Pay off debt or fund retirement accounts?

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FWFamily
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Pay off debt or fund retirement accounts?

Post by FWFamily » Sat Apr 15, 2017 12:08 am

Hello all,

I have been researching Bogleheads on and off again for roughly a year now and have recently been focusing all of my attention into retirement ideas. I will post my financial picture and ask questions below.

Emergency funds: 17k
Debt: Mortgage 4.25% for 30 years, balance $84,572 (value of house is 113k) payment is $545 a month
College (myself)= 1.6k subsidized Stafford loan @ 6.8% interest
Spouse = 41K mix of loans @ 6.8% interest (07 years until loans are forgiven)
Car = $15,555 @ 6.9% interest with 56 months remaining
Credit Card = $7,980 @ 12.8% interest with Wells Fargo
$4,200 @ 14.26% interest (Wife’s card – not sure of the bank)
Tax Filing Status: Married filed jointly
Tax Rate: 15% Federal, 3.3% State (2016 combined income was $82k)
State of Residence: Indiana
Age: 29
Spouse: 28
Target Retirement age = 60 at the latest

Pay - Annually
Mine = $36,961.60 - City job (withholding allowances = 3 for federal and state)
$5,106.36 – Military monthly drill pay
$8,808.00 – Non taxed VA disability income (will receive for my lifetime)
= $50,875.96 for all sources of income
Spouse = 46,203.50 – Case manager at local elementary (withholding allowances = 0 for federal and state)

Current Retirement Accounts

Indiana Public Employee Retirement Fund (PERF)
Mine = Employer contributes 14.2% of pay with 11.2% being in a defined pension plan and 3% in an annual savings account
Military Retirement = The online calculator is not available anymore, but I’m tracking towards $1,400 a
month once I turn 60.
Spouse = Same as my retirement. 14.2% of salary is contributed from employer


TSP
Roth-IRA = $913.55 (L 2050 – 25%, F Fund - 10%, C Fund – 30%, S Fund – 25%)

Questions:
- Should I use the 17k to pay all of the credit cards off and then leave the rest for an emergency fund?
- Should I pay off half of the credit cards and max out my Roth IRA for 2016?
- Since we both have defined pensions building, should we focus more on paying off all of our debts before fully funding IRA's?

bjames310
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Re: Pay off debt or fund retirement accounts?

Post by bjames310 » Sat Apr 15, 2017 12:19 am

My two cents --

1) If you can afford it, max out ur retirement funds. You only get so much space per year, and if u don't use it, u lose it. I'm 32 and only started 3 years ago. I wish I started earlier.

2) pay off your debt. I recently paid off all of mine (only student loans, no house yet as I live in CA where it's hella expensive) and paying off my lump sum was the greatest feeling ever.

Loik098
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Re: Pay off debt or fund retirement accounts?

Post by Loik098 » Sat Apr 15, 2017 12:42 am

FWFamily wrote: - Should I use the 17k to pay all of the credit cards off and then leave the rest for an emergency fund?
This. Paying off bad debt and establishing an appropriate emergency fund are the first steps in the Boglehead Investment Philosophy.

I'd also prefer that you find a way to pay off or refinance your wife's student loans as well before continuing retirement savings, but that point is often argued here. IMO, 6.8% is too high.
Last edited by Loik098 on Sat Apr 15, 2017 1:15 am, edited 1 time in total.

venkman
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Re: Pay off debt or fund retirement accounts?

Post by venkman » Sat Apr 15, 2017 1:13 am

FWFamily wrote:Hello all,
*stuff deleted*
Questions:
- Should I use the 17k to pay all of the credit cards off and then leave the rest for an emergency fund?
- Should I pay off half of the credit cards and max out my Roth IRA for 2016?
- Since we both have defined pensions building, should we focus more on paying off all of our debts before fully funding IRA's?
The short answer is definitely pay off the credit cards first. Presumably, if an emergency did happen, you could then use the credit cards to cover the expenses that your emergency fund would have covered. The guaranteed return of 12.8%+ by paying off that debt is far more than you would expect to get from any investment. I would probably also pay off the car and Stafford loan debt--a guaranteed 7% return is still way better than any risk-free investment you could be in right now. There is the opportunity cost of not being able to contribute to the Roth; but when you get to the point where you have money to invest beyond the maximum for a Roth, a stock index mutual fund is still pretty tax-efficient.

The long answer involves the question of how you got in that much debt in the first place. If there was an emergency and you had to live off the credit cards for a while, that's understandable. But if you've just been living beyond your means, you need to address that before you do anything else. Step 1 is paying off the credit cards. Step 2 is making sure from now on you don't charge anything that you can't pay off at the end of the month.

