Would you rather? (Financial Question)

Would You Rather?

  • Pay debt off as quick as possible.

    Votes: 14 87.5%

  • Pay minimums and have a larger bank/savings account and more spending or emergency money.

    Votes: 2 12.5%
  • Total voters
    16

TapouT

Well-Known Member
Joined
Oct 5, 2008
Location
Hickory nc
Bear with me as this will be pretty long...This is a very random question but I've been thinking a lot about the future lately and would like some outside input. My wife and I (both under 30) are home owners as of November last year, have a 5 digit bank account, work full time with no children, have 3 vehicles and 3 motorcycles. 1 of the vehicles is paid for and the 3 motorcycles are all paid for. We have two car payments. We put a couple thousand down on both with great interest rates. Our mortgage is $738/month at 3.25% (Fixed) interest and we pay $1,000 every month on it. Car payments are both under $300 but we pay $1,000/month on one and $500 on the other. We have 1.9% interest rate on both vehicles. We do NOT have any credit card debt so the rest of the money goes towards utilities, gas, food etc...my question is this for the older folk who have done it...is it wiser to pay off the debt quicker (spend much more money each month towards the bills), or just pay minimums and allow the bank account to continue to grow? I like the idea of paying off the debt much quicker but we don't really HAVE to and I feel like we could have a lot more money/things if we just paid minimums. Again, the only debt we have is our mortgage and two car payments. One vehicle we owe $5k on (books for $13k) and the other we owe $11,800 on (books for $16k).
 
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I guess it would depend on the interest rates the loans have. If your money is earning more interest in savings (or whatever method you are using) than the loans are accruing, I would keep doing what you are doing. If the interest rates are higher for the loans than your savings (typically the case), I would pay off the debt as quickly as possible.
 
obullfish said:
I'd keep paying extra like you are doing on all the debt as long as the extra is going towards the principle as I'm sure that you are smart enough to make sure of that. Only advantage to the mortgage is the tax benefits from the interest deduction. Give @EdJonesJeeper a holler to steer you in the right direction for the future.
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Every cent above our actual payment goes straight towards principle balance and we have a low interest rate on both cars.
 
Do you have a 401K where you work and does you company match your contributions? I bet the right with the right investment choices you'd make more than 3.25%. Good job on paying extra on the principle. By doing the exact same thing I'll have my 15 year mortgage paid off in less than 10 years.
 
TapouT said:
Mortgage is 3.25% fixed and both cars are 1.9% interest.
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I'd build up an emergency fund you feel is necessary and a modest savings while paying minimums on the 3 low interest debts you have. Any extra would go into a high risk investment account and knock down 10%+ earnings.

Once your comfortable with your savings and emergency accounts, then either throw more $ at your investment accounts or pay off your low interest loans. I wouldn't be hell bent on paying off the house asap since the interest is a tax deduction.

That's not financial advice, it's just what I would do if it were me. ;) I'll leave it to the experts to give out the real advice.
 
tlucier said:
Do you have a 401K where you work and does you company match your contributions? I bet the right with the right investment choices you'd make more than 3.25%. Good job on paying extra on the principle. By doing the exact same thing I'll have my 15 year mortgage paid off in less than 10 years.
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Thanks man. We have a 30 year loan but hope to have the house paid for in less than half that time.
 
Dave Ramsey would say set $1,000 in cash aside for an emergency. Then set up a zero-based budget - you know how much you make every month so spend it on paper first...give EVERY DOLLAR a job. Then pay extra on your debt starting with lowest balance first (pay minimums on your other debts in the mean time). Once the smallest debt is paid off, add that payment amount to the minimum of the next larger debt. Lather, rinse and repeat until you pay off all your debt (except maybe mortgage). Then save up 6-8 months of expenses in cash (for emergencies) and set it aside. Don't invest this money. You want it liquid just in case you need it. Then and only then start investing. He'd also say drive your cars into the ground, but make "payments" to yourself each month even after they are paid off. Sooner than you think you'll have enough money to pay cash for your next vehicle. The problem with credit is you lose twice - you get charged to use someone else's money and you don't earn interest on your own money.

There are a lot of people who think Ramsey's advice is misguided and it may be. There likely are smarter ways to go about managing finances, but it worked for me. Paid off car note and student loans in three years. Now I pay cash for all my vehicles, am self employed and have plenty left over to save for retirement. Greatest feeling in the world is being debt free.
 
adman02 said:
Greatest feeling in the world is being debt free.
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Just wait until you experience the feelings of: drunkeness, euphoria, and orgasm...
 
It all depends on how worried you are about your credit. Usually, closing a loan (early) will make it drop because it's about credit available vs. credit used...to the best of knowledge. Someone correct me if I'm too far off.
 
rockcity said:
I'd build up an emergency fund you feel is necessary and a modest savings while paying minimums on the 3 low interest debts you have. Any extra would go into a high risk investment account and knock down 10%+ earnings.

Once your comfortable with your savings and emergency accounts, then either throw more $ at your investment accounts or pay off your low interest loans. I wouldn't be hell bent on paying off the house asap since the interest is a tax deduction.

That's not financial advice, it's just what I would do if it were me. ;) I'll leave it to the experts to give out the real advice.
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This right here.

