Reader Case: Pay Off Debt or Invest

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It’s Friday and you know what that means. Time for another reader case!

And guess what? This time it’s NOT going to be about renting versus owning. Shocking, right? But hey, I gotta take a break every now and then. I might pull a ranting muscle and then where will we be?

Now, the reason why this reader case caught my eye is because they’re dealing with an issue many Millennials face…so many, in fact, that collectively, Americans now own a combined $1.4 TRILLION in student debt, at an average of $30K per student. Yikes!

So how do we tackle this common Millennial problem? Let’s begin:

“Hi FIRECracker & Wanderer!

I am a huge fan of your website and love the fact that you guys are revealing the truth to investing and showing people that everyone can do it! You guys have become my new role models and here’s why.

Asides from wanting to get out of the rat race we call a 9-5, I want to see the world, experience different cultures, and share a meal with people from all different backgrounds. There’s so much more to life than work and you guys are able to explore that.

When I saw that’s what you guys are doing, instantly I became hooked to your God-sent advice. I’m 24, graduated from college in May 2015, and recently started traveling. I had never been outside of the country growing up because my family couldn’t afford it. There were 4 of us living in a 1 bedroom, 600 sq ft apartment. So yeah…

Anyways enough about that. I would be so eager and blessed if you guys could assess my current financial situation! You guys probably get so many emails so chances are you won’t respond but here goes nothing!

  • Gross/net annual family income: $55,000/year
  • Monthly spending: $2000/month
  • Debt: Student Loans
    • Outstanding balance: $25,553.65
    • Minimum monthly payment: $296.17
      • $4,936.12 @ 4.66% FIXED
      • $1,881.66 @4.66% FIXED
      • $5,010.83 @3.86% FIXED
      •  $1,927.72 @3.86% FIXED
      • $4,080.18 @3.4% FIXED
      • $2,188.98 @6.8% FIXED
      • $3,119.95 @3.4% FIXED
      • $2,311.76 @6.8% FIXED
  • Fixed assets I own: 2004 Honda Accord (approximately worth: $5,000)
  • Checking account: $3,387.47
  • Savings account: $17,883.34

If you guys could find it in your hearts to assess my situation and offer tips/advice I would be forever grateful!

Thankful for you guys,

Now, don’t let all those debt numbers scare you. At first glance, it looks bad, but considering how BT is only 24, earning a decent salary right out of school, and already has a nice chunk of savings makes me feel good about their situation.

But feelings don’t help you pay off your debt, so let’s math this shit up!

Case Summary:

Gross Income:$55,000/year
Assets:$3387.47+ $17,883.34 = $21,270.81

Right there you can see something odd about BT’s situation. BT makes a decent salary and doesn’t have extravagant expenses. But why does he have student debt….as well as savings?

He has THAT much debt killing ammo and he chooses NOT to use it? Why, BT, why?!

If you were paying some crazy low interest rate of less than 2%, this wouldn’t be a problem, but some of your debt has rates of 6.8%!

Now, I know the temptation is to keep savings around “just in case” so you feel safer if you were to lose your job, need emergency funds, etc. Or maybe some people want to feel the emotional high of “yes I have money!”

But in reality, you don’t.

Using the ammo to feel “secure” or “good about yourself” doesn’t make sense. This is because you are losing money faster from debt than the interest earned from your savings. Plus any interest earned with your savings is taxed at the marginal rate.

You have a fire-breathing debt monster that’s silently eating all your ammo! The longer you wait to shoot it the less ammo you have.

So instead of having debt AND savings at the same time, you should:

a) murder the Debt Monster
b) build an Emergency Shield that’ll cover you for 6 months
c) invest

Don’t even think about investing until your debt is dead and your emergency shield is in place. Murder that debt monster before it devours all your ammo!

If BT feels his job is insecure and would sleep better at night with a 6-month Emergency Shield, then he can set aside 6*2000/month= $12,000 of his $21,270.81 savings for emergency funds, and then murder a big chunk of the debt with the remaining $9,270.81.

Which debt should he kill off first? The ones with the highest interest rate obviously.

With $9,270.81 worth of debt killing ammo, he could take out the 2,311.76 @6.8% FIXED, $2,188.98 @6.8% FIXED, and the 4,936.12 @ 4.66% FIXED. Which leaves him with only $12,000, which he could kill in less than a year, considering how he saves 56% of his pre-tax income. And since he’s only 24 and just started working, he has lots of time to invest for early retirement after his debt is paid off.

