Paying off debt vs continuing to invest?

[layner]

Married 26 y/o’s with 2 kids. We have have right at 100k in 401k’s and IRAs, and we also have a taxable account with around $60,000 in it. We have 2 debts at this time. A credit card with $6,000 on it that is 0% interest until June of 2023 and a vehicle loan for my wife’s car. It has a 5.4% interest rate with $17,500 owed and the note is a little more than $350 a month.

Right now, our taxable is down about 5k because of the market correction, and I don’t want to pull any money out at a loss but I also don’t like holding any debt. The car loan payment is a small fraction of our monthly take home (like 3%) and we will only pay $3,000 in interest over the life of the loan. The credit card, I’m not worried about. It’s interest free for another year and it will be paid off by then no matter what. In an average month we have at least 3-4K over expenses, retirement contributions etc that can be used as savings or debt payments. What would you guys do? I see 3 good options.

A.) Take the money out of our taxable account today and just pay it off.

B.) Cash flow paying off the credit card the beginning of 2023 (will only be a month or two), continue saving in the taxable and pay off the vehicle when the market rebounds.

C.) Keep putting everything in savings in hopes the market has come back by June of next year then withdraw and pay everything off.

What should we do? I don’t want to cut off investment contributions completely to only pay debt. I want to take advantage of buying as much as possible while the market is down.

 

[kliver]

@layner r/personalfinance has a flow chart called prime directive that's good for answering these questions

 

[ajharmon89]

@layner There's no wrong choice here and it doesn't especially matter that much. Paying $6k today vs 8 months later really won't have a major impact on your long term finances. I wouldn't lose sleep over it.

Long term, I would expect the market to beat both the 0% credit card and the 5.4% car note. Keeping the money in the market is the smarter play from an expected value stance. I am debt averse though, so I'd be paying extra to reduce it.

I'm curious why you have the credit card debt to begin with. Was it from before your income was up? Or taking advantage of a 0% offer?

 

[layner]

@ajharmon89 Taking advantage of the 0%. It was for a few big purchases

 

[sheyla]

@layner Before you pay it off, I'd see if you can get a lower interest rate on the car loan through a local credit union or something. 5.4% is right on the cusp of "cheap debt" vs. "pay it off". In today's interest rate environment, you may not get a much better rate but it's worth a shot. If not, then don't rush to pay it off, especially if the car is worth more than you owe on it. It's a depreciating asset in the end. Focus more on investing in income/returns-producing assets like your investment portfolio.

IMO, just keep plugging away. Don't pay off the car yet unless you think it will bring you mental clarity and reduce financial stress. The market is down 20% off of all-time highs so now would be the most opportune time to invest more money if you can reasonably afford to do so. And since it's such a small share of your HHI (3%), I wouldn't see a problem in keeping the loan provided that you have a 6-12 months emergency fund built up.

Edit: To put it in different terms, the most you stand to gain by paying it off early is saving roughly $2,500-3,000 in interest. But investing that same $17,500 over the next roughly 60 months could net you alot more in investment returns (given a historically average 8% annual returns over the next 5 years). There's no right/wrong answer here and it all depends on how comfortable you are with Risk/Reward and financial stress.

 

[bell122855]

@sheyla Well said. You are thinking all the right thoughts. There is no substitute for a healthy retirement account to consistent investment. There is also no sin to holding debt if it is at a reasonable rate. Keep plugging away. Spend less than you make and your financial future will be bright.

 

[shawnv78]

@layner I would leave your investments alone and just start paying down your debts with the extra money each month. Then stay out of debt moving forward and invest. Being debt free is very relaxing for me. Well worth it.

 

[resjudicata]

@layner Use the funds in your taxable account, pay everything off today. This will free up monthly cash flow and reduce risk.. pile back into the market. You’ll sleep way better.

The market could go down another 20%.. and you’d still have debt. If you pay everything off and the market goes back up, big whoop.. you’re debt free and can invest more.

 

[zackg]

@resjudicata Why not just payoff the debt monthly with his cash flow? By cashing out the taxable account your effectively paying ~130% of your debt after taxes. Especially true for the 0% debt.

 

[drdoctor]

@layner Pay off the debt. Stay out of debt forever. Invest with all the extra money you have from staying out of debt.

 

[cedarchest]

@layner Honestly you are doing great. I wouldn't worry about the car loan. I'd just continue doing what you are doing. If anything I'd consider investing more into the market. Now things are on sale. Maybe in 6 months (or whenever the market starts to revover) I'd focus on paying down you car if you feel it important to pay down sooner.

I feel like you've done everything correctly and at this point it's a matter of comfort. Are you more comfortable having now debt? Pay it off (even if it's not the best financial move).

I think your 401k and taxables are in great shape for someone your age. You are clearly super responsible. Do what feels right to you.

No wrong move here.