Max out on 401k or pay off student loans?
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Anonymous
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HHI approx $220k (me: about $95k)
Student loans (mine only): $53k (currently paying $1000 per month) Mortgage: $2250 Childcare: $1000 monthly, soon to be $2000 monthly upon arrival of second child in fall Car payment (DH): $300ish per month, 2 years left. I drive old paid off car 401k: (DH): approx $150k; (me): approx $60k Cash on hand (each): about $15k, total about $30k no credit card debt Back story (in case relevant)- I went to grad school 10 years ago and ended up in low paying jobs in international development from 2006-2009. A contract job I worked on ended during the recession (mid-2009), and I spent 3 years trying to find stable work. During that time, I worked a lot of odd jobs, and saved a lot, relative to what I was making by living very simply. Paid health insurance on my own, etc. In 2012, landed my current job and have been maxing out on 401k contributions ever since. DH bought a house in 2009 before we met. I had enough saved that I encouraged purchase of a rental house (mostly my cash) which we bought early 2015. The down payment (approx $80k) might have better gone directly to my student loans, but we made the decision we made. We found out 2 weeks ago, there is a proposal put in for a development across the street from our rental house so there is incredible potential for appreciation there..mentioning this for the folks who are going to criticize me for buying a rental before paying off my loans. I know I could be throwing myself to the wolves by asking advice here. We live very very simply- rarely eat out, always pack lunches, I drive a 17 y/o car, etc, in order to save. Cash on hand not incredibly high due to frequent smaller maintenance tasks in our current house and putting 20% down on rental house. We pay jointly on childcare, mortgage, groceries, etc, but each pay our own transportation, I pay my loans independently etc. I want to be done with my student debt. Should I lower 401k contributions to make progress? If I continue to pay at current rate ($1000k per month), if I am ABLE (ie no unforeseen huge expenses that cut into my extra contributions), it will still take me 4 more years to pay, but it means stagnant cash on hand and little extra savings on my end. |
Anonymous
| OP again. I should note my minimum required loan payment is $300. I'm paying as much as I can per month to shorten my payback period. |
Anonymous
| What is your interest rate? |
Anonymous
| 2.75% but interest accrues daily, something to the tune of around $5. So if I pay extra on my loans the day after the min payment is withdrawn from my account, it goes directly to principal. If I pay on the 5th or 14th or any other day of the month, the extra first goes to principal. You can only make a "principal only" payment at the start of each month for this reason. |
Anonymous
| oops, I meant the extra goes toward interest if the additional payment is not at the start of the month. I hit 'submit' too fast. |
Anonymous
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I don't know the answer to this - I'll just tell you what I did. About 7 years ago, DH and I went to a financial advisor. At that point, we did not own a house, were doing 401K matches at work + fully funding our Roth IRAs, and together had about 60K in student loan debt. They gave us an action plan, which was to build up emergency fund to minimum 25K, which we did. Then, we saved for a down payment (a small one as we did an FHA loan). Then, we paid off the loans. In hindsight, I think I wish we had invested in addition to the 401K/Roth AND paid off loans at the same time as we were paying 1600 a month to get rid of the loans. We ended the loan and that next month had to start paying daycare, so the timing was great.
I am SO GLAD we don't have those stupid loans hanging around now that we have a second kid. I feel so flexible and nimble having literally no debt (except mortgage). I'm sure we could have more in investments had we invested versus focused on the loans, but at this point, we have about 300K in investments, no debt, 2 kids, and a house. I feel ok! |
Anonymous
This is encouraging. Thanks- that's just it: I know getting rid of debt with take some serious work, but I'm eager to not have it looming overhead. A financial advisor might be in order to help weigh some options. |
Anonymous
This is unclear. You don't state whether you nixed your retirement contributions entirely while building the ER fund and then paying the loans. That's kind of a big difference there. |
Anonymous
| If you think you can do better than 2.75% investing in the market, then you should probably continue maxing 401ks and prioritize other investing too. But I get not wanting to have that debt either for psychological reasons. As long as you're doing SOMETHING (debt repayment or investing, or a mix of both) you're doing great. |
Anonymous
We continued to fund the 401K/Roth while building the ER fund and paying the loans. We didn't do after tax investing, in order to pay down the loans. I sort of wish we did, but at the same time, I am more than happy to not have the loans over our heads. |
Anonymous
This is great info... I am also trying to figure out how to save for a house and pay off student loan. I just called and made an appointment with a financial advisor to help us get on track. |
Anonymous
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simple rule...
you can't borrow for retirement......... |
Anonymous
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I hated having student loans. While I was paying those off I contributed to retirement only what I needed to get the entire employer match I was offered (about 5% of my salary). I'm mid-30s and have no regrets at present about this plan. After having my first child I was so, so, so glad I was debt free and could feel like I was choosing to return to work rather than needing to return to work to repay my student loans. For me, choices and flexibility are priceless.
Also, I don't understand the comments about seeking out a financial advisor. Maybe I just don't understand what financial advisors offer. I just run the math myself to see how long it will take me to repay X or to save up Y. It sounds like OP has already done some of this. What else to financial advisors offer? Their opinion on historical savings rates? You can look that up yourself. Ideas of ways to invest your money? Be very, very careful of this. It if sounds too good to be true it probably is. |
Anonymous
| OP, why do you and your DH keep your finances so separate? You are a team making decisions for the long run interest of the team. Do you get more return out of the rental house than he does? Is the debt/equity precisely equal between the house you live in (is this in oth your names or just his) and the rental investment (I interpret your description as being owned jointly despite the fact that it was largely your money going to the downlayment). It sounds like you are both savers on the same path but in parallel rather than jointly. There could be a better decision if you consider your family finances as a whole rather than two attributed pieces. |
Anonymous
I may not have been clear on the sharing of expenses. I contributed largely to the rental house as I had the cash I had been saving. Currently, I am using the small amount of extra cash from the rental income each month to help toward my loans. (So 1/3 of the monthly student loan payment I make comes from the rental income and 2/3 from my own earnings). Since I had the benefit of walking into the house he invested in 6 years prior, we just call it even. We both contribute to the mortgage on our current house. Our names are both on the mortgages for both houses. We contribute jointly to all shared expenses. Its only that I don't contribute to his car payment, as I'm working on my own student loans, which I don't expect him to contribute toward. I know some couples put it all in the same pot, and maybe we would at some point, but at this point, we haven't made that decision. |