So my advice to BT is this. PAY off your debt! You have enough Debt Killing Ammo, so murder that be-yotch!

Option 1: Murder most of the Debt Monster RIGHT the HELL now. Declare victory, dance on its corpse.

Option 2: Murder the most expensive parts of it, then as it’s stumbling around wounded, finish it off within a year Mortal Kombat-style.

And then celebrate with a well-earned vacation! You deserve it after all that murdering!

Aaaah I can feel the tension in my murdering muscles just melt away…

After that, you’ll be in good shape to start building your portfolio so you can graduate from BeginnerTraveller to PermanentTraveller! YEAH BABY! The world is YOURS!

What you do guys think? Does it make sense to have savings at the SAME time as debt?

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67 thoughts on “Reader Case: Pay Off Debt or Invest”

  1. Either option is good. Just get it done! I murdered my consumer debt in 2015 and since then I’ve been stacking bills and following your investment series since its inception.
    I tell ya, the feeling of not having consumer debt is a liberating one. I get to go to work for totally different reasons. Instead of making that pay cheque to pay my minimums or whatever. I get to work because I want to work not because I have to work. My purpose has change. Now I’m the guy at work spreading the MR gospel. LoL
    Pay off that debt BT and start stacking again; I did the same thing and the stacks grow that much faster with out minimums!

    Writing this from Puerta Vallarta, Mexico.

    1. Way to murder that debt, Mjh! Thanks for spreading the message and keep growing that stack! You’re absolutely right that going to work become you want to instead of being forced to changes everything. That’s the power of zero debt and F-U money.

      Are you on vacation in PV? Or do you live there?

      1. We are on vacation. I constantly toy with the idea of living in Mexico. At the moment our focus is stacking and investing. Once we’ve satisfied the travel bug with visiting other country’s around the world we’ll pick a destination to live full time Or Part time.

        1. Good idea to test it out on vacation. 🙂 So far I’m finding that Mexico and Central America are comparable in living costs to South East Asia. But you’d never know unless you’re actually on the ground rather than reading about it in the newspapers. Mexico also has the advantage that you can get a 90-day visa on arrival at no cost.

          How do you like it so far?

          1. I love Mexico; it’s close enough to Canada in case of family emergencys and depending on where you stay, i.e. Pacific side, mid country or Gulf side, the culture and scenery is different.
            When I was in Thailand in 2014 the first thought that came to mind was ‘ This is Europes Mexico!’. I really like Thailand and south east Asia. We talk about visiting and all the time; but when it comes time to plant roots, at the moment, Mexico is high in my list. Of course playing firm roots won’t happen for 15-20 years. Lots to do and lots could change. =D
            The country is very sensitive to tourists. It’s a HUGE (said like Trunp) part of there local economy’s. 1 bad review of Trip Advisor could effect a resort or city for months. I mean look at how this is happening with United and American Airlines. Bad reviews are stock killers.

    2. Well done Mjh and the same logic applies to the reader case as well. Good advice FIRE Cracker.

      My advice in similar cases is often this: If your debt interest rate is more than 2/3rds of the long-term return of a stock index portfolio, it is better to pay off debt with savings rather than invest. I apply the 2/3rds logic because equity market returns have high standard deviation (as high as 20%), in other words ‘lumpy’, so the threshold for a fixed rate debt payoff should be adjusted accordingly. Long-term equity return averages ~8% (or 6% if you wish to be conservative considering recent market valuation), so the threshold is either 5.3% or 4%. We can take an average of these figures and say, once you have any debt at 4.6% or higher interest rate, it is better to pay it off with savings.

      1. Good rule of thumb. I tend to lean even more conservative (you never know when a laid off is coming) so my threshold is 2% or below, but bigger risk takers can use your rule.

  2. Both options presented are sound options. I lean toward option two, as I beleive in having an emergency fund of at least six months. If he were still residing with his parents, I would say kill all of that debt off​ immediately.

    When I completed grad school, my total debt from school loans was around $40,000. Fortunately for me, the interest rate was less than 3%. I actually could have paid it off sooner than I did, but I focused on my mortgage since it was a higher interest rate.

