Need Advice

[jbings4]

Hey all,
I just joined this forum today and I really like what I have read so far. Let me give you a brief overview of our financial situation so you can give the appropriate feedback/advice.
I am 31 and my wife is 30. We both have two master's degrees and bring home a combined gross household income of around 120K/yearly. After all our necessary expenses are paid we have around $2500 left over each month.
We currently own a small, 1650 sq. ft. home worth around 151k. We owe 150k on the mortgage itself. Our interest rate on this home is a fixed 30/year at 7%. We also own a rental home that was just appraised for 135k and we owe 101k remaining on that mortgage. We just recently refinanced the rental home and are now bringing home around 300/monthly income after we make the mortgage payment on this house. Our current interest rate on the rental is 4.875%. We both have credit scores above 780 at this point.

We are both teachers and are slotted to retire in around 25 years or so. Combined we put around 700/month into our teacher retirement fund here in GA. Once retired, we will receive 60% of the average of our highest 3 years of pay for the remainder of our lives. We also pay social security as well.
The only debt we have is our two houses and school loan debt, but this totals around 350k (I hate even writing that number). We don't owe anything on credit cards or car loans at this time. We both own nice vehicles with low miles that are paid for in full. We owe around 106k in student loans with apr's ranging from 1.76% to 6.8%.
Now here is my question: We have to start paying on our school loans in a couple months and I am considering making the minimum payment (10 year plan at 950/month) and then throwing an additional $1500/monthly towards our loans. This would put us at paying around $2450 in school loans monthly. Using this plan we would knock out our school debt in 42 months or 3 1/2 years.
I have been interested in starting a Roth IRA and contributing the full $5000/yearly. Should I pay a little less on my school loans so that we could start the Roth now and put around $400 a month into this Roth account monthly or would I be better off being really aggressive at getting rid of our school loans quickly? I know there are many schools of thought when it comes to this. I have always focused on getting out of debt completely (Dave Ramsey style!), but have recently thought that we should open a Roth so that we could have a lump sum of money when we are ready to retire. Based on an 8% return rate, we would contribute around 145k throughout the life of the Roth and end up with a lump sum around 600k. We are frugal with our money and are OK sacrificing now to set ourselves up for the future.
My goal in a couple years is to buy our dream house and I know I need to lower my debt to income ratio in order to do this. That is why I am leaning towards paying off school loans in an aggressive manner.
I would love some feedback from all you savvy investors out there. Thanks for taking the time to read this long post and let me know your thoughts.

 

[Rambler]

Welcome to the forum. The amount of student loans you two have makes me dizzy. First build an emergency fund if you haven't already. Then pay off the debt as quickly as you can. I would advise sticking ith a modest home after that. I certainly would not be dreaming of a new home until I tackled the debt.

Good luck

R

 

[jbings4]

Rambler,
Thanks for the quick response. Yes, the amount of school debt we have makes me ill to my stomach. By dream home, I mean something reasonable that I can raise my family in, nothing too expensive. I'm just not sure whether I should aggressively pay of the school loans or start my Roth. We do have an emergency fund of around 15k which I have in an ING savings account.

 

[arebelspy]

You are doing a great job LBYM. Saving 2500/month = about 30k/yr. Maybe more now if you weren't counting the rental house income in that.

Your student loans can be paid off in ~3 years at that rate (since you are already paying on them, and the extra is 30k/yr x3 years = 90k).

Whether it's wise to pay them off based on the interest rates is a separate question, but I wouldn't worry about that total so much based on the amount you are saving.

Between having the pension and social security, I think it's okay to delay other retirement contributions for a year or two while you pay off higher interest debt.

In any case, keep your spending that much below your income and you'll be doing great.

 

[FIREd]

Welcome jbings4,

I would concentrate on:

1) putting an emergency fund in place if you don't have one already
2) paying back the student loan at 6.8% as quickly as possible
3) saving some money to refinance the main residence (7% for a fixed 30-year mortgage sounds really high with a credit score of 780).
4) saving for retirement

The dream house should wait.

I would pay only the minimum on the student loan at 1.76% for as long as possible.

 

[packrat44]

Welcome jbings4,

I would concentrate on:

1) putting an emergency fund in place if you don't have one already
2) paying back the student loan at 6.8% as quickly as possible
3) saving some money to refinance the main residence (7% for a fixed 30-year mortgage sounds really high with a credit score of 780).
4) saving for retirement

The dream house should wait.

I would pay only the minimum on the student loan at 1.76% for as long as possible.

+1.

I hate debt with a passion and have not used it even to buy houses. However, with the overwelming odds that inflation will cause interest rates to more up, I also would hold back on paying the low interst loans and do as FD has stated. You are on firm ground and heading in the right direction.