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Watty
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Re: Pay off debt or fund retirement accounts?

Post by Watty » Sat Apr 15, 2017 3:15 am

FWFamily wrote: - Should I pay off half of the credit cards and max out my Roth IRA for 2016?
- Since we both have defined pensions building, should we focus more on paying off all of our debts before fully funding IRA's?
bjames310 wrote:1) If you can afford it, max out ur retirement funds. You only get so much space per year, and if u don't use it, u lose it. I'm 32 and only started 3 years ago. I wish I started earlier.
There is no hurry to fund a deductible IRA since you have access to the TSP and can save a lot in that next year after you get your debt under control. If you also have access to a Roth TSP then there is no reason worry about not making this year's Roth IRA contribution since you can make up for that in future years.

If both you and your spouse have access to the TSP or a 401k then you can each contribute about $18,000 a year to that or possibly a Roth TSP or ROTH 401k. You could also probably contribute about $5,500 to a Roth IRA. There is probably no reasonable way that you would be able to max out all your retirement accounts so there is no big rush to fill up all those possible contributions this year.
FWFamily wrote:Questions:
- Should I use the 17k to pay all of the credit cards off and then leave the rest for an emergency fund?
That sounds reasonable to me.

You have about $97,000 a year in pretax income and excluding your mortgage and your spouse's student loan you have about about $31,000 in other debt.

If you paid off your credit cards that would leave you about a $5,000 emergency fund and $20,000 of that other debt.

Unless you have some other high expenses you didn't mention then you should really be able to cut back your spending and have that paid off before the end of the year. That would leave you with just your mortgage and your spouse's student loans that will be eventually be forgiven.

You should also look into refinancing the car since you may be able to get a lot better interest rate than that. If there are credit issues then your credit score might improve a month or two after the credit cards are paid off.

blueman457
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Re: Pay off debt or fund retirement accounts?

Post by blueman457 » Sat Apr 15, 2017 4:02 am

Your non mortgage debt is almost equivalent to your annual salary, which is concerning. In addition to paying off your credit cards, refinancing your student loans, and car loan, I would encourage you to look at your spending habits. There isn't enough information about how your got into so much credit card debt or why your car loan rate is so high, but if this is a spending issue paying off the credit cards now isn't the only answer.

Blue man

blevine
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Re: Pay off debt or fund retirement accounts?

Post by blevine » Sat Apr 15, 2017 4:16 am

I do not think you should live without an emergency fund.
Banks can revoke your card and if so, likely when you need them most. The advice above to use a cc as your emergency fund is risky.

And forget the ira while in debt at high rates (credit cards) or debt you can never have forgiven (student loans).

I would think in terms of forcing yourself to "save" by paying off debt until college and cc are paid, then save to a retirement acct.

As far as which to payoff first, consider your job/income stability. If there is any chance of job losses/severe income loss, you would be glad if you had only paid the student loans off. Many can't be negotiated, but under duress you can negotiate a partial payoff credit card debt.

If you feel secure in your jobs and wont consider the above worst case, then of course payoff highest rate debt with part of your paycheck each month. Keep ideally six months in that emergency acct.

SleepKing
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Re: Pay off debt or fund retirement accounts?

Post by SleepKing » Sat Apr 15, 2017 7:12 am

I also feel you should pay off the credit cards first, starting with highest interest rate. Also, check out any teacher or military credit unions for cards with a lower interest rate. Better yet, cut the cards up!

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knpstr
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Re: Pay off debt or fund retirement accounts?

Post by knpstr » Sat Apr 15, 2017 7:32 am

The first step is stop going further into debt. So no more using credit cards or taking out any other loans.

Next, leave $1,000 in the emergency fund then use the $16,000 (and anything else you have) to pay off in this order.

Pay off in this order:
$1,600 student loan
$4,200 credit card
$7,980 credit card
$15,555 car
$41,000 student loan(s)

One 1 debt is paid off roll that payment into the next debt to pay it off even faster.

Since the $16,000 will get you down to the car and last student loans right away, put all those minimum payments you had been paying to the credit cards and student loan towards the car loan.

Once the car loan is paid off, roll all of those payments on the last student loan. That loan should be able to be paid back without forgiveness and as in recent news, some of those "contracts" are being found invalid and aren't being forgiven.

You guys are in a hole but with your income could be free of all debt other than your house in about 1 to 2 years. You guys make good money, shouldn't take longer than two years to pay back everything but your house.

Don't worry about your Roth's until all the debt above is paid off. You said you have pensions building and "missing out" on the Roth contributions will give you motivation to pay off the debt asap and get back to wealth building.