    I also had a MMA type savings account that was paying around 5% at the time. As a result, mathematically​ it didn’t really make sense for me to pay down the student loans at the time.

    However, the math is only one aspect to be considered. Psychology also plays a role. If being completely debt free motivates you and puts in a better place psychologically speaking, then get it paid off as soon as possible. Then take that $266 per month and start plowing it in to low cost index funds as soon as possible. Get the power of compounding interest working for you as soon as​ you can.

  3. I think it’s an easy case and totally agree that the debt should be gone. There’s no point of having this much saving (especially on a saving account) while he has over 6% fixed loans. The 3.4% ones are a bit more grey area, but I’d personally also get rid of those asap. Then within a year he will have $300 extra per month which can be invested. Not too bad and can be achieved quite easily.

    1. Yup, BT is in a good place. Whether he chooses to pay it off right away or within a year, the debt will be killed off pretty quickly.

  4. Yes! Debt-murder stories! I love them!

    First, kudos to BeginnerTraveller. I came from a low-income background too and it’s not easy to get out of that trap (sadly I’m still not earning the big bucks yet…). It sounds like they worked very hard for what they have, so good job!

    I think whether they choose Option 1 or Option 2 depends on a few other factors, like how much risk they have in their life. Do they own their own home? Is their job situation tenuous? Are they supporting kids? Parents? Nanas? That kind of thing…if so, I’d suggest going for Option 2.

    But if they don’t have many other risky situations in their life? Option 1 all the way, baby.

    1. Well-said. All debt needs to die a horrible death. Whether he chooses option 1 or 2, his debt will be dead in less than a year.

  5. I think that personal psychology is not to be ignored here. It feels good to be debt free. And percentages like 6.8% are certainly killers but they are only 20% of the actual loan amount. There is another 25-30% at 4.66% which is bad too.

    However, given that the market yield of VTSAX is around 1.87 its hard to make an argument that in the long run the market will grow less than 2% per year. So you’re clearly better of killing the 6.8 and 4.66% and then paying the rest down in an accelerated rate while building up emergency funds and investments.

    But again, this depends on how free you will feel without debt.

    1. The return in the markets could beat his lower interest debts, BUT if he loses his job, markets are down and he still has debt and no emergency funds, it’s not a good situation to be in. Always have a plan for worst case situation.

      But considering how he can pay off the debt in less than 1 year, unlikely that he’ll run into the worse situation. He’s good either way.

  6. An easy one for a change hein FC. Nice work. I really hope that BT can pay off only the higher interest rate debts because, if you borrow from the same lender, sometimes they just won’t let you pick the dragon you wanna kill first (guess why).

    1. Good point. Another reason why debt needs to die a horrible death. Lender can always screw you around because you are their bitch.

  7. Agreed that he should kill off his high interest debt with his savings, but I’d argue it’s more beneficial to invest your money rather than pay off debt at 3.4% for example. You can easily get an ROI of 6%+ in a fairly safe portfolio so paying off debt at 3.4% is taking away from potential gains, but that’s just me. Many people prefer to get rid of all debt no matter what before investing. I have student debt at 1.5% (Hooray for UK student loans) and have no intention of ever paying it off even though I could wipe it out right now if I wanted.

    Also, I personally disagree with a 6 month emergency fund, but again that’s just me. I guess it depends what you do with that fund, but having $12,000 sitting around earning nothing is a waste IMO. There is nothing wrong with having an emergency fund consisting of liquid investments (which a portfolio is) and many people even use their credit card limit as an emergency fund (would only advise that if you are a sensible spender).

    1. What? 6%+ safe in stocks? In what world?
      not even 6 months in emergency savings? It’s seems that you’re really serious on that 6% figure…

      1. Where did I say stocks? I said a safe portfolio. Long-term you should easily get a 6% return on even a 50/50 portfolio of stocks and bonds.

        And no, I don’t agree with a 6 month emergency fund. For us that would be over $30,000 sat in cash earning nothing just for “safety”. How many people even use their emergency fund? Sure, keep a couple of months but 6 months is excessive. We keep around 2 months in cash and have credit card limits of $20,000 just in case, which can be paid off upon withdrawal of any money from our portfolio should we need it.

