Debt and investing

[MetEdDawg]

Wanted to get the boards opinion on this. I'm 30 and have a lot of debt. Car, deck, work done on the exterior of the house during deck project.

My wife and I make pretty good money and right now we are doing a combo Roth IRA investing and debt snowball. Any of you financial gurus out there able to advise me on whether or not this is smart? Obviously I have to make minimum payments and that's not an issue. Would it be smart to hold off on investing the next couple of years and put literally every extra dime toward the debt? Keep going the way I'm going with a combo?

We have a good enough emergency fund to manage stuff that comes up so we are safe there for now.

[AROB44]

My principle has always been.....There is no such thing as good debt. Of course, I am older and I realize that some debt is necessary during various stages of life, but I always worked hard to reduce debt to zero.

[Martianlander]

For what my opinion is worth, as young as you are I would put the Roth on temporary hold and throw everything at the debt till all is paid except the house. Then go back to aggressively investing the IRA.

[Tbonewannabe]

You have to look at the Debt is the same as investments. If you have a credit card debt and it has a 15% interest rate then you won't find an investment anywhere close to that. I worked for a guy who taught people how to manage finances. He always said to pay off the lowest debt and snowball it because it gives you positive momentum in paying off debt. You notice how great it feels to pay something off then you work on your next debt with more energy.

Other than an emergency fund or company match then you want to pay off your debt because it probably cost you more money than you can make. At the end of the day money in and money out is the important part. What is the point of saving if you are making $50 on investments and paying $100 in interest. You are better off paying off the debt.

[MetEdDawg]

You have to look at the Debt is the same as investments. If you have a credit card debt and it has a 15% interest rate then you won't find an investment anywhere close to that. I worked for a guy who taught people how to manage finances. He always said to pay off the lowest debt and snowball it because it gives you positive momentum in paying off debt. You notice how great it feels to pay something off then you work on your next debt with more energy.

Other than an emergency fund or company match then you want to pay off your debt because it probably cost you more money than you can make. At the end of the day money in and money out is the important part. What is the point of saving if you are making $50 on investments and paying $100 in interest. You are better off paying off the debt.

This is kind of where I'm at.

The good thing is my wife and I have zero credit card debt. Probably very few 30 year olds running around now without that. We also have sinking funds for expenditures that happen once a year or quarterly. The debt we have are student loans (mine will get forgiven in a few years because I teach), home and other house improvements, and car.

So the good thing is our debt isn't any of that super high interest rate debt. So I'm thinking now is the time to start a massive snowball. We've got the means to do it and other than me just wanting to put something away, there's really no reason we couldn't hammer out the low hanging debt fruit in a year and a half if we put all available resources to it.

[Matty Dispatch]

I know what Dave Ramsey would say: PAY OFF THE DEBT!

Seriously, pick yourself up a copy of the Total Money Makeover. You sound like you're pretty good with personal finance, but still that book will inspire you to do more and make every dollar count. I was 32 years old when I read it. At the time I had a budget and thought I was doing well because we only had car loans. Within a year we were debt free except the house. We saved for a five-figure emergency fund for the first time. Then we started taking extended vacations for the first time. Then we've paid cash for remodeling the house, upgrading fixtures, etc. Now we are saving for college and retirement. Soon we will be aggressively paying off the house. The Total Money Makeover changed our lives because we now have the ability to do so much more with our money.

[Johnson85]

Wanted to get the boards opinion on this. I'm 30 and have a lot of debt. Car, deck, work done on the exterior of the house during deck project.

My wife and I make pretty good money and right now we are doing a combo Roth IRA investing and debt snowball. Any of you financial gurus out there able to advise me on whether or not this is smart? Obviously I have to make minimum payments and that's not an issue. Would it be smart to hold off on investing the next couple of years and put literally every extra dime toward the debt? Keep going the way I'm going with a combo?

We have a good enough emergency fund to manage stuff that comes up so we are safe there for now.

