Pay off Loans vs. Saving Forum

[Anonymous User]

Basically, I'm trying to strike the right balance between saving and paying off loans. Household income next year will be between $160-180k depending on spouse's renegotiated contract. I have 45k in student loans. Our expenses will average about $7k a month. Using a very basic income tax calculator, I think we'll net worst case $121k leaving about $30k to allocate to savings. (The 7k monthly expenses includes my minimum loan payment of $450 a month). How much extra should I use to pay off loans? How much should I save towards retirement? We have a medium-term goal of buying a house within the next 7-9 years with hopefully a $120kish down payment. We have about $60k in savings already (between some retirement, emergency, and general down payment savings).
I'm really going back and forth about what the best thing would be considering our goal of buying a house!
Additionally we have kid(s) so I like to have some cushion (which we do have with emergency savings in a high-yield savings account).

[Whatislaw]

Is it private loan? Federal loan? Perkins loan? Depending on the loan type, I'd approach it differently. Does your spouse have any student loans to factor into this equation? Is your credit score strong? Asking because refinancing and consolidating the loans may be worth it given your relatively small student loan principal.

[Anonymous User]

Is it private loan? Federal loan? Perkins loan? Depending on the loan type, I'd approach it differently. Does your spouse have any student loans to factor into this equation? Is your credit score strong? Asking because refinancing and consolidating the loans may be worth it given your relatively small student loan principal.

OP here-thanks for the reply. Federal loans, $20,000 at 6.0% interest rate and 25 at 6.6%. My spouse has no student loans- this student loan is the only one type of debt we have. According to credit karma my score is in the high 750's.

[Anonymous User]

Is it private loan? Federal loan? Perkins loan? Depending on the loan type, I'd approach it differently. Does your spouse have any student loans to factor into this equation? Is your credit score strong? Asking because refinancing and consolidating the loans may be worth it given your relatively small student loan principal.

OP here-thanks for the reply. Federal loans, $20,000 at 6.0% interest rate and 25 at 6.6%. My spouse has no student loans- this student loan is the only one type of debt we have. According to credit karma my score is in the high 750's.

If you have no intention of ever doing IBR (Income Based Repayment) then I'd suggest looking at First Republic Bank. They do a great refinance rate of 1.9 to 2.9% APR which is half of what your current APR is. However, I personally keep my stuff in Federal Loans because it gives me the option of IBR if I need it. Since you're looking to buy a house, and god forbid you ever lose a job or transition or have other expenses because let's say your car needs major repairs, etc., IBR gives you more flexibility. To save money, you can just target and pay down the loans faster each month by making additional payments to principal. Enroll in an IBR payment plan though so that you can get credit for the payments you're making and that way they can discharge with time if you for some reason haven't paid it off in 20/25 years (undergrad/grad).

When push comes to shove, my view is this. Having a savings means you, your family, your children eat, have a roof, etc. Paying off the student loans, while a good goal that we all have, will not guarantee you someone saving your ass should the day come where you are in a financial crunch. My priorities are: Savings, Mortgage, then Student Loans. I would not reverse the order. Watch out for the 401k crap though. Recently it's been up and down. You may be better off saving some accessible cash (i.e. Savings Account/ short-term CD) until you have disposable savings that you want to toss into a 401k and be okay with not accessing till after 65.

[sparty99]

Not sure why your expenses are 7,000. You should be able to save more then 30,000. I can save that on a 105k salary. You should be saving 6 to 7k and should be debt in 6 to 8 months easily. Get rid of your damn deb

[Anonymous User]

Not sure why your expenses are 7,000. You should be able to save more then 30,000. I can save that on a 105k salary. You should be saving 6 to 7k and should be debt in 6 to 8 months easily. Get rid of your damn deb

I agree I should be able to save more- I'm purposely underestimating and would like to save closer to 40-50k. However living in the tri-state and having more than 1 kid in full-time childcare can get you to 7k pretty quickly

[sparty99]

