Comments on: Pay Down Debt or Invest?

By: Mike

Mike — Sat, 12 Sep 2009 01:45:19 +0000

Nancy, good question.

I’d probably cap the emergency fund at $1,000 or so and work toward paying off that debt ASAP. As it sounds like you’ve figured out, you won’t be able to keep it at 0% forever.

Yes, you’ll be paying a loan that’s currently at a 0% interest rate and forgoing whatever interest could be earned on a savings account. But the way I see things, credit card debt (even if it’s temporarily at 0%) is something you want to get out of as quickly as you can.

Alternatively, go ahead and put all the money into your emergency fund (assuming it’s in something that earns interest) and then a month or so before you have to transfer the debt to another card, use all the emergency fund money (except $1,000 or so) to pay off as much of that card as possible.

By: Nancy

Nancy — Sat, 12 Sep 2009 00:40:34 +0000

One thing you overlooked with debt is debt that has a low rate. Presently I have credit card debt at 0% until March 2010. While I will not be paying the debt off by the expiration, I do plan to move it to another card, preferably with 0% or a very low rate. Given this, does it make sense to pay down a balance during the 0% time frame, or would the money be better invested in an emergency fund? I have been investing money in an emergency fund while my debt interest is at 0%. What’s your opinion in this case?

By: FinanciallySmartServices

FinanciallySmartServices — Wed, 09 Sep 2009 21:14:05 +0000

I believe that persons should pay off their debt before investing. Having debt and concentrating on investments will place added stress on the individual. Being debt free will allow this individual to make concise and practical decisions regarding the investment(s) he/she has interest in.

By: Monevator

Monevator — Fri, 04 Sep 2009 16:18:20 +0000

Super post. When I finish my borrowing to invest article I think I’ll do a take on this for UK investors. Will link to you for my US readers’ benefit.

By: Mike

Mike — Thu, 03 Sep 2009 19:11:24 +0000

tg: Based on the information you’ve given, that’s very nearly what I’d do in your situation. I’d probably come back to your 403(b) and max it out completely before making any extra payments on the student loans. (Whether or not I’d do that depends upon the student loan interest rate and upon the administrative fees and quality of investment options in your 403b)

Of course, I can’t promise that it’ll end up being the single best decision. (There’s no way to know for sure without knowing what each asset class–stocks, bonds, real estate, etc–will earn in the future.)

Either way, sounds like you’re doing well already. Nice job.

By: tg

tg — Thu, 03 Sep 2009 19:05:53 +0000

My emergency fund is topped off and so is my 403(b) match; my only debt is my student loan. If I follow your order, it looks like I would 1) max out the IRA 2) save for a 20% down payment for a home in my taxable savings account 3) pay off my student loans. Is that what you’re suggesting?

(I’d be happy to rent nearly forever, but we also want our own land to grow our own food, which is not really available to rent, nor can rented land get the benefit of building soil over decades.)

By: Kathy

Kathy — Wed, 02 Sep 2009 16:00:04 +0000

Regarding the student loans….subsidized loans have another benefit that shouldn’t be overlooked — they allow deferrment, forbearance, and even cancellation (in limited circumstances).* How many other loans have policies that allow you to stop making payments — with no negative impact on your credit rating — if you lose your job, get sick, or go back to school?

No debt is good debt, but during uncertain times like today’s job market, these “safety net policies” have caused me to deprioritize my student loans in my debt elimination schedule (well, these policies and the really low interest rate I have!)

* It should be remembered that interest continues to accrue during a deferment or forbearance.

By: My Journey

My Journey — Wed, 02 Sep 2009 15:20:50 +0000

Just a quick note, the amount you can deduct from your student loans is directly tied to your MAGI. I learned that the hard way when I graduated law school making more than what is allowed. No one told me that at the bursar’s office! That may change your order regardless of whether it is subsidized or not.

http://www.myjourneytomillions.com/articles/education-loan-interest-not-always-tax-deductible/

By: Matt Jabs

Matt Jabs — Wed, 02 Sep 2009 14:47:43 +0000

Yeah, perhaps it does. The thing is… it is just better for me personally to pay off the debt. It will be gone within the next 10 months (hopefully the next 4 depending on how fast my blog income grows) and I am comfortable starting my 401k contributions after that.

Personal finance is always personal and the emotional victory of debt elimination is more valuable to me than a few bucks on a 401k match. But this will of course differ from person to person.

By: Mike

Mike — Wed, 02 Sep 2009 14:44:00 +0000

Yeah, that’s how my wife’s 403(b) works as well. It leaves something to be desired. Yet
a) Even at two years (20% vested), it becomes a better option that paying off many credit cards, and
b) It’s better than nothing!