It's simple math really.
Priority #1 - make sure you have a good healthy emergency fund set aside, like 2 months worth of income or so - in case of unexpected job loss, sudden emergencies, etc.
Then do math comparing interest rates. Pay off whatever is the better deal.
E.g. your savings account is probably like 1%, while mortgage, car etc are 3+ %. So you're better off paying down those debts than having extra $$ sitting in a savings account . Again, this is assuming yo ualready have a good comfortable "extra" amount set aside.
If you have ANY carry-over credit card debt, pay that off FIRST because it is really high interest.
But really, you're going to be waaaay better off putting $$ into investments than mortgage or car loan. These days halfway decent mutual funds will net you 6-8% APR easily, if you are in more risky areas right now it's way higher. PLUS if done in an IRA or 401k, that $$ is tax deductible now so you save an extra 25% or whatever.
If your employer does a 401k matching fund, do that right now to whatever amount the max match. That is free money!

So in other words, I'd prioritize like this (based on typical interest rates:
1 - safety/extra fund (this is a security/comfort issue, not about maximizing profit)
2 - Credit cards
3 - employer-matched 401k
4 - own 401k / IRA etc
5 - Mortgage *
6 - car loan *
6.5 - hookers, blow, and truck parts
7 - savings

* depends on the interest rate. Keep in mind mortgage interest I tax deductible so take 25% off the stated rate.
 
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IMO people get all hung up on "debt free" and paying off mortgages etc.
I'd be perfectly happy to have debt at 3% for 40 years if I can take that same money and invest it at 7% for the same time. That's 40 years of making 4% interest for FREE.

You just have to look out for cash flow - don't want to be at a point where so much $$ it tied up that when you need it in emergency or big life changes, you can't get it or have to assume a whopping loss/debt to get it.

my personal plan is putting every extra penny into our mortgage ONLY until we hit the 78% mark and ditch MIP. Then all of that extra, plus the amount we're currently paying for MIP, goes into 401k. If mortgage rates are still as low as I'm at now, I will re-fi to re-stretch the amount and get the payment lower, and take the monthly savings and again stack that into 401k.
 
I will be honest it was TLDR, but I skimmed.

Here is what you should always live by: "Put your money where the interest is highest" If you have credit card debt that is at 20% and a savings that earns 1%, pay towards the credit card before you put in the savings. If your mortgage is 3.5% and your investment account earns 7% then pay the min on the mortgage and put everything you can into the investment account.
 
RatLabGuy said:
IMO people get all hung up on "debt free" and paying off mortgages etc.
I'd be perfectly happy to have debt at 3% for 40 years if I can take that same money and invest it at 7% for the same time. That's 40 years of making 4% interest for FREE.
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^^^This...it's a little more complex than being net positive when considering gains, write offs, credits...etc. And you also have to factor in how much how much of your income is going to investments vs debt. Meaning if only 5% of your income is going to investments at 15%, but 30% of your income is going to debt at 5%...that doesn't mean you're 10% to the positive. But that's my overall philosophy, I really don't care how much debt I have. If your only options are debt or savings...I'd pay off debt first. However, as others have said, get an emergency fund first. Personally, I keep 6 months salary in the bank and have cash in a safe. From there I put in whatever my company matches for the 401k. I give 20% to my advisor with a 12-15% annual return. None of my debt is larger than 4% interest and less than 30% of my monthly income. From there, I keep a few grand in savings (about 10% of annual salary) and if we need more for a vacation or something, we cut back on some of our frivolous monthly expenditures.
 
keep up the good work with your credit. Refreshing to see folks still wanting to put forth the hard work.

Hiring a financial advisor was a really good choice for us. At first, I thought we were wasting our money. However, I'm glad my wife won that battle.
 
I keep enough in savings to cover me for about 6 months if I lost my job. I refinanced for 3.125% (pretty good for a double wide) and knocked it back to 15 years. I pay 1000 a montb...should have it paid off in 10 years. All I owe besides that is 15k on my tractor and 8k on my truck. Not bad to be 27.

I have a pretty good retirement too...I'm a federal employee. They'll match up to 5% in our TSP (basically a govt 401k) and however many years I work is the percentage of my highest 3 years salary I get along with the draw from my retirement account.
 
Pay some things slowly in order to maintain best credit
 
We're both in our mid 20's. We have a little over $20k in our checking account with $3,000 in a safe at our house. Our highest debt is 3.25% which is the mortgage. Like I said, both vehicles are 1.9% interest rate and we have a paid for Jeep. I believe I'm going to try the "pay off smallest debt owed" as quick as possible while paying minimums on the other and then move on to the next one. Never had a credit card in my life lol
 
TapouT said:
We're both in our mid 20's. We have a little over $20k in our checking account with $3,000 in a safe at our house. Our highest debt is 3.25% which is the mortgage. Like I said, both vehicles are 1.9% interest rate and we have a paid for Jeep. I believe I'm going to try the "pay off smallest debt owed" as quick as possible while paying minimums on the other and then move on to the next one. Never had a credit card in my life lol
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If you have discipline, pay the higher interest stuff first. It will save you money over paying the small stuff first. Paying the small stuff first is really just about momentum and motivation by hitting little victories, not about saving the most money on interest. If you don't need little victories to stay disciplined, pay the highest interest first.
 
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