Not sure why your expenses are 7,000. You should be able to save more then 30,000. I can save that on a 105k salary. You should be saving 6 to 7k and should be debt in 6 to 8 months easily. Get rid of your damn deb

I agree I should be able to save more- I'm purposely underestimating and would like to save closer to 40-50k. However living in the tri-state and having more than 1 kid in full-time childcare can get you to 7k pretty quickly

Pay off your debt in 6 to 8 months and in a year you are debt free and will have $24 to $30k in savings. Don't keep the student loan. Lower your expenses. Cut cable, no eating out, no eating out, no eating out, no travel. This should be real easy. You are not being serious with saving $30, 40, or 50k in a year on 180k salary.

[nixy]

Not sure why your expenses are 7,000. You should be able to save more then 30,000. I can save that on a 105k salary. You should be saving 6 to 7k and should be debt in 6 to 8 months easily. Get rid of your damn deb

Why must every one of these threads turn into a denunciation of people’s spending habits? Just take their damn expenses at face value instead of trying to preach frugality.

(Also $45k is pretty minimal and manageable, so I agree that either route works for the OP depending on their priorities.)

[Necho2]

It doesn't- it's just that the same person who comes into every single financial thread to extoll his Dave Ramsey-esque shtick about cutting expenses and getting rid of debt at the expense of everything else. It's most obnoxious when he's demanding that people not max out tax-preferred retirement vehicles, but I think OP can determine for themselves how much they want to cut expenses to the bone.

[AVBucks4239]

I could go into a long spiel, because we need more information, but here's what I am doing right now with a much larger loan balance:

(1) Refinance your student loans;
(2) Maximize your tax-advantaged retirement vehicles (most especially your 401k);
(3) Automate $3,000 to an Ally account every month;
(4) When Ally is enough to pay off the loan, pay it off.

The reason I would do this is because the spread between your interest rate and Ally (refinanced at 4.5ish% - 2.25%) is extremely minimal when you consider that you can deduct student loan interest. Keeping the cash on hand gives you short term leverage in case something comes up.

Further, paying off debt without paying it totally off is throwing money into an abyss that never comes back. If something happens during repayment, and the loan is still there, you still have your monthly payments. By keeping the money in a savings account, you still have that money and are probably only losing a couple bucks a month.

Of course, all of this depends on discipline -- can you do this? I myself have found my spending to increase while implementing this strategy. My wife and I are re-setting in March but you need to keep discipline in mind.

[sparty99]

There's some value to having liquidity.

But to a large extent, this all comes down to how much you value being debt free vs how much you value the freedom that comes with liquidity. Your loans are small enough in absolute terms that it's not going to be a huge difference in $$ in whether you pay them off in 3, 5, or 10 years (assuming that if you're not paying down loans, you're saving). That's especially true if you do not refi -- although even if you do refinance (in which case the interest that you save by paying off your loans will likely be less than the interest you make by investing that money), the difference will still be small.

Does that make sense?

In any event, if I were in your shoes and did not have any short- or immediate- term goal of buying a house or making some other large purchase, I'd probably refi and aim to pay down my loans in 5 years and put the rest into savings. If I had a tangible purpose for saving, I'd probably refi and aim to pay down my loans in 10 years and save the rest. $45k in loans is little enough as to be fairly manageable even if one of the two of you loses your job, especially if you've refinanced and built up some savings.

He could pay it off in 6 to 8 months and by year 5 he would have no debt and 200k or 10 years no debt and 450k.

[sparty99]

There's some value to having liquidity.

But to a large extent, this all comes down to how much you value being debt free vs how much you value the freedom that comes with liquidity. Your loans are small enough in absolute terms that it's not going to be a huge difference in $$ in whether you pay them off in 3, 5, or 10 years (assuming that if you're not paying down loans, you're saving). That's especially true if you do not refi -- although even if you do refinance (in which case the interest that you save by paying off your loans will likely be less than the interest you make by investing that money), the difference will still be small.

Does that make sense?