Good luck! :beer
For further help see Dave Ramsey website to get out of debt
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

FWFamily
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Re: Pay off debt or fund retirement accounts?

Post by FWFamily » Sat Apr 15, 2017 8:23 am

Thank you all of the advice. I had to live off of my credit card for almost a year when I first got out of the military and have consistently made minimum payments. My wife wanted to get involved with Mary Kay and they convinced her to open up an account and buy this big starter kit. She is in the process of trying to sell the stuff back, which would pay off the card, so if we use our savings now to pay it off any income she makes can be put back into our savings.

We have been pretty free spenders over the years. We actually almost bought a lake cottage at her family's lake, but after reading the site and with my 30th birthday approaching, I figured it would be wise to finally ask for some advice.

After reading the responses I think my next step should be to: 1) Pay off the student loan and both credit cards. 2) Use the money saved and roll that into extra car payments.

Question:

I have roughly 1k in my TSP as of now… should I cancel my monthly payments into that account and use that $304 and combine it with my other savings and pay off the car/bad debt even faster? Or should I continue to contribute to the TSP account?

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BL
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Re: Pay off debt or fund retirement accounts?

Post by BL » Sat Apr 15, 2017 8:37 am

I have roughly 1k in my TSP as of now… should I cancel my monthly payments into that account and use that $304 and combine it with my other savings and pay off the car/bad debt even faster? Or should I continue to contribute to the TSP account?
I don't know, but how about trying to squeeze 304 from your living expenses as a 1-year budget diet instead? Then you could do both.
Consider:
Cable
Phones
eating out
booze
vacation
other purchases, spending

bloom2708
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Re: Pay off debt or fund retirement accounts?

Post by bloom2708 » Sat Apr 15, 2017 8:41 am

Get a copy of The Total Money Makeover by Dave Ramsey. Both of you read it cover to cover.

It is a great plan and it works. You need a plan. Too much debt. Living beyond means.

Watch this video: https://vimeo.com/41152287

Funny and true. Good luck!
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

FWFamily
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Re: Pay off debt or fund retirement accounts?

Post by FWFamily » Sat Apr 15, 2017 8:50 am

BL wrote:
I have roughly 1k in my TSP as of now… should I cancel my monthly payments into that account and use that $304 and combine it with my other savings and pay off the car/bad debt even faster? Or should I continue to contribute to the TSP account?
I don't know, but how about trying to squeeze 304 from your living expenses as a 1-year budget diet instead? Then you could do both.
Consider:
Cable
Phones
eating out
booze
vacation
other purchases, spending
We have recently cut cable from DirecTV to DirecTV NOW which saved us roughly $100 a month. Our phones are definitely an issue as we have IPhone 7's with AT&T. We switched to their unlimited plan which has saved us a little bit, but our bill for that is over $200 a month. Not sure how to get that lower at this point since they make you lease the phones. We used to eat out 4-5 times a week but have made it a point to eat out only once a week. I used to spend over $60 a week on booze but have pretty much cut that out. We just went on spring break to Gatlinburg, which wasn't a back breaker but we have a cruise in June. We have everything paid for besides the transportation to and from the airport and anything else we spend on board.

I have tried cutting out most other reoccurring purchases. I'm about to cancel my parking at work which is $65 a month. I do have to figure out car insurance. My wife's car has depreciated to around 6k and we still have full coverage for it. I was thinking about getting minimum coverage on that and keeping full coverage on my vehicle.

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Cosmo
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Re: Pay off debt or fund retirement accounts?

Post by Cosmo » Sat Apr 15, 2017 8:57 am

blevine wrote:I do not think you should live without an emergency fund.
Banks can revoke your card and if so, likely when you need them most. The advice above to use a cc as your emergency fund is risky.
The OP would still have around $5,000 left in the emergency fund and would have TWO credit cards to use in the event of an emergency. Odds of BOTH banks revoking both of your credit cards? Very low.

FWFamily
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Re: Pay off debt or fund retirement accounts?

Post by FWFamily » Sat Apr 15, 2017 9:09 am

Cosmo wrote:
blevine wrote:I do not think you should live without an emergency fund.
Banks can revoke your card and if so, likely when you need them most. The advice above to use a cc as your emergency fund is risky.
The OP would still have around $5,000 left in the emergency fund and would have TWO credit cards to use in the event of an emergency. Odds of BOTH banks revoking both of your credit cards? Very low.
I feel the same. I have had my credit card for almost 15 years and they continually raise my limit. All those years of me paying them interest, and never late, obviously has me as a valued customer. My wife has had her card for a little over 2 years and again, we have never been late before on payments on these cards. A couple of years ago both of our credit scores were in the high 500's. I did a score predictor and if I paid off my card it would go up from 720 to 740. My wife is also approaching the 700's so I think we have made some considerable progress in that area. We acknowledge the past mistakes and with the help of Bogleheads I hope to be in a better position.