Can't really answer without knowing the interest rate and term of the debt and what your investment alternatives are. But generally, up to 4% fixed interest, I would not pay it down unless and until I was maxing out my tax advantaged savings. From 4-6%, I would look at the market. With a CAPE of 30+, I would probably just pay off the debt. Hard to beat a guaranteed return of over 4% when the CAPE is that high (not that the CAPE is the be all and end all, but it's pretty well correlated with returns looking out over a couple of decades, which is what you should be looking at as far as putting it into tax deferred v. paying down debt faster).

This is also ignoring the risk of an income shock though. IF you can make it a while on one income, then it's a lot easier to bear the risk of an income shock, or if both of you are in fairly recession proof jobs. But even then, if you have say $1k a month in non-mortgage debt payments, and you can cut it down to $500 by increasing your debt snowball for a few months, that might be worth it if it makes an income shock a lot more manageable, whereas if you are good either way, then you can let it ride and focus on investing.

[Matty Dispatch]

Can't really answer without knowing the interest rate and term of the debt and what your investment alternatives are. But generally, up to 4% fixed interest, I would not pay it down unless and until I was maxing out my tax advantaged savings. From 4-6%, I would look at the market. With a CAPE of 30+, I would probably just pay off the debt. Hard to beat a guaranteed return of over 4% when the CAPE is that high (not that the CAPE is the be all and end all, but it's pretty well correlated with returns looking out over a couple of decades, which is what you should be looking at as far as putting it into tax deferred v. paying down debt faster).

This is also ignoring the risk of an income shock though. IF you can make it a while on one income, then it's a lot easier to bear the risk of an income shock, or if both of you are in fairly recession proof jobs. But even then, if you have say $1k a month in non-mortgage debt payments, and you can cut it down to $500 by increasing your debt snowball for a few months, that might be worth it if it makes an income shock a lot more manageable, whereas if you are good either way, then you can let it ride and focus on investing.

All of that makes good math sense, but what if you lose your job? What if something unforseen happens? The debt will still be there. If you take from your investments you'll get a huge tax hit. It just makes good sense to pay off the debt first, then invest. You can do math all day long to justify why the stock market will make more than you're paying in interest, but you're essentially borrowing money to invest it in that scenario. Just limit your risk by paying off the debt and then you'll be freed up to invest all you want without being beholden to anyone.

[Jack Lambert]

All of that makes good math sense, but what if you lose your job? What if something unforseen happens? The debt will still be there. If you take from your investments you'll get a huge tax hit. It just makes good sense to pay off the debt first, then invest. You can do math all day long to justify why the stock market will make more than you're paying in interest, but you're essentially borrowing money to invest it in that scenario. Just limit your risk by paying off the debt and then you'll be freed up to invest all you want without being beholden to anyone.

The thing about a Roth is the fact that it is considered FIFO. The goverment doesn't care about your money that you put in. In a Roth the contribution is always after tax money. Now the product your using to fund the Roth might have surrender charges. Most annuities will for at lest five years up to 20 years depending on the product and guarantee interest rate.

Also with a Roth once it has been established for five years it could all be tax and penalty free from the goverment based on certain events such as turning Age 591/2, becoming disable, dying or first time home buyer (10,000 max life time).

Also for the poster I would not use a Roth that had a minimum contribution. One of the down side to a Roth is the fact if you make too much money you cannot contribute that year. What if that happens? Find a Roth that will let you skip contributing to if you do not want to contribute.

It does have a maximum contribution that you can make. Income could effect that.

[Matty Dispatch]

The thing about a Roth is the fact that it is considered FIFO. The goverment doesn't care about your money that you put in. In a Roth the contribution is always after tax money. Now the product your using to fund the Roth might have surrender charges. Most annuities will for at lest five years up to 20 years depending on the product and guarantee interest rate.

Also with a Roth once it has been established for five years it could all be tax and penalty free from the goverment based on certain events such as turning Age 591/2, becoming disable, dying or first time home buyer (10,000 max life time).

Also for the poster I would not use a Roth that had a minimum contribution. One of the down side to a Roth is the fact if you make too much money you cannot contribute that year. What if that happens? Find a Roth that will let you skip contributing to if you do not want to contribute.

It does have a maximum contribution that you can make. Income could effect that.

Any investment gains on a Roth are taxable if you take them out before you are 59 1/2. You take out $20,000 at 45 years old and you are going to pay $5-6K in taxes that you will never get back.

