Invest vs pay down debt?

[marykate1019]

31 M making $140k/ year with approx 25-40k / year in bonuses. 5% of income goes to 401 k and employer matches 4%

Wife 30 F works part time to stay with our kid (2y) and cover car insurance + day care + other minor expenses

-Mortgage 221 k left @ 2.87% (1430/ month)

-Student loans 125 k left @ 5.9% avg (1400/ month)

-No car debt because both of us are driving older vehicles but wife wants nice things and might need to buy a car this year/ next

-Looking into possibly buying a home closer to family+ daycare and would likely rent out current home at around 2200-2500/ month

-wife MIGHT start additional schooling which will be 40k and take around 3 years. After finishing salary will be around 100-150 k for 3 days of work.

-Probably another kid or two next few years

-70 k saved plus wife has about 30 k saved

GOAL: Get around 6-8 k in passive income and retire early (with part time work)

I am not good in stock trading nor do I have the desire/time to learn between work, husbanding, and parenting. I have been paying down my student debts very generously since graduating. To give perspective student loans were 230k in 2019. Been paying the minimum on mortgage because of the interest rate. My question, is should I buckle down and keep paying down the student debt or should I pay the minimum and invest the rest? And if I do invest, what to invest in anyway?

Any and every tip will be appreciated, thanks in advance

 

[steve77777]

@marykate1019 in your place I would contribute the 401k in order to match the employers. For both.

All the left over I will push into that 5.9% loans. I know you can invest in the market with a better ROI (SP500 has a 7% average return, and 7% is > 5.9%) but less debt is priceless.

On the other line, I will not touch that mortgage as interest is smaller than inflation and I would not add another Mortgage until the interests are reducing a little as a few days ago I saw 6.5% mortgages....

 

[allroads]

@steve77777 Note: the 5.9% return on debt pay-down is tax-free.

 

[marykate1019]

@steve77777 The reason I’m doing 5% is because the employer matches 4%. But thank you for the reply

 

[allroads]

@marykate1019 When doing this analysis, you need to think about the fact that paying down your student debt absolutely IS investing your money… doing so provides a guaranteed TAX-FREE return of 5.9%!

Where else can you get a guaranteed tax-free return of 5.9%?

 

[marykate1019]

@allroads Interesting way of looking at it . Thank you

 

[christineleex3]

@marykate1019 U r in a strong position,

If you need the cash for another house np but my.2 cents would be to the following.

Open or use you accessible CC lines to get 40-50k in a 18 to 24 month balance transfer if you have that available at 0% use all that to pay down your student loans, then use your cash to kill the rest.

Once that's gone your savings will aggressively replenish monthly. And you will save urself around 7k for 2024.

When transfers come due at the end of your minimum payments pay them back in full with savings.

 

[marykate1019]

@christineleex3 Interesting take but makes sense, thanks

 

[clothilde]

@marykate1019 The best order is to get clear of all debt except your mortgage, build a fully funded emergency fund, then start saving towards your goals (schooling, cars, retirement fund etc). Money being saved towards goals more than five years away could potentially be invested in the stock market as long as you've completed the other steps first. Invest in a well diversified passively managed low cost fund in a low cost platform unless you know better.

 

[radicalson]

@marykate1019 Dude, you are $346,000 in debt. Is the value of your house, cars, and investments more than $246,000? Because, if not, you have a negative net worth and are broke. Pause the investments and get your debt paid off.

 

[marykate1019]

@radicalson House is valued at 350-380 k, cars are worth 20k so I guess it’s worth getting that student loan paid off asap

 

[adon]

@marykate1019 I'd pay off that student loan ASAP. The mortgage is low enough interest that I wouldn't pay it off early. Keep about 30k for an emergency fund and throw 70k at the student loans Then continue to pay it off as quickly as you can until it's gone.

If there's nothing wrong with your current cars, "wife wants nice things" isn't a reason to get another car with your current situation.

If you buy another house, your new mortgage is going to be at a much higher interest rate. That's probably going to hurt.