PFInterest
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Re: Pay off debt or fund retirement accounts?

Post by PFInterest » Sat Apr 15, 2017 9:19 am

pay of the credit cards, no question about it. the market isnt even returning that amount and you free up monthly cash flow.
(also you guys need to consider laying off credit cards in the future)

the other debts come next at your priority, the mortgage comes last i think on that list.

another thought i had. 7 years forgiveness on 41K is not that much. dont forget you will owe taxes on how much is forgiven so save up, and file the paperwork. this is the year we will see is any PSLF will happen.
now im not sure how the private case manager market is, but if she gets a better paying job you might come out ahead refinancing those to 2-3% and paying them off. but since you cant even qualify for a car loan that low, this might be unlikely.

also consider Mr. Money Mustache. I would call you guys in a debt emergency for sure.

FWFamily
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Re: Pay off debt or fund retirement accounts?

Post by FWFamily » Sat Apr 15, 2017 9:29 am

PFInterest wrote:pay of the credit cards, no question about it. the market isnt even returning that amount and you free up monthly cash flow.
(also you guys need to consider laying off credit cards in the future)

the other debts come next at your priority, the mortgage comes last i think on that list.

another thought i had. 7 years forgiveness on 41K is not that much. dont forget you will owe taxes on how much is forgiven so save up, and file the paperwork. this is the year we will see is any PSLF will happen.
now im not sure how the private case manager market is, but if she gets a better paying job you might come out ahead refinancing those to 2-3% and paying them off. but since you cant even qualify for a car loan that low, this might be unlikely.

also consider Mr. Money Mustache. I would call you guys in a debt emergency for sure.
The loan forgiveness is one thing that we really don't have a clue on. Like you mentioned, this is the first year where we see if the PSLF will happen and how impactful it will be. Our thought was that we would pay for the next 07 years and then it would be forgiven so I wasn't concerned trying to pay it off any faster. My wife has a BA in Psychology so I highly doubt she will get a better paying job here in Indiana. I think with the pension plan offered through the state she is in a good spot career wise.

The car loan was more of an emergency back in late 2015. My car was totaled and I had a credit score that was in the low 600's. I have increased it by over 100 since then so hopefully with a little more work we can get closer to that 2-3% interest rate area.

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BL
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Re: Pay off debt or fund retirement accounts?

Post by BL » Sat Apr 15, 2017 9:47 am

For car loans, check your local credit union and also check PenFed.org

carofe
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Re: Pay off debt or fund retirement accounts?

Post by carofe » Sat Apr 15, 2017 9:52 am

Great answers. I just want to add something regarding your credit card:
FWFamily wrote:Credit Card = $7,980 @ 12.8% interest with Wells Fargo
I recommend you have a look at 0% credit cards. While you pay that balance you can get a 0% credit card and transfer it.

Check this out: https://www.credit.com/credit-cards/balance-transfer/

I recommend you look at Chase Slate (0% for 15 months) or Citi Simplicity (0% for 21 months). If you need more time than that you can always switch to another 0% credit card of another bank (usually they have to be from different banks to allow the balance transfer to be accepted).
US Total Stock Market + Intermediate Term Bond. That's it.

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grabiner
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Re: Pay off debt or fund retirement accounts?

Post by grabiner » Sat Apr 15, 2017 10:17 am

FWFamily wrote:I have roughly 1k in my TSP as of now… should I cancel my monthly payments into that account and use that $304 and combine it with my other savings and pay off the car/bad debt even faster? Or should I continue to contribute to the TSP account?
Since you aren't getting a match (as a member of the reserves), it's not worth contributing while you have high-interest debt. You get 6.8% or more risk-free by paying down the loans. You can make up for this by saving more for retirement once the loans are gone; the money which was previously going to loan payments will be available for investing.
David Grabiner

FWFamily
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Re: Pay off debt or fund retirement accounts?

Post by FWFamily » Sat Apr 15, 2017 12:09 pm

grabiner wrote:
FWFamily wrote:I have roughly 1k in my TSP as of now… should I cancel my monthly payments into that account and use that $304 and combine it with my other savings and pay off the car/bad debt even faster? Or should I continue to contribute to the TSP account?
Since you aren't getting a match (as a member of the reserves), it's not worth contributing while you have high-interest debt. You get 6.8% or more risk-free by paying down the loans. You can make up for this by saving more for retirement once the loans are gone; the money which was previously going to loan payments will be available for investing.
Thank you for the guidance. I changed my contribution to 0% for my TSP until I can pay off my debts. Paying off the credit cards, my school loan, and having the money I previously put into the TSP, allows for an additional $750-$800 I can start putting towards my vehicle loan. Once I pay that off it will be a good time to evaluate the PSLF and see if we should aggressively pay off the 41k school loan or pay the minimum until it can be forgiven.