Also, you have to make over $250K to not qualify for a Roth. I'm going to go ahead and make a guess that a 30 year old in a lot of debt is not making anywhere near that amount. And if you do one day make that amount, needing to invest in mutual funds for your retirement is not a necessity.

[Jack Lambert]

Any investment gains on a Roth are taxable if you take them out before you are 59 1/2. You take out $20,000 at 45 years old and you are going to pay $5-6K in taxes that you will never get back.

Also, you have to make over $250K to not qualify for a Roth. I'm going to go ahead and make a guess that a 30 year old in a lot of debt is not making anywhere near that amount. And if you do one day make that amount, needing to invest in mutual funds for your retirement is not a necessity.

Wrong. If you become disable, die or first time home buyer and your Roth is five years old it is tax free penalty free. Also if it is not five years old the 59 1/2 does you no good. A single male with an adjusted gross income of 250K a year will not be able to contribute to a Roth but I did say in my post income can effect if you can contribute or not. If you have an adjusted goss income in 2018 of 180K or less you can make a full contribution. If it is between 180K to 190K you can make a partial contribution. Adjusted gross income over 199K you cannot contribute to a Roth. That is for a single. I work for a insurance company. Annuity is part of my job. I have a tax facts in front of me right now. But I don't need it. I know the laws and tax consequences for IRA's. Can I tell you how to get to your adjusted gross income? No I cannot.

[Johnson85]

All of that makes good math sense, but what if you lose your job? What if something unforseen happens? The debt will still be there. If you take from your investments you'll get a huge tax hit. It just makes good sense to pay off the debt first, then invest. You can do math all day long to justify why the stock market will make more than you're paying in interest, but you're essentially borrowing money to invest it in that scenario. Just limit your risk by paying off the debt and then you'll be freed up to invest all you want without being beholden to anyone.

The reference to "income shock" was I guess an unnecessarily complicated way of saying "lose your job". The entire second paragraph was the acknowledgement of risk.

The debt will still be there, but if you've been putting money into a roth, you can still draw up to the amount of your contributions without paying a tax penalty. So no, you will not have a huge tax hit. Since he is a government employee, there is also the potential he has access to a 457. It's basically a better version of a 401k, so if he were to lose his job, he could withdraw and just pay ordinary income taxes, no penalty.

Also, you are missing the main point of the post, which is that you need to take advantage of your tax advantaged accounts when you can because you can't make go back and utilize those. If you fail to max it out, you just lose the opportunity. So say you have $60k of debt at 5%. You can put $24k away ($18.5k in a pre-tax 401k and $5500 in roth) while paying off your debt in 15 years or you can forgo the 401k and Roth and payoff your debt in 5 years and then add that money to after tax saving.
Ignoring any change in value of the portfolio, that's about $60k of taxes you are able to defer and put into your 401k, and then that's another $66k you have after tax in a Roth that is also available as an emergency fund if you need it (and indeed would pay off the entire remaining debt if necessary).

That's not a game changer, but it's certainly nothing to sneeze at, especially when you are talking about having that done at say 30-35 instead of 40-45.

Also, while there is risk, there is also risk associated with not getting a share of growth when it occurs. While the stock market performs well over long periods of time, there are considerable lengths of time where it doesn't. The longer you have exposure, the less extreme your experienced return will be. So while paying debt reduces some risk from an income shock, it also increases the risk that you will be on the sidelines (or really "buying" low yield "bonds") while the stock market is doing well and then you will switch into buying stocks at a peak and then experience effective sideways returns because of buying high.

This is essentially what I have done. I aggressively paid down debt through a great bull market, and now I am plowing money into the stock market when the CAPE is over 30. That is not a good recipe for solid long term returns and wish I had understood the risk I was taking at the time.

[Matty Dispatch]

Also, you are missing the main point of the post, which is that you need to take advantage of your tax advantaged accounts when you can because you can't make go back and utilize those. If you fail to max it out, you just lose the opportunity. So say you have $60k of debt at 5%. You can put $24k away ($18.5k in a pre-tax 401k and $5500 in roth) while paying off your debt in 15 years or you can forgo the 401k and Roth and payoff your debt in 5 years and then add that money to after tax saving.