In any event, if I were in your shoes and did not have any short- or immediate- term goal of buying a house or making some other large purchase, I'd probably refi and aim to pay down my loans in 5 years and put the rest into savings. If I had a tangible purpose for saving, I'd probably refi and aim to pay down my loans in 10 years and save the rest. $45k in loans is little enough as to be fairly manageable even if one of the two of you loses your job, especially if you've refinanced and built up some savings.

He could pay it off in 6 to 8 months and by year 5 he would have no debt and 200k or 10 years no debt and 450k.

The opportunity cost of paying it off early is (1) missed opportunities that would have been made available with more liquidity (purchasing a home is a big one, but by no means the only one); and (2) lost interest from investing that money. If he refinances, pays off his loan slowly, and invests, he'd have <em>more</em> in total by year five <em>and</em> by year 10, assuming pretty standard returns, than he would under your plan; ie, would you rather have $200k and no debt or $250k and $25k in debt? That's not to say that paying off loans slowly is the correct call -- there's something to be said about the guaranteed 'returns' one gets from paying off a loan. But it's an illustration of why your pithy advice is not necessarily correct.

Your advice does not calculate risk. Stock market fluctuations, job losses, medical care, dying family member, funeral expenses, etc. Additionally, there are no missed opportunities here. He is out of debt in 6 to 8 months and by month 12 has 20 to 30k in savings versus you wanting him to carry debt for 5 to 10 years.

[nixy]

And the whole point is that if those emergencies occurred the person would have built up cash to cover them through the investments made in lieu of paying off debt. And that by investing now they’d make more money than they have to pay by paying off the debt later. You need to get that not everyone shares your view of debt and you haven’t really put forth a good reason why they’re wrong, except that you’re convinced debt is per se bad. (It’s also $45k - payments will be small.) Is there a reason why it matters so much to you that someone would take a different approach to their money?

[Anonymous User]

OP here- Thank you so much everyone for the replies! First off, I'm a she not a he but thats neither here nor there. I guess what I'm struggling with is what percentage should I allocate to savings and what to debt. I definitely am not going to take an all or nothing approach and have my debt paid off in less then a year- I have other savings goals and my spouses job is very stable. Plus, I do have family support that will bail me out in the remote chance we both lose our jobs and won't be able to service our debt- I'm not really concerned about loosing my job and falling behind in payments.
I'm also not willing to live with a substantially reduced lifestyle just to pay off my debt very quickly- I think the Dave Ramsey approach is useful for people who have consumer debt- with the theory that if you don't change your lifestyle you will just continue to accumulate whereas that concern is nonexistent with student debt.
So I guess if anyone could point towards percentages that would be helpful. I understand that different people have different priorities but I'm wondering at what point paying off my debt faster stops paying off.

[AVBucks4239]

OP here- Thank you so much everyone for the replies! First off, I'm a she not a he but thats neither here nor there. I guess what I'm struggling with is what percentage should I allocate to savings and what to debt. I definitely am not going to take an all or nothing approach and have my debt paid off in less then a year- I have other savings goals and my spouses job is very stable. Plus, I do have family support that will bail me out in the remote chance we both lose our jobs and won't be able to service our debt- I'm not really concerned about loosing my job and falling behind in payments.
I'm also not willing to live with a substantially reduced lifestyle just to pay off my debt very quickly- I think the Dave Ramsey approach is useful for people who have consumer debt- with the theory that if you don't change your lifestyle you will just continue to accumulate whereas that concern is nonexistent with student debt.
So I guess if anyone could point towards percentages that would be helpful. I understand that different people have different priorities but I'm wondering at what point paying off my debt faster stops paying off.

This is a very, very, very personal decision. There is not going to be any right answer. The only thing that is definitely true is that whatever you do choose to save should be done in tax-advantaged vehicles. Beyond that, percentages are up to you.

I am similar in that I have loans and am absolutely not slaving to pay those off. I am taking a balanced approach by maxing tax-advantaged vehicles and then paying off the debt over the period of approximately six years (about $27,000/year).