        I’d rather throw the $30,000 into a portfolio and earn a return on it than have it sat in my bank doing nothing for decades. You can always withdraw from a portfolio if you need it (especially if you keep it in a TFSA where you won’t get hit with tax expenses on capital gains if you do need to withdraw)

        To explain it in financial terms if you keep $30,000 in cash as an emergency fund, after 40 years you will have $30,000.

        If you invest that $30,000 and leave it there for 40 years earning 6%, you will have $330,000 after 40 years. I know what I’d rather have the potential for $300,000 interest than the security of having cash sat around just in case.

        The worst that can happen in my situation is you need access to your emergency fund during a financial crisis when your portfolio has depleted. In that case you simply withdraw from the bonds you have in your portfolio (which have increased during the financial crisis) as your emergency fund. Simple.

        1. It really depends on the context. If BT has more of a ‘regular full time’ job, then yes, 6 months could be seen as excessive, however if it’s ‘temp,’ ‘contract’ or ‘consulting’ work, then 6 months is entirely prudent. Hubby was in the IT consulting field, which can be really lucrative, however there’s a reason why some wound up back in the much, much lower paying ‘full time’ equivalent job…they didn’t put aside a 6 months + emergency fund when times were good. Consulting work tends to either monsoon rain or dry up like the desert (ditto for temp and contract work)…and those fluctuations also tend to align rather heavily with the health of the economy/stock market. An emergency fund proved vital to being able to ride things out rather than being forced to sell out when the market’s down because you’re out of work for a prolonged period of time.

          1. Fair enough in that case you’d obviously keep money around to cover costs when things get rough. It’s almost not an emergency fund in that regard though, since you KNOW you will need money later, are paid a premium as a result when you do work, and in all likelihood you will be unemployed at some point in the not too distant future. It’s sort of like working the oil fields, you make a killing for a while, then you don’t work for a while, so you need to prepare for that. The difference is, you know it’s coming so it’s not really an emergency fund.

            My example is mostly for people in relatively stable jobs without any expectation of being unemployed in the future except for an unexpected change. That’s really what an emergency fund is typically for and IMO 6 months left sat around in cash if you’re in stable employment is a wasted opportunity.

            1. No one will really appreciate the value of a cash cushion until they’ve lived through a massive market crash. It’s not fun.

              1. Or a strike! I have worked for the government for many years and the first strike happened just after all student loans had been repaid but I had little in the way of cash cushion. I considered the food bank but shame kept me away ? For the second strike six years later (first one was five weeks and the second almost 10) I had savings and was fine. Many others lost their homes and toys (boats etc.) and relationships from the stress. Do what you can as yearly as you can!

                1. Yikes! That sucks. Didn’t even think of that. Glad you had savings the 2nd time and everything turned out fine. Would not wish that on my worst enemy.

    1. It’s psychological I think. People like watching their piles grow and ignoring the debt monster. Better to look at the debt interest and use math instead. Math always wins!

    1. Because of the 55,000.00! I believe BT is a woman because of the vocabulary. Men don’t write those words!!

      1. Yes I agree with the vocabulary… What does the 55,000 have to do with gender? Do women have a hard time getting that as a starting salary right out of school?

  8. I’m always of the opinion that you should just crush that debt first. Yeah, it sucks to have to do that, but you can get that done in 2 years and then you’re still in your 20s with your entire life ahead of you. I’ve always felt that early on, it’s easy to catch back up. And when you’re young, your need for emergency savings isn’t as high. You’ve got no responsibilities beyond yourself, probably. If you lose your job, chances are, you can find another or figure out a way to hustle your way to survival.

    1. “And when you’re young, your need for emergency savings isn’t as high. You’ve got no responsibilities beyond yourself, probably. If you lose your job, chances are, you can find another or figure out a way to hustle your way to survival.”

      Or just maintain an emergency fund of six months so that you don’t have to “figure out a way to survive.”

      1. I like the way you think! I’m also a “plan your steps carefully, make lots of backup plans” type of person. Not a big fan of being caught off guard and having to put out fires on the spot. I’d rather not shorten my lifespan with unnecessary stress.

        The fly-by-the-seat-of-your-pants type of people can do it. I can’t. Not that there’s anything wrong with being either type of person. I just prefer to minimize my stress.

