent?

Your spouse puts 3% of their income into a regular (not tax differed) account? Why? Why not pay those student loans and make a guaranteed 6.5% return?

You are still a couple of months from emergency funded?

My suggestions.

Your 401k up to match only - if no match then do an IRA.

Emergency Fund
Your IRA or 401k to match (fill IRA if still room)
Student Loans
Spouse IRA
Save for House

I agree with this, but would add that I would not buy a house until you’ve paid off the student loans.

First, if you restrict yourself that way it will provide an incentive to get the loans paid off as fast as possible.

Second, you will have more options with choosing a house if you don’t have the student loan payments dragging down how much mortgage you’ll qualify for.

Prioritize the loans by paying the minimums on all the others until you get the one with highest interest rate paid off and continue that method until they are done.

Nate79
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Location: Delaware

Re: How to prioritize paying down loans vs. savings

Post by Nate79 » Mon Jun 18, 2018 9:59 am

I would pay off the student loans using as much money as possible above the 401k match. At those interest rates a guarantee return is very nice. You should be able to pay them off in 3 years or less if you get intense about it. I also agree with delamer that I would wait to buy a house until your student loans are finished. I would stop all extra investing until this is done.

If your spouse has been investing in individual stocks on the side I would review that portfolio for selling and using to pay off the student loans, house down payment in the future, and/or buy index funds. Depends on the tax implications on whether to sell the individual stocks/investments outside of retirement accounts.

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