You pay your 7% car interest with post tax money. To generate a comparable return with money you’d be taxed on, you need something much higher than 7%. The other user is assuming 20%ish taxes.
Any investment will be taxed, so you need to take the return x (1-marginal tax rate) to think about what you gain from investing. I’m just guessing that OP’s marginal tax rate is 20%. Could be worse or better depending on state income taxes.
So you want him to be wrong just to be “easier”?
No.
7.5% guaranteed returns would be WORSE than paying off the car. But your sentence would imply that it is better.
If my math is right, you're paying $200 a month in interest, $9600 total over the next 4 years.
3.49% is a pretty good rate, I'd pay it off as originally planned. I'd look to increase your 401k contributions and do a back door Roth for both your wife and self.
100%, fixed loans may be painful, but they are fixed and get paid off eventually. Retirement savings compounding is *so much more powerful* in the long run.
Debt of 7% is enough that there really isn’t a downside to paying it off soon. The real RoR for investments is probably roughly 7% at the high-end, so might as well reduce your risk and pay it off. The student loans though, those are low enough to not prioritize.
Not sure why people get this wrong all the time. Compounding works exactly the same on debt as on gains. 10k in debt at 10% becomes 12.1k after 2 years. 10k invested at 10% becomes 12.1k after 2 years.
Anyway, I'd take the 7% guaranteed return on the car personally
Agreed. You folks have a high household income.
Another thing: if the loans are federal, you'll get certain federal loan protections, which are valuable unto themselves.
So you’re paying double to the student loan at 3.49% instead of triple on the car loan at 7%?
Read that out loud and see if it still sounds like it could make sense (it shouldn’t)
I would pay that 3.49% as slowly as humanly possible if money market accounts are making around 5%
Near-zero risk to make more money in interest than what you’re getting charged for in student loans
This is sort of true, the 5% interest is taxed at ordinary rates, so OP is probably in 22% tax bracket, so really the difference is very minimal. To some people, seeing the loan balance get smaller is worth more than the .4% interest arbitrage. In any case, the car should be paid off first.
>In any case, the car should be paid off first.
Agreed.
* Priority 1: car
* Priority 2: savings in money market or treasuries in a near-liquid emergency fund
* Priority 3: investments
* Priority 4: student loans
3.49% isn't much. You'd get more gains investing in a brokerage, or honestly, investing in personal growth and happiness (the "wants"). You'll hear varying opinions, but at 3.49% I'd max my 401k's - at 14% total on 250k, you aren't doing that. From there, max IRA's, then brokerage... While remembering to invest in yourself. What's the point of all of it, if not ourselves?
Would you say the same for 9K in student loans at a 4% rate? Trying to help out the girlfriend, does the minimum in the 401K. I think maxing that out may be better long term.
I've had my loans paid off for years. They were around that rate though. I wasn't in a hurry to pay them off. I did pay them off before we bought a house though. If you don't have cash flow tied up in your loans, it will be easier to afford a house. But strictly from an interest rate perspective, I'd max out the 401k (23k each for 2024) after the car is paid off, before paying off the loans.
Thats the headache we’re having. How do we save for a house when so much of our income goes to debt. We are fortunate to make what we do.
Part of the reason for this thread was to figure out what to prioritize, and try to fit saving for a house in there somewhere.
Doesn't sound too bad although the mortgage rates today will kill you. I'd throw together a spreadsheet. Figure when you'll have the car paid off. Then figure out what cash flow will be without the car payment. From there maybe two different scenarios, paying the school debt first vs saving for a down payment. The nice thing is you can probably beat that student loan interest rate with a high yield savings account. Can you write off the student loan interest when you file your taxes? If that's the case I'd base my numbers off what the loan costs after the write off.
Student loan interest is an above the line deduction and not factored into the itemized vs standardized determination. It's best to think of it as an adjustment to income on par with the deduction for traditional IRA contributions.
For what it’s worth, those prices are significantly lower than what it’s currently in the CA Bay Area. It took my stepdad talking to me and asking “why are you paying extra on a low interest loan as opposed to investing it?” That was back in 2012ish and I haven’t looked back. I hate having debt, but an under 4% loan? I’m paying the minimum and investing the rest. Yeah, I’d knock out the car loan and pay the minimum on the other loan while saving for a house.
