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Started By
Message
Debt Pay Down or Invest - Interest Rate Threshold
Posted on 12/30/24 at 9:31 am
Posted on 12/30/24 at 9:31 am
I will be recieving a large check in the next few weeks that will substantially improve my financial situation.
The question is, what to do with it - invest or pay off debt? The likely answer is a bit of both, but I'm trying to determine a cut off interest rate at which anything above that rate should be paid off, and the remainder of the check should go towards investments.
I can cover all debt payments via my normal cash flow, so this is really just an opportunity to acclerate paydown on some of these accounts.
Various Debt Interest Rates below - in order of interest rate (highest to lowest):
Student Loans #1 (federal) - 6.35%
Student Loans #2 (federal) - 5.75%
Student Loans #3 (federal) - 5.06%
Car Loan #1 - 4.99%
Car Loan #2 - 3.99%
Student Loans #4 (private) - 3.32%
Mortgage - 3.25%
The question is, what to do with it - invest or pay off debt? The likely answer is a bit of both, but I'm trying to determine a cut off interest rate at which anything above that rate should be paid off, and the remainder of the check should go towards investments.
I can cover all debt payments via my normal cash flow, so this is really just an opportunity to acclerate paydown on some of these accounts.
Various Debt Interest Rates below - in order of interest rate (highest to lowest):
Student Loans #1 (federal) - 6.35%
Student Loans #2 (federal) - 5.75%
Student Loans #3 (federal) - 5.06%
Car Loan #1 - 4.99%
Car Loan #2 - 3.99%
Student Loans #4 (private) - 3.32%
Mortgage - 3.25%
12
Posted on 12/30/24 at 9:38 am to blackoutdore
I should also mention that we fully max out our 401K and HSA.
My current plan is to use the check to pay off Student Loans #1 - #3, and car loan #1 and #2 ( car loan #2 has less than $3K on it remaining and is scheduled to be completely repaid this year anyhow). After that, I will use the remaining funds to fund 2024 and 2025 backdoor Roth.
That will leave about $24K left of the check to put towards whatever.
My current plan is to use the check to pay off Student Loans #1 - #3, and car loan #1 and #2 ( car loan #2 has less than $3K on it remaining and is scheduled to be completely repaid this year anyhow). After that, I will use the remaining funds to fund 2024 and 2025 backdoor Roth.
That will leave about $24K left of the check to put towards whatever.
Posted on 12/30/24 at 9:40 am to blackoutdore
How big is the check and how much are the debts?
Posted on 12/30/24 at 9:54 am to blackoutdore
Money Guys would recommend hitting high interest debt. If 20-29, that’s 6%, 30-39, 5%, 40+, 4%.
Posted on 12/30/24 at 10:21 am to blackoutdore
Always pay down debt first. You will always be
getting a raise every month with no risk.
getting a raise every month with no risk.
Posted on 12/30/24 at 10:38 am to blackoutdore
quote:
I can cover all debt payments via my normal cash flow, so this is really just an opportunity to acclerate paydown on some of these accounts.
It’s also an opportunity to accelerate the wealth growing process. Use the cash that was servicing the debt to fund that venture, whether it be stock market, real estate, etc.
We were able to do something similar earlier this year.
While it’s not the sexiest thing to do with newfound money, clicking the balance option and hitting submit payment on everything but the mortgage is a great feeling.
Posted on 12/30/24 at 10:42 am to blackoutdore
quote:
Student Loans #1 (federal) - 6.35% Student Loans #2 (federal) - 5.75% Student Loans #3 (federal) - 5.06%
Definitely these
quote:
Mortgage - 3.25%
Definitely not this
Posted on 12/30/24 at 10:44 am to blackoutdore
I know I'm in the minority but no debt is a great feeling.
Posted on 12/30/24 at 11:12 am to blackoutdore
6% is where I'd start leaning to pay debt. Invested capital gives you more options if you need access to $ for any reason. Long term I expect 7-10% market returns on investments.