    2. Agreed that when you’re young you can usually figure a way out, an emergency fund was a million miles way from my thoughts at that age. Also, when you are married the chances of needing a 6 month emergency fund reduces a lot. The likelihood of you BOTH losing your job at the same time is pretty small. My wife lost her job recently for two months and we managed to just live off my salary for those months. Sure, we couldn’t save a cent during that time, but we didn’t go in the red either. This is the beauty of being able to live off one salary, you don’t really need an emergency fund at all.

      If you DO need an emergency fund, I’d also argue to invest it in a balanced portfolio rather than have it sat in cash doing nothing (see my post above).

      1. ” My wife lost her job recently for two months.”

        Ahhh, I see where you got the 2 months emergency fund from now.

        Sorry to hear about your wife losing her job, but glad you guys made it out just fine. Hey, if you want to take more risks, go head. Other people may not feel that comfortable with it. Not everyone can find a job in 2 months or has a spouse that works. I’ve known people who lost their jobs and didn’t find another one for 6 months – 1 year.

      2. I understand your disdain for cash sitting there gaining little interest. I think most of us who follow this blog would agree that sucks. We want as much of our dollars working for us as possible.

        However, don’t allow recency bias of this long bull market we have been experiencing to cloud your judgement.

        Remember, an emergency fund only really needs to include enough to cover your expenses. Since we are debt free and fairly frugal, our expenses are low. As a result, a six month emergency fund is only a drop in the bucket for us.

        When you are young and have few assets, you are one medical emergency away from financial ruin. I think it’s dangerous advice to tell a young person to have no financial cushion and find a way to survive without it. I don’t care where you keep your emergency fund, as long as it is very liquid and you can get to it quickly.

    3. Thanks for your 2 cents, FP! I looked at how faster your are murdering your student debt as the perfect inspiration for other people to do it too. The faster you get rid of the debt, the faster you get to freedom.

  9. I understand the need to pay off debit but what if you owe a lot… a whole lot! I owe 175,000 is school loan debit. I read online that your loans are forgiven after consistent payments for 20 years which would be far less than the 175,000.

    Should I just make my payments for 20 years (maybe it’s 10), have the remainder forgiven OR pay it off??

    I have 100,000 in savings currently. I am self employed so my income is not stable. So, should I attempt to pay it off or wait it out? The monthly payment is very manageable.

    1. The urgency is largely dependent on the interest you are paying on the debt. Without knowing that it’s hard to say whether you should pay it off. It also depends where your savings are being held and what they are earning.

      If the interest on your debt is greater than the interest you are making on your savings, you need to pay off the debt before saving up. If not, then you are safe to keep saving.

      For example, if you have $100,000 in savings earning 5%, you are making $5,000 a year in interest. If your debt has interest of 3%, it’s costing you $3,000 a year in interest. Therefore, you are adding $2,000 to your net worth by not paying off the debt every year. It’s pretty straightforward really.

    2. I would pay minimums on the debt and then max out my savings every year to the legally allowed limits for RRSP-TFSA/Roth-401k. Every penny after that would go towards paying off the student debt early.

    3. “I read online that your loans are forgiven after consistent payments for 20 years which would be far less than the 175,000.”

      Be careful with this. If you are American, it’s not forgiven, the remaining loan amount is added as taxable income, which means it just converts into a tax debt:

      What is the interest rate on your loans? And are you just putting the 100,000 into a savings account where the interest is taxed at the marginal?

  10. Hey MR fam, this is BT!

    I took FireCracker’s advice and paid off my high interest loans. I now only have the 3% loans left to pay off. I’m hoping to pay these off in one year.

    FireCracker hit the nail on the head when she said “Or maybe some people want to feel the emotional high of “yes I have money!” This was definitely the case, coupled with my aspirations of starting a business (I wanted to have start up cash). But after realizing the interest rate on my savings is getting crushed by my loan interest, I paid off the high interest loans.

    Having loans suck! But I think it has helped me mature financially– forcing me to learn how to better manage my finances and even bringing me to Millenial Revolution. So although it’s not the best situation to be in, I’m approaching it with a positive outlook and educating myself. Plus seeing my bank account drop is only making me hungrier.

    Let’s get after it MR fam!!!


    1. Nice work, BT! In less than a year the rest of that debt will be dead and we can all dance on its grave! Make sure you go somewhere nice to celebrate afterwards!