Compound
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Re: Pay off debt or fund retirement accounts?

Post by Compound » Sat Apr 15, 2017 12:56 pm

FWFamily wrote:
grabiner wrote:
FWFamily wrote:I have roughly 1k in my TSP as of now… should I cancel my monthly payments into that account and use that $304 and combine it with my other savings and pay off the car/bad debt even faster? Or should I continue to contribute to the TSP account?
Since you aren't getting a match (as a member of the reserves), it's not worth contributing while you have high-interest debt. You get 6.8% or more risk-free by paying down the loans. You can make up for this by saving more for retirement once the loans are gone; the money which was previously going to loan payments will be available for investing.
Thank you for the guidance. I changed my contribution to 0% for my TSP until I can pay off my debts. Paying off the credit cards, my school loan, and having the money I previously put into the TSP, allows for an additional $750-$800 I can start putting towards my vehicle loan. Once I pay that off it will be a good time to evaluate the PSLF and see if we should aggressively pay off the 41k school loan or pay the minimum until it can be forgiven.
Your plan looks sound -- you've got a good path forward!

Good luck.

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jharkin
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Re: Pay off debt or fund retirement accounts?

Post by jharkin » Sun Apr 16, 2017 5:56 am

Sounds like you have good advice. It wasn't explicitly mentioned but also remember that at your income the student loan interest should be fully federal tax deductable, and most times you have the ability to ask for a temporary deferment in case you ever become unemployed.

For those two reasons I would attack the student debt LAST, and focus on the credit cards first followed by the car. Of course also look into refinancing as others suggest.

Good luck... And dont forget to consider the positives - the debt may look like a mountain, but OTOH with 4 difference streams of income including multiple pensions you are in a far more stable position than families who might face similar issues while relying on only one income stream in a high volatility private sector industry and nothing but a 401k... In a couple years you will have the worst of the debt tacked and then will start catching up on retirement.

blevine
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Re: Pay off debt or fund retirement accounts?

Post by blevine » Sun Apr 16, 2017 11:10 am

FWFamily wrote:
Cosmo wrote:
blevine wrote:I do not think you should live without an emergency fund.
Banks can revoke your card and if so, likely when you need them most. The advice above to use a cc as your emergency fund is risky.
The OP would still have around $5,000 left in the emergency fund and would have TWO credit cards to use in the event of an emergency. Odds of BOTH banks revoking both of your credit cards? Very low.
I feel the same. I have had my credit card for almost 15 years and they continually raise my limit. All those years of me paying them interest, and never late, obviously has me as a valued customer. My wife has had her card for a little over 2 years and again, we have never been late before on payments on these cards. A couple of years ago both of our credit scores were in the high 500's. I did a score predictor and if I paid off my card it would go up from 720 to 740. My wife is also approaching the 700's so I think we have made some considerable progress in that area. We acknowledge the past mistakes and with the help of Bogleheads I hope to be in a better position.
How quickly we forget...
Remember way way back, in 2009-2010 when the economy was in freefall ?
Banks were pulling back from the credit card business, actively stopped adding to credit limits for many customers,
closed accounts for some others. Even in good times, they check your credit regularly. The time when you need the emergency
funds are exactly the time when they can shut down your credit limit and even close your account. The advice above to be left with $5,000 in in your
emergency fund is TERRIBLE advice. Yes pay off your credit card debt would be the most profitable way to deploy this cash,
but you could say the same thing if you had no debt. An emergency fund by it's very nature is supposed to trade reward for reduced liquidity risk.
Almost any way you "invest" your emergency funds can be more profitable, but that is not a fact to even consider. ALL YOU SHOULD CONSIDER
is how many months times how much you truly need to spend each month and that is how much should be in your emergency fund.
If you would only spend $5000 in the amount of time it would take to get a new comparable job, then go ahead and do that.
But for most people I don't think $5,000 would be enough. Anything in excess of that yes, should pay down debt.
Which debt is also not so obvious, as I said, you can never get out of most student debt, and while the rate may be lower than other debt, something to consider. That is also a risk/reward trade off. More rewarding to pay down highest rate debt, but reduced risk to pay down debt you can never eliminate even in the worst of circumstances.

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