 

[HatePayingTaxes]

I would pay off the student loans first. Since you're considering kids, having no debt (except mortg) will be a huge relief mentally. We have 2 small kids and I can't imagine raising them w/ debt hanging over. Also, when kids come into picture, you never know if your wife will be staying home, unexpected expenses, possibly upgrading car, etc so it's good to minimize your monthly expenses.

 

[panacea]

I agree with the posts that recommend establishing a solid cash reserves first (3-6 months of expenses). I'd also contribute to Roth IRAs at the same time that you're working on this emergency fund since you can always withdraw Roth IRA contributions in an emergency without penalty. The benefits of the Roth are hard to beat and the earlier you start the better. Next, I'd pay off any student debt that has a rate greater than 4.9%. If you're in the 30% marginal tax bracket (federal and state combined), this is your effective rate on your 7% mortgage. Make minimum payments on the lower interest rate student debt. Once you knock out all the high interest student debt and get the emergency fund established, you can go more aggressively after the 7% mortgage. I agree with using restraint on the dream house. Buying expensive houses and cars are two of the biggest things that prevent us from achieving financial security as early as we'd like. Good luck and good fortune!
~Matt

 

[jbings4]

Still undecided!

1. Put the dream house on hold.
2. Pay off higher interest school loans ASAP!
I am still undecided whether I should open up a Roth for my wife and I and only contribute 100 or 200 dollars per month or just go full bore at the school loans. I've always been intrigued by the "debt free" lifestyle and getting rid of these loans has become an obsession of mine. My wife is staunchly against investing in the IRA until we get our school loans out of the way, but as I look at the ammoritization table it makes me think we have to start early to make truly great gains at the end. I'm still confused!!!!!!
The only only other thought I have is to sell the rental house we own. We have around 35k in equity in this property and bring home around $300/month after the the mortgage is paid. The rental also has a tax benefit that needs to be weighed in.
I've also considered selling our two cars that are both fully paid off. I have a Saab 93 and she has a Volkswagon Jetta. We could probably get around 18k for both these cars. We would then have to go out and buy two junkers to ensure we can still get around. Is this crazy?!
I really have enjoyed everyones input thus far and look forward to keeping this thread going.

 

[arebelspy]

1. Put the dream house on hold.
2. Pay off higher interest school loans ASAP!
I am still undecided whether I should open up a Roth for my wife and I and only contribute 100 or 200 dollars per month or just go full bore at the school loans. I've always been intrigued by the "debt free" lifestyle and getting rid of these loans has become an obsession of mine. My wife is staunchly against investing in the IRA until we get our school loans out of the way, but as I look at the ammoritization table it makes me think we have to start early to make truly great gains at the end. I'm still confused!!!!!!
The only only other thought I have is to sell the rental house we own. We have around 35k in equity in this property and bring home around $300/month after the the mortgage is paid. The rental also has a tax benefit that needs to be weighed in.
I've also considered selling our two cars that are both fully paid off. I have a Saab 93 and she has a Volkswagon Jetta. We could probably get around 18k for both these cars. We would then have to go out and buy two junkers to ensure we can still get around. Is this crazy?!
I really have enjoyed everyones input thus far and look forward to keeping this thread going.

This is all IMO. You'll find plenty of opinions and discussions on paying down debt before investing and vice-versa.

I'd only pay off the high interest student loans. You said they range from 2% to 7% (roughly). Pay off anything above 3 or 4%.

After that contributing to the Roth while paying down is fine.

Selling the cars is a fine plan, if it leaves you the same amount of happiness.

Selling the rental seems like a bad idea. Ignoring tax issues (both income tax on the rental income and depreciation deductions) you say you're making 300/mo after expenses (I'm assuming you're counting maintenance, repairs, and vacancy into that). 300/mo = 3600/yr. If you sold you'd get 35k, minus selling expenses. Meaning you're getting roughly a 10% return on that money. Plus the renters are paying down the principal and there's possible appreciation, meaning you're likely getting an even better return. Selling to stick that 35k into a Roth seems like a bad idea to me.

You do have to weigh that against the hassles of landlording.

Like I said, you'll hear lots of different opinions. Decide what's best for you.

 

[jbings4]

To clarify....

I would sell the rental to pay off the 6.8% school loans, not fund the Roth. Thanks for all this advice. This forum has been fantastic!!!!

 

[FreeAtLast]

I would pay off the student loans first. They are now front and center and can be tackled now. Over time other thing in life have a way of coming up and changing priorities.

You don't want those loans hanging over your head too long. I think that you already know this.

Welcome to the forum.

 

[robbridg]

Welcome jbings4,

I would concentrate on:

1) putting an emergency fund in place if you don't have one already
2) paying back the student loan at 6.8% as quickly as possible
3) saving some money to refinance the main residence (7% for a fixed 30-year mortgage sounds really high with a credit score of 780).
4) saving for retirement

The dream house should wait.

I would pay only the minimum on the student loan at 1.76% for as long as possible.

I agree. Continue to LBYM and save as much as possible. I would make sure that your emergency fund equals 6 months of living expenses.