    2. Good move, BT! You really did make the right move! It’s very dangerous to keep high interest debt like that for any longer than you really need. It may not feel great when you look at that account balance immediately after the payments were processed and finalized, but it was hands down the best financial move you could make right now.

      Aggressively pay down those loans and, from there, start investing.

      ARB–Angry Retail Banker

    3. Congratulations BT! I’ve learned that if you’ve been living on a fixed income for sometime, that it makes sense to use the freed up payments from your 6% loans and add that amount to your lower interest loans to get that paid off. Once all that is done, your current saving plus what was your payments, from all your loans, will all go back to saving/ investing / starting your Business.
      That stack grows very very quickly once your done paying off everything. It’s very important not to increase your spending though.

  11. I will start off by saying that I paid off over 135,000 in student loans in about 3 years interest rates mostly 6.8%-8.5% with about 25k at <3%. Looking back, I have only one regret and it's that I didn't max out my 401k once I killed off all loans above 5%. That being said here's how I did it.

    1) I took a job that I knew I wouldn't like much because it was stable at a good company that paid 80k/year.
    2) I threw every penny at the highest interest loans keeping less than $1000 of cushion in my account on top of monthly expenses.
    3) I was able to do this because I knew my expenses were so low I could easily survive on unemployment insurance and severance package for a year or more if I was to lose my job. And in a catastrophe I could always lean on credit cards.
    4) I didn't buy a car for the first year or so, biked/transited around town and cut my expenses to the bone ~18k/year.
    5) Once my loans were paid off I had the freedom to find a much more enjoyable job and now invest huge amounts while still taking nice vacations. (1 month in Hawaii between jobs and 2 weeks in Dubai with wife's family)

    P.S. If you have a company match for 401k or equivalent make sure you are getting the maximum that is matched (and preferably max your 401k). That free money is not to be ignored.

    1. Wow! Nice job murdering a debt monster THAT big in just 3 years! All the sacrifices you made sounds super tough but in the end looks like it was all worth it! Thanks for sharing!

      Agree with you on the 401K match. Definitely should take advantage of that free money.

  12. This is just me, but I try and do all 3 at once in this order:
    1) Pay debt : 90% of monthly allocated savings
    2) Invest: 5% of monthly allocated savings
    3) Minor “Oh Shit” Emergency Fund: 5% of allocated monthly savings

    Ok so I know you’ll say “but you should eradicate the debt monster, bathe in its blood, and burn it to ashes with holy fire”…I agree. However, as much as I want to take emotion out of the game, its tough for someone just starting out.

    Here is my reasoning:
    1) 90% of savings to pay debts: Duh
    2) Helps start good habits by teaching dollar cost averaging. Even if its 1 – 2 shares a month of an index fund (commission free), those few shares you may buy until your debt is paid off can have a decent return and afford you a few more shares with your gains
    3) An “emergency fund” is a matter of perspective. In my field, 3 months would be enough, and may be similar for others, some may be longer. I called this one a “minor oh shit” fund because at BT’s savings rate of 52% a month, and doing some US based averages, they may only put $80ish/month into this category. But that $80 may help if a tire blows on their car, or if they need to buy a new shirt and bottom for a wedding, or whatever. That little tiny cushion of cash helps keep the debt payments even and consistent to keep up the momentum.

    So for me, this is what I have done since I was enlightened to this blog and the entire FI movement, and I paid off all of my credit card debt in 3 months and will be paying off my LAST consumer debt a year ahead of schedule this september.

    So yes, kill that debt monster, but imho, may be helpful to stash a few pennies.

    1. Oh, I’m not worried about your, Bill. I know you have your shit together 😉

      Fantastic job paying all your credit card debt off! Now you only have 5 months until you can bath in that bastard’s blood. MUAHAHAHAH!

      How are you going to celebrate come September? (after you wash off all the blood of course)

  13. Hi BT,
    Further to what Brendan said, what are you spending 2K a month on for expenses? I lived as I had as a student in the first year after graduation to pay off my 10k loan, and was even very excited when I bought butter versus super cheap margerine.

    If you can live with 3 others in 600 square feet, can you get creative with living expenses, more roomates etc.?

    I only wish I had kept this up for longer and would have had more choices earlier.

    Great job on paying the loans back!