If it goes shorter or longer, great; but a balanced approach seems to meet all my goals (saving for retirement, reducing taxable income, getting rid of the debt about 10 years after graduation, etc.).

So you do you. The right answer depends on you. Go for it.

[Anonymous User]

OP here- Thank you so much everyone for the replies! First off, I'm a she not a he but thats neither here nor there. I guess what I'm struggling with is what percentage should I allocate to savings and what to debt. I definitely am not going to take an all or nothing approach and have my debt paid off in less then a year- I have other savings goals and my spouses job is very stable. Plus, I do have family support that will bail me out in the remote chance we both lose our jobs and won't be able to service our debt- I'm not really concerned about loosing my job and falling behind in payments.
I'm also not willing to live with a substantially reduced lifestyle just to pay off my debt very quickly- I think the Dave Ramsey approach is useful for people who have consumer debt- with the theory that if you don't change your lifestyle you will just continue to accumulate whereas that concern is nonexistent with student debt.
So I guess if anyone could point towards percentages that would be helpful. I understand that different people have different priorities but I'm wondering at what point paying off my debt faster stops paying off.

There's no one correct answer. This entirely has to do with how you'd personally like to value risk, liquidity, and the nice feeling of being debt free. Personally, in your shoes, I'd favor a slow payoff, high-savings strategy--refinance your debt with someone like FRB and pay it off on a ten-year time frame while saving everything else in a mix of stocks, bonds, and high-yield savings accounts/CDs. Your debt load is low enough, especially in relation to your monthly expenses, that it's unlikely to be a deal-breaker in the event of future financial hard times. On the other hand, your high monthly expenses and the fact that you have a family raise the value of liquidity -- the likelihood that you'll want to make a big purchase (like a house) or will face a some unexpected expense is substantially higher than it would be if you were single.

Here's a quick anecdote: this is the strategy that I took. I wasn't planning on buying a house, but the opportunity arose unexpectedly and because I had liquidity to spare, I went for it. There have been plenty of non-financial advantages to home ownership, but it's also been a stupendous (like literally tens of thousands of dollars) investment. Had I had ~$30k less in savings, I would not have made that move. Additionally, I had a unique career opportunity arise that required me to work without pay for several months. I would not have taken that opportunity had I not had liquidity, and my career is immensely improved because I did. On top of this, one of my family members had a medical situation arise requiring substantial unforeseen expenses -- but my liquidity helped us weather things relatively stress free. Although I still have debt, my debt load is manageable and has been through this time.*

*Note that there may be some confirmation bias in my advice.

[sparty99]

There's some value to having liquidity.

But to a large extent, this all comes down to how much you value being debt free vs how much you value the freedom that comes with liquidity. Your loans are small enough in absolute terms that it's not going to be a huge difference in $$ in whether you pay them off in 3, 5, or 10 years (assuming that if you're not paying down loans, you're saving). That's especially true if you do not refi -- although even if you do refinance (in which case the interest that you save by paying off your loans will likely be less than the interest you make by investing that money), the difference will still be small.

Does that make sense?

In any event, if I were in your shoes and did not have any short- or immediate- term goal of buying a house or making some other large purchase, I'd probably refi and aim to pay down my loans in 5 years and put the rest into savings. If I had a tangible purpose for saving, I'd probably refi and aim to pay down my loans in 10 years and save the rest. $45k in loans is little enough as to be fairly manageable even if one of the two of you loses your job, especially if you've refinanced and built up some savings.

He could pay it off in 6 to 8 months and by year 5 he would have no debt and 200k or 10 years no debt and 450k.

The opportunity cost of paying it off early is (1) missed opportunities that would have been made available with more liquidity (purchasing a home is a big one, but by no means the only one); and (2) lost interest from investing that money. If he refinances, pays off his loan slowly, and invests, he'd have <em>more</em> in total by year five <em>and</em> by year 10, assuming pretty standard returns, than he would under your plan; ie, would you rather have $200k and no debt or $250k and $25k in debt? That's not to say that paying off loans slowly is the correct call -- there's something to be said about the guaranteed 'returns' one gets from paying off a loan. But it's an illustration of why your pithy advice is not necessarily correct.