I'd work on debt before increasing investments.

 

[marykate1019]

@adon What do you think would be a “reasonable debt” before starting any investments ?

 

[adon]

@marykate1019 The mortgage. I mean, you can do whatever you want of course. I just don't like the idea of keeping that student loan for super long periods of time. Too many people don't try to pay it off, and have it for years upon years.

 

[marykate1019]

@adon It’s a ball and shackle bottom line and I am in the same line of thinking. That’s why I have been trying to pay it down as fast as I can. The mortgage to me is doable because of the interest rate.

Everyone raves about investing in the stock market because of the larger average annual return. I don’t have the time and knowledge to sit down and look at different indices and choose where to invest. That’s why I also don’t gamble.

 

[resjudicata]

@marykate1019 Stop talking yourself out of the stock market. It is not that complex. Just put the shit in VTI(total stock market) and be done.

“Don’t have the time and knowledge “. What are you avoiding? You don’t have time to plan out your financial future and significantly grow your wealth? You already got the hard part done (high income).

 

[blueberry25]

@marykate1019 If your goal is to retire then why are you only putting 5% into your 401k? I would be maxing that for the tax advantage and investing in broad index funds that cover domestic and international stock markets.

Money beyond that I think paying down your higher interest student loan makes sense.

If you want early retirement and your wife wants nice things now you two may need to have a talk about that.

With your current finances and situation I don't really see an substantially early retirement happening unless your combined income increases...although you didnt say how much your wife makes so hard to tell for sure. You might be able to retire around 59.

You paid off 105k in student loan in 4 years so thats probably like 30k "saved" a year to do that. You put 5% of your income into a 401k which is only 7k a year. 4% match so 12.6k total a year. So you are basically saving 43k a year. If you are 31 now by 59 you would have saved $1.25M. If you get an average 6% inflation adjusted return while you are saving thats $3.7M. 4% rule on that is $148k a year which would be $12k a month before taxes probably like that 9k or so after. So yeah maybe you could retire at like 55 with your current course.

 

[marykate1019]

@blueberry25 I am doing 5 % since employer matches max 4% plus I pay 1090/ month for health insurance. Thinking of having a second kid and the insurance is good for maternity/ delivery care. I don’t want to stretch myself too thin and be net positive each month.

Wife and I have had the conversation. She drives a 2015 Rogue which is notorious for having transmission issues. Trade in value is around 5 k right now but that goes out the door once that transmission fails. Most likely looking at another suv between 27-35 k

She makes anywhere between 45-60/hour. If she finishes her additional schooling, she can have a salary between 90-150 k on 3 days of work.

Everyone keeps telling me to invest, invest, invest but I don’t even know what to invest in and that’s why I have been paying down the larger interest debt

 

[blueberry25]

@marykate1019 You don't get the tax savings from your employer contribution, you are giving up a lot of tax savings only contributing 5% to your 401k. That is money not being saved for your retirement. As for not wanting to stretch yourself thing I understand that but you are the one that said you want to retire early. You arent going to retire early by putting 5% a year into your 401k. Keep in mind any money you put in that 401k you instantly get your marginal tax rate in additional money to invest. So by say putting $1000 into your student loan to save that 5.6% you are not putting $1000 into your 401k which (assuming your marginal rate is 22%) means you dont get that 22% to invest upfront.

As to what to invest in, its easy...you invest in EVERYTHING. Meaning you buy an index fund that owns all available publicly traded stock. Then you are basically betting that over time the value of all companies on the whole will go up. That is a pretty safe bet. The market, on average, returns about 10% a year when you look over 30 year time spans. All my savings go into tax sheltered retirement accounts and are invested in the total stock market (and about 15% into bonds and cash equivalents). I do quite well with that (would screen grab and share my portfolio performance over the last year if that would be useful at all).

As for the trade in $5k isn't that much. You'd save $5k if that car lasts another year versus having to pay for a 35k car and the payments and added insurance costs involved in that.