    1. I like the way you think! Always good to look for cost efficiencies. $2000/month isn’t extravagant, but if he can find ways to bring down the cost without losing too much quality of life, why not?

  14. This is perfect advice. I feel like my threshold is about 4%.

    I’m carrying some debt right now, even student debt like 10 years later, but it’s at 1.75%. Same with a car payment, we could have paid cash, but at 1.79% I feel like the money is better deployed elsewhere. We also have the assets to kill it immediately should we care to.

    But with these types of rates, yes kill it NOW!

      1. I guess there’s one advantage to being older. I graduated when the government loans were still variable rates. So when the rates dropped I consolidated and locked it in. Then they gave me .5% reduction for auto-payments. So, I’m over paying it some, just because it drives me nuts. It actually takes some will power not to just pay it off. But yeah I think it’s not hurting me that much.

        As for the car, we needed to get a new one and our credit union had a special for 1.79% on used cars with some stipulations on mileage etc. So we found one right at the limit and took advantage of that.

        I wouldn’t advocate for debt, but sometimes it makes sense so you can take advantage and not drop the a large amount of cash immediately. We didn’t over spend on anything, and have enough to cover the balances at any time.

        Like anything else… Math that shit up!

    1. With rates that low, I would be tempted to let those loans ride as well. Id be throwing as much money as possible at investments instead. Get those investments and compounding interest working for you as soon as possible. That’s what the math tells me to do in a situation like that.

      1. Yeah that’s exactly what we’re doing. We needed a new car, and with those rates I figured it’d be better to let the cash grow in our investments and pay it back over time to arbitrage the difference. Anyway. Yeah. Point being if you can find cheap money it might make sense to take on a little CONTROLLED debt.

        This was a very calculated decision. And again. I’m not advocating for debt, especially for debt out of your means. But if need be we could cut a check and kill both of these loans. There’s just no need at the moment.

  15. got rid of ALL debt 30 years ago

    and i mean ALL .

    only buy what i can , living frugally and really well

    been FI since i was well 31 .. .

    balanced portfolio and renting and traveled
    the world many many times . bliss

      1. Wow! Well done! I have no idea how people had the guts to become FI without the FIRE community for support and motivation. You paved the way for the rest of us!

  16. Good case study FireCracker. Like most of the commenters, I agree with paying off that high interest debt with savings.

    But the lower interest debt I wouldn’t be in such a hurry to take out. That money earning 6-7% will out earn the interest required (3.5%). When we consider taxes, the margin isn’t that huge, but it *is* a margin…

    Small consistent wins matter!

    This is exactly why I have a mortgage still, despite my financial independence. I could write a check and pay off my mortgage tomorrow, but I won’t!

  17. Hey everyone, I’ve read your comments 3 times over. Can somebody point me in the right direction if I want to invest in a “safe portfolio” earning ~6%? I’d like to put at least some money (maybe 4-6k) into it in order to start earning some compound interest. Thanks everyone!


    1. Read the 4 articles in the invest series to determine your risk tolerance first:

      Do not start investing until you understand how index investing works. Then and ONLY then, you can read and follow along with the investment workshop:

      My advice is still to pay off your debt and put aside emergency funds first. But it’s up to you.

  18. I would recommend killing all of the debt now with your savings. Also divert your monthly savings to kill the remaining debt agressively, if you feel you are in a job that is decently secure or you are in a industry where it might be easy to find work.

    You can always take out a 0% credit cards that goes for nearly 12 to 15 months with just minimum payment. We racked up a huge debt (nearly 250k) as my wife went for dental studies. Given that we both got into high paying jobs (not stable ones though) and we had a kid going into day care, we still went ahead with agressive debt paying strategy and payed it off in 3 yrs.
    In the process i rotated around 30k debt on 0% credit cards for 2 years and is nearly at a point that i will be done paying it off.
    We surely did focus a lot on making sure that these credit cards to not become a monster and pain.
    I know it was very agressive but it paid off. We are almost debt free and now focusing on investments.
    I did go slow on retirement savings for a while but getting back to agressive strategy on that front too.

  19. The letter didn’t say whether BeginnerTraveler has access to a retirement plan through work. If so, and if they offer an employer match, that’s something I would recommend contributing to (at least up to the match) even while paying off debt.

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