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Get rid of the debt......
Let’s here it I want to know your reasoning? Psychological or money driven? My net worth will be higher overtime IMO by focusing on investing and debt later. Curious your opinion why
Since this thread has shown the question regard OP, the answer is easier because OP knows themself. However, let me try to answer for the unknown client.
If my client is a serial debtor, that is, someone that cannot help themselves when it comes to wanting (buying), then I encourage saving more now. If the client is truly focused on the long term, then let them decide how much goes towards savings and how much for debt. Always have some go towards savings with a plan to invrease savings with every pay raise.
Sometimes you won't find out the client is a serial debtor until you update the new car & loan for the 3rd time in 3 years at which point you probably need to determine if you are keeping the client and how much more the client needs to save versus spend. Some serial debtors are salvageable if they are willing to save first.
I made minimum payments on debt (mortgage and student loans) while maximizing investment contribution for the reason stated. As my income increased I started increasing the allocations to all 3 (quality of life, debt, investment). It wasn’t the result of some optimization function, just easy to keep the prevailing allocation. For bonuses I still put everything to investments. Eventually the debt was small enough that I just paid it off in a lump sum.
Can you refi the debt since interest rates are so low, but keep putting the same payment towards them? This will pay them down faster and allow you to put more into investments as well.
Do both, at that interest rate it's not terrible, and assuming you are on the younger side, early investing will help you considerably if you factor in lower current income with Roth contributions.
I don't think it's an either/or situation, but if you had CC debt at 20%+ then you would pay down debt
All the more reason to invest, max out a Roth now while your 23. You *should* make more and be at a higher tax rate later in life.
Some of it is phycological but at 60 you won't be thinking "I'm glad I paid that debt off 30 years ago" you'll be saying "I have X amount in a tax free account, woo hoo"
Just my opinion. You can definitely argue it different ways
Every Financial decision like this has to be considered in terms of both "Economic Sense" and "Peace of Mind Sense". As advisors, we can not determine which one makes more sense for the client. We can help the client look at the big picture and by talking about the concerns, and benefits the the client must often trust their gut on which is more important to them. Personally I prefer to invest and at some point take that money off the table to pay down debt. When the debt is a mortgage, we have to consider the bigger tas advantage of paying more interest for a longer period of time. As an advisor, we must not imply that our investment skills will out perform their current debt's interest (4-5% in your example) because that would imply we are saying past performance equals future performance.
The hard part is there is no right or wrong answer. There is a right answer on paper but it’s hard to measure the decisions we make/miss from
The psychological part
It’s a great question and the answer will be somewhat based on their age, goals, history with spending and debt, reserve amounts etc. I tend to advise clients in general to build emergency money first. Then split contributions between debt and investing since they are both important. I also find that debt manages to show up again in the future so if you don’t make investing a priority you will end up with not much in the end. If all goals are being funded and reserve are set up then I could see throwing addl cash flow to pay off debt, if nothing else but psychological freedom as you said. Not sure if that helps.
That really does. In school I feel that we were taught debt is good and focus on investments. Great point, my thoughts so far I think is making a shift. I am 23 so I think from these conversations for my example I will continue doing 8,400 towards Roth IRA/401k and anything past that and HSA goes to debt.
Also working through the emergency fund in a great place to
Interesting. Put the numbers off to the side. Do you feel that having that debt burden held you back from taking on career risks?
Yeah great point. Maybe I’m trying to get to get to a point but not asking the right questions to myself on why I feel I need to pay it down
Unfortunately I cannot. The debt is in student loans and I do not have a house to use for equity to refi into.
So in my head that leaves the decision do I accelerate my debt payoff or do I focus on investments.
Either way will still max my Roth IRA but after that I was doing Roth 401(k) due to age. But trying to decide if I should throttle down that and focus more on debt
One factor that hasn’t been mentioned is that this is student loan debt, which is nearly impossible to discharge. Maybe you don’t put all your extra cash toward it, but I think getting rid of it faster would make you feel better (based on all the information you’ve shared.)
Personally I made the career leap here BECAUSE all I have is a mortgage (made the change when I was 34.)
Wow awesome to hear. All I have is student debt. I think I can max my Roth IRA and still pay that off in 5-6 years.
Focusing on a heavy emergency fund build up to in order to feel comfortable making shifts as well