I don't understand this example. If you have $60K in debt and $24K available to contribute to 401K & Roth, why would it take 5 years to pay off the debt if that's what you poured all your money into. Seems to me it would take 2.5 years. (60 / 24 = 2.5)

Maybe it was a typo, not trying to be argumentative. But most people can pay their debt off in 1-2 years. To me, that is worth it not to owe anyone anything. Especially if you are 30 years old. Just fully funding a Roth IRA from the time you are 30 to 65 will make you a multi-millionaire. Add 401K to it and you'll have plenty of money to retire on, and that doesn't include your house or social security (which probably won't be around in 35 years but then again that's what they were saying 35 years ago).

[Johnson85]

I don't understand this example. If you have $60K in debt and $24K available to contribute to 401K & Roth, why would it take 5 years to pay off the debt if that's what you poured all your money into. Seems to me it would take 2.5 years. (60 / 24 = 2.5) It is 2.6 years basically. Assuming the if you don't make the 18,500 401k contribution, you end up with $13,505 after tax (assuming 5% marginal state tax rate and 22% marginal federal tax rate and no itemization). Add that to the $474.48 a month you would have already been paying on the 15 year amortization and the $5500 annual for the roth, and you end up at $2,058.49 a month avaialble, which puts you at just under 2.6 years to pay it off. Not sure how I screwed it up so bad and didn't notice that the numbers were way off. So it's only about $13k in taxes you defer over the 2.6 years.


Maybe it was a typo, not trying to be argumentative. But most people can pay their debt off in 1-2 years. To me, that is worth it not to owe anyone anything. It's really 6 of one half dozen of the other when you are talking about 2.6 years. If you look at it over 15 years and assume a 5% real return and a 27% effective marginal income tax rate, then you only end up with about a $48,732 difference in today's dollars after 15 years. Run that to 30 and it ends up being a hundred thousand dollar difference (again in todays dollars). Nothing to sneeze at but you do carry some risk for it.


Especially if you are 30 years old. Just fully funding a Roth IRA from the time you are 30 to 65 will make you a multi-millionaire. Add 401K to it and you'll have plenty of money to retire on, and that doesn't include your house or social security (which probably won't be around in 35 years but then again that's what they were saying 35 years ago). My turn to catch a math mistake on your part. Putting $5,500 into a roth over 35 years and getting a 5% real return will leave you with $496,761 in todays dollars. At 7% real return that's $760,302.83. Even if you assume maxing it as a married couple will only get you to $1.52M.

To get to 2 million in 35 years by maxing out a roth as an individual ($5,500 in todays dollars), you'd need the equivalent of an 11.3% real return, which obviously isn't happening short of you putting all of your money in the next berkshire hathoway).

If you looked at it as a married couple (investing $11,000 annually in today's dollars), you'd need a 8.25% real return (which also probably isn't happening, but it's only a percentage or two higher than some of the more optimistic long term real return projections).

[Matty Dispatch]

Well I was thinking of Roth IRA maxing as a married couple, since most 30 year olds are married. If you have over 1 million and a paid for house when you retire that is going to be enough 19 times out of 20. I just don't like any debt. Most people aren't smart enough or structured enough to be successful with your model. I'm not saying your wrong, but for 90% of Americans, being out of debt and funding an IRA puts you on the path to retire with dignity.

[Johnson85]

Well I was thinking of Roth IRA maxing as a married couple, since most 30 year olds are married. If you have over 1 million and a paid for house when you retire that is going to be enough 19 times out of 20. I just don't like any debt. Most people aren't smart enough or structured enough to be successful with your model. I'm not saying your wrong, but for 90% of Americans, being out of debt and funding an IRA puts you on the path to retire with dignity.

I'm not sure it takes any more discipline. The hard part is avoiding spending so that you have the money available to pay down debt or invest. Once you've done that, I don't think it takes more or less discipline to do one or the other. But certainly don't disagree that paying off the debt and then investing is a good route (or better route depending on your appetite for risk). youre really talking about fiddling around the edges. I enjoy looking for optimizations, but if you don't enjoy doing it, the difference is pretty minor