Your advice does not calculate risk. Stock market fluctuations, job losses, medical care, dying family member, funeral expenses, etc. Additionally, there are no missed opportunities here. He is out of debt in 6 to 8 months and by month 12 has 20 to 30k in savings versus you wanting him to carry debt for 5 to 10 years.

Yes it does -- see above. My point isn't that paying off debt quickly is the wrong call. My point is that it's nowhere close to the easy and obvious call that your posts imply. It's worth noting that many of your examples of risk, "medical care, dying family member, funeral expenses," are risk unrelated to an invest or pay-off strategy -- and are actually examples of the value of liquidity: if you have a medical emergency and need to quickly drum up $50k in cash, it's not going to matter whether your loans are 5% or 100% paid off -- but it will matter whether you have $50k in your bank or investment account.

Also, there absolutely may be missed opportunities: by paying off her debt in 6-8 months, the OP puts herself roughly $40 'behind' on savings, relative to where she could be. That could easily be a material difference for years to come for house purchasing and other similar decisions. Again, that doesn't mean that a slow payoff strategy is the correct call. I'm not arguing that your advice is wrong, per se, so much as that it's bad.

No, you don't calculate risk because the stock market can tank while investing. She would have a 4-5 month liquid emergency fund in a year and be debt free for any emergency. In 18 to 24 months she would have a down payment for a new house plus a higher FICO score for a home loan, no PMI. Paying off debt is a 6% return. The S&P 500 has only been 8% return YTD. Home girl, pay off your debt. It is a lousy 6 months. And I just can't believe you pay $84,000 in expenses. Girl....

[nixy]

Sparty, just stop.

[AVBucks4239]

No, you don't calculate risk because the stock market can tank while investing. She would have a 4-5 month liquid emergency fund in a year and be debt free for any emergency. In 18 to 24 months she would have a down payment for a new house plus a higher FICO score for a home loan, no PMI. Paying off debt is a 6% return. The S&P 500 has only been 8% return YTD. Home girl, pay off your debt. It is a lousy 6 months. And I just can't believe you pay $84,000 in expenses. Girl....

Not going to repeat myself from other threads, but I am also going to go on record and say that I disagree with Sparty's analysis regarding debt payoff. It's a lot more complicated than his/her black and white analysis and I think there are far more benefits to not paying off debt.

[Guchster]

No, you don't calculate risk because the stock market can tank while investing. She would have a 4-5 month liquid emergency fund in a year and be debt free for any emergency. In 18 to 24 months she would have a down payment for a new house plus a higher FICO score for a home loan, no PMI. Paying off debt is a 6% return. The S&P 500 has only been 8% return YTD. Home girl, pay off your debt. It is a lousy 6 months. And I just can't believe you pay $84,000 in expenses. Girl....

If you can't believe a working family in the tri-state with children pays $7k a month in expenses, which includes her debt service, then you don't have kids.

OP, to answer your question, I was in a similar (trying to figure out my own risk tolerance, while deciding how much to save for a house) and after a lot of pros/cons and scouring forums, eventually decided on a 80/20 (savings/debt service) until I hit a benchmark savings target, then 50/50 until I hit my actual savings target, and now 10/90. I also carve out a small piece for my 401k that I ramped up when I hit the benchmark.

As others have echoed, it's entirely tied to your own risk tolerance and what's going to cause the less stress in your life.

[Sprinkler]

Because of a generous scholarship (charged for 1 year of 3) I paid off my student loan inside of two years (@ $3k per month). Just a minimal amount allocated for savings. I paid 6.5% interest instead of opting for a lower rate (because of their drawbacks ―i.e. being terminated). Had I taken the lower rate option, it would have been cheaper, but there is something to say for peace of mind. As it turned out, the couple of people I know who were terminated stayed on the payroll for three months, and their firm web presence remained intact. Voting for paying off the loan, asap.