The federal student loans also give you some protections and payment flexibility other debt doesn't. If you die or become totally disabled they are discharged and if you lose income you can put them on income based repayment or defer payment entirely if you qualify.
I'd be wealthier today if I hadn't paid off low interest student loans and mortgage early.
The federal student loans also give you some protections and payment flexibility other debt doesn't. If you die or become totally disabled they are discharged and if you lose income you can put them on income based repayment or defer payment entirely if you qualify.
I'd be wealthier today if I hadn't paid off low interest student loans and mortgage early.
This post was edited on 12/30/24 at 11:21 am
Posted on 12/30/24 at 11:17 am to prostyleoffensetime
quote:
It’s also an opportunity to accelerate the wealth growing process
Investing the $ now jump starts wealth building even more though.
Posted on 12/30/24 at 12:23 pm to TorchtheFlyingTiger
quote:
Investing the $ now jump starts wealth building even more though.
That’s true, given his interest rates. He’s in a good spot either way. Kind of just depends on how much debt he wants to keep carrying, I guess.
You made good points on the student loans though. I’ve never dealt with those.
Most of our debt aside from mortgage and vehicle was consumer debt from when we were young and dumb. OP doesn’t look like he was as dumb as I was at one time.
Posted on 12/30/24 at 3:21 pm to blackoutdore
Pay off debts and do not incur more debt
Posted on 12/30/24 at 3:47 pm to HeartAttackTiger
quote:
I know I'm in the minority but no debt is a great feeling.
Because on paper, it's a bad idea.
However, life is not a spreadsheet, and the psychological "lightness" that comes from not having any debt - or a negligible amount of debt your family could absorb if you died tomorrow - is unbelievable.
Posted on 12/30/24 at 4:06 pm to SouthPlains
Same goes for if you have investments to cover the debts. Heirs can sell shares to cover debt. Plus heirs get a stepped up basis and federal student loans are discharged at death.
Accessible assets also provide a peace of mind that paid off debt doesn't. In a crisis, a paid off pstudent loan or even home equity if you cant qualify for a HELOC won't help.
Accessible assets also provide a peace of mind that paid off debt doesn't. In a crisis, a paid off pstudent loan or even home equity if you cant qualify for a HELOC won't help.
This post was edited on 12/30/24 at 4:07 pm
Posted on 12/30/24 at 4:13 pm to blackoutdore
Do what makes you feel good.
Now my $ .02 with is without more data this is simply an emotional decision, in paying interest versus earning returns. If investing the left over into a qualified account is what your thought is, explore investing it all in a non qualified account and let your earnings accelerate paying down your debt. Fixed debt payments are friendlier in an inflationary cycle and earnings on a large number generate large numbers. And if I'm correct, student loan interest is tax-deductible. It's good to be in your position.
Now my $ .02 with is without more data this is simply an emotional decision, in paying interest versus earning returns. If investing the left over into a qualified account is what your thought is, explore investing it all in a non qualified account and let your earnings accelerate paying down your debt. Fixed debt payments are friendlier in an inflationary cycle and earnings on a large number generate large numbers. And if I'm correct, student loan interest is tax-deductible. It's good to be in your position.
Posted on 12/30/24 at 6:19 pm to blackoutdore
quote:
Student Loans #1 (federal) - 6.35%
Student Loans #2 (federal) - 5.75%
Student Loans #3 (federal) - 5.06%
Car Loan #1 - 4.99%
Car Loan #2 - 3.99%
Student Loans #4 (private) - 3.32%
Mortgage - 3.25%
Gah damn
Posted on 12/30/24 at 7:20 pm to blackoutdore
All I can say is this man. The psychological comfort of not having debt hanging over me or around my neck is something I'm perfectly fine with purchasing at the expense of investing.
This post was edited on 12/30/24 at 7:21 pm
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