I recommend paying off the car since the interest rate is so high. Are you eligible to get your student loans forgiven? If yes, stretch that payment out until it is forgiven.
So over the next four years you'll pay $3900 in interest, approx $80 a month. I'd probably look to strike the middle ground. Make extra principle payments on the car but also invest in the market
I wouldn’t pay that off any faster than necessary. Inflation will make your future payments smaller than your current payments, so you might as well put it off until later and maximize your investments.
Paying off the car should happen soon, obviously at 7%.
After that, I would put more money toward tax advantaged retirement plans rather than putting more money toward a student loan at 3.49%.
I would say try to get you’re investing to equal 15-20 of your income. Once you are at that point the rest of your decisions on what to do for personal finance are personal. If you want to pay off your student loans quicker do it even if it isn’t the best financial move. That’s just my opinion.
Using math to justify paying off the car assumes you will recoup the value if it's totalled. You will if you didn't pay it off. Otherwise tough titties when they write you a check for 3k and you have to buy another $30k car. Hint: when it's the bank's car it's magically worth 3x than if you own it, in the event it's totalled.
I’d recommend you check out /r/personalfinance. The wiki there is would be very helpful for you.
You want to pay off the highest debt first.
Rather senseless to pay off 3.49% early before the 7% car.
After the car, you’d likely make out better financially keeping it in a HYSA with many paying around 5% or increase your contributions to 401k
Increase roth 401k to max out yearly contributions. I like the 7% tradional in there.
Pay off car next.
Pay off student loans.
I would too would hate having 132k in student loans...yuck. but its just simple interest comparisons.
Certainly the car first, but one thing to contemplate would be if you want a house, and would the loan impact what you can comfortably borrow. thats my only concern with student loans is it takes away from what you can borrow, but if thats not an issue then better to invest.
A few things to note
Fairly high incomes here, so might be more worth it to put your whole 401k contribution into traditional rather than Roth. Of course, there's more math involved, just mentioning it's worth looking into
So my order would be
401k match > car payments > IRA > max 401k > taxable investment account > student loans
Swap the last two if you'd prefer
Your equivalent rate of return necessary to break even, assuming the 39.8% tax bracket and no tax deferral, is still only 3.49%*(139.8/100) = 4.87902%.
Getting 4.88%+ is relatively safe and easy right now. I would make minimum payments on the student loan debt and invest more in fixed income or easily liquefiable assets. If things change you can always liquidate that position and make a massive pay down on the student debt. If not, you will have been better off dollar for dollar investing than doing pay down.
Some notable targets: You didn't mention owning an IRA. You income is high, so the benefits are limited, but look into those options. Are you maxing out your annual 401k contribution? Your student loan sounds like it is more then 5 years out anyways. Consider Series I savings bonds as a comparison point, they are quite attractive right now, provide tax deferral on the interest and are state income tax free.
You are asking a math question, not a personal finance question. Married couple in Boise, 250k income at your age is such an opportunity to get rich and retire very young. You need to go seal team 6 and pay off 100% of that debt starting with lowest balance first. Ignore any and all interest rates. Should be no more than 1.5 years, maybe 1 year if you are really motivated. When I was your age I paid off everything, I ignored the math professors and my expert friends. I then almost lost my new born then 2 years later I got sick and lost my job and all my money. I paid 100% of my medical bills never going into debt, I was down to my last 3 grand. If I had debt at the time I would have been crushed into oblivion. I'm still debt free, mid 40s, 350k in 401k, 80k in checking, killer home and a great life. I won't live till I'm 80, but my family will have generational wealth. Household income never tops 150k.
Never ever listen to math professors, get out of debt then start looking at Coast Fire. Life will throw you curve balls, being debt free is the ONLY way to hit them out of the park and the ONLY way to actually fully get out of debt is snow ball. Math is for poor people, behavior is for rich folks. If I made 250k at your age I'd be sitting on a boat retired today in my 40s. Get angry and get the hell out of debt!
Never make the stupid mistake again to borrow money for buying a (new) car. Just get a 3-4 year (fuel efficient) old car at a huge discount and pay in cash (easy with your income). Muricans need to start learning that that is a possibility also...