 

[Tractor guy]

I echo the other comments. You're money ahead to pay of high interest (after taxes) loans first. I'd pay down the 6.8% student loan, refinance your prime house loan, and then put money towards eliminating whatever you're paying the most interest on. After you get your debt reduced, start putting money into your Roth.

The key point to remember is that you want to maximize your Net Worth (assets-liabilities). Financially, putting money towards reducing liabilities is the same as increasing your assets. And the calculation doesn't care if your liability is called a house or a student loan. Money is money.

Right now, you will be hard pressed to get 7% on any investments in your Roth so its better to reduce your liability that is costing you 7%. I would pay down your mortgages before the 1.68% student loan.

I would not sell your paid for cars and buy junkers. My experience with cars is that there is a "sweet spot" when you have minimum costs. This is generally after they are paid for and you can lower your insurance. After they get old and worn, maintenance costs and the cost of unreliability (tows, rentals, etc) go up. The cars you own are probably in that sweet spot. Anything that is cheaper (and older) is closer to the point at which costs are going to increase.

Lorne

 

[ERD50]

I would pay off the student loans first. Since you're considering kids, having no debt (except mortg) will be a huge relief mentally.

Not everyone thinks this way. I'd be much more relived mentally to have a low interest loan with that money in the 'bank'. Especially, if that loan is forgivable at death (I believe that's the case with student loans), that's the equivalent of an equal amount of life insurance for your family. You could factor in the cost of life insurance.

I would not sell your paid for cars and buy junkers. My experience with cars is that there is a "sweet spot" when you have minimum costs. This is generally after they are paid for and you can lower your insurance. After they get old and worn, maintenance costs and the cost of unreliability (tows, rentals, etc) go up. The cars you own are probably in that sweet spot. Anything that is cheaper (and older) is closer to the point at which costs are going to increase.

Lorne

Agreed. Plus, you are going to lose on the 'spread' between buying and selling. Well, maybe the Saab 93 should go

Saab 93 - Wikipedia, the free encyclopedia

I assume you have a Saab 9-3, but that threw me!

-ERD50

 

[jbings4]

Attack Student Loans!

I've done some calculating and am thinking it would be best to attack my student loans with a vengence. It I decided to drag out the student loan payments for 10 years, I would be paying an additional 28k or so in interest. If I put into my plan of paying $2500/month towards student loans, I would have them payed off in 42 months or 3 and 1/2 years. When I pay my student loans down with this payment plan I would pay around 7-8k in interest. This is a difference of around 20K, which equals around 7k a year or $455/month. This is a huge savings and I think that saving 20k or so on paying my student loans off early would be a good idea at this point. I know there are many different schools of thought when it comes to investing/paying student loans off early. The thought of saving 20k on paying my loans off early seems like a really good idea to me. Also, I hate having any kind of debt and the satisfaction I receive from pounding away at these debts is addicting. Can anyone give me a valid reason to start investing now and paying less on my student loans? I am excited about being out of school debt and being diligent with my spending for three years seems like a small price to pay to be student debt free! I feel like things would really open up nicely for us financially once we can put the student debt loans to death. Thanks for all your input thus far and I look foward to keeping this thread going and keeping you updated on our progress and goal of becoming debt free. Thanks again for those who have taken time to respond to this thread.

 

[GregLee]

Also, I hate having any kind of debt and the satisfaction I receive from pounding away at these debts is addicting.

I know that feeling -- great to be debt free. And I think you'll be doing very well following your plan. However, all the same, I'm not sure you're approaching the matter 100% rationally. While the faster you pay off the loans, the more you save in interest payments, as you say, you also lose the use of the money you used to accelerate paying down the loans. You should balance out what you will save with what you will lose to decide how fast to pay down the loans. Compare the interest rate you will be paying on the student loans if you stretch them out with the interest you would earn on the money you deferred paying the loans.

 

[arebelspy]

Exactly. What if you pay 20k more in interest, but make 40k more investing that money?

I'd follow the advice given towards the beginning of the thread - pay off student loans with higher rates, keep the lower rate ones (< 4-5% IMO, though advice will vary on that, of course).

Paying off your student loan at 2% may not be the best financial move, but it may be better psychologically if you hate debt that much. With the market turning the way it is, now might not be a bad time to get in (or dollar cost averaging in over the next while).

 

[FreeAtLast]

You might just want to pick a target date that you want to have the student loans paid off by and that will dictate how much you will need to pay monthly. I am not sure if you can pay the high interest loans off first. I seem to remember a problem with trying to do this with my daughter's student loans with Sallie Mae and it was not possible as payments were divide equally among all of the loans since they were all under the same account.

 

[obgyn65]

I am not a finance person, but paying the student loans seems to be the top priority in your case. Welcome to the board.

 

[serie1926]

Financial Peace University - daveramsey.com

this is my advice.