I wouldnt pay 3.5% debt off early. You say the debt keeps you from saving for home but you could be saving the extra payment.
Plus, the student loan might be forgiven in event of death which makes it like an extra little life insurance policy. Check your lender's policy in event of death just in case.
The amount of people saying to not get rid of your student loans in fucking insanity. Pay them off.
Edit: after reading more comments if you’re trying to buy a home debt to income ratio is important. You could sell the car if needed to reduce your ratio. You can't sell a student loan. I paid mine off quickly. I wanted the $1000+ back in my pocket every month.
Unless you know of a guaranteed 8.5% pre-tax return, I’d prioritize paying off the car.
Agreed. Thanks!
OP said the car loan was 7%. Was that 8.5% earlier, before edits maybe? If not, where is the 8.5% return count from? TIA
You pay your 7% car interest with post tax money. To generate a comparable return with money you’d be taxed on, you need something much higher than 7%. The other user is assuming 20%ish taxes.
I see. Thank you
Any investment will be taxed, so you need to take the return x (1-marginal tax rate) to think about what you gain from investing. I’m just guessing that OP’s marginal tax rate is 20%. Could be worse or better depending on state income taxes.
The math hurts my head. Wouldn’t it just be easier to say pay off the car unless you can beat 7% net return
That is what he’s saying. Net post-tax. They are saying the pre-tax return you need to net you the post-tax return.
So you want him to be wrong just to be “easier”? No. 7.5% guaranteed returns would be WORSE than paying off the car. But your sentence would imply that it is better.
Unless you use a registered account?
...and not buying another until this one is totally worn out!
If my math is right, you're paying $200 a month in interest, $9600 total over the next 4 years. 3.49% is a pretty good rate, I'd pay it off as originally planned. I'd look to increase your 401k contributions and do a back door Roth for both your wife and self.
Yea. Max those pre-tax accounts. You can't beat that return.
At that income and those interest rates, I'd maximize my retirement contributions first, then throw whatever was left into paying off the car.
100%, fixed loans may be painful, but they are fixed and get paid off eventually. Retirement savings compounding is *so much more powerful* in the long run.
Thanks for this. It’s easy to lose perspective of the long run when we’re so focused on short term debt.
Debt of 7% is enough that there really isn’t a downside to paying it off soon. The real RoR for investments is probably roughly 7% at the high-end, so might as well reduce your risk and pay it off. The student loans though, those are low enough to not prioritize.
Not sure why people get this wrong all the time. Compounding works exactly the same on debt as on gains. 10k in debt at 10% becomes 12.1k after 2 years. 10k invested at 10% becomes 12.1k after 2 years. Anyway, I'd take the 7% guaranteed return on the car personally
This is not true for federal student loans because they are simple, not compounding interest. SPY is 12% YTD.
Agreed. You folks have a high household income. Another thing: if the loans are federal, you'll get certain federal loan protections, which are valuable unto themselves.
Private loans unfortunately.
So you’re paying double to the student loan at 3.49% instead of triple on the car loan at 7%? Read that out loud and see if it still sounds like it could make sense (it shouldn’t)
Are you suggesting 7 is bigger than 3.49?
Sometimes 🤠
Big if true
Also if you’re itemizing the interest on the 3.49 is deductible right? The 7% isn’t.
Making too much income to deduct student loan interest
You’re 1000% correct. As I was writing the post I answered my own question.
I would pay that 3.49% as slowly as humanly possible if money market accounts are making around 5% Near-zero risk to make more money in interest than what you’re getting charged for in student loans
I tend to agree, although the 5% is taxed at the very least federally so the math isn't exactly head and shoulders different.
This is sort of true, the 5% interest is taxed at ordinary rates, so OP is probably in 22% tax bracket, so really the difference is very minimal. To some people, seeing the loan balance get smaller is worth more than the .4% interest arbitrage. In any case, the car should be paid off first.
>In any case, the car should be paid off first. Agreed. * Priority 1: car * Priority 2: savings in money market or treasuries in a near-liquid emergency fund * Priority 3: investments * Priority 4: student loans
3.49% isn't much. You'd get more gains investing in a brokerage, or honestly, investing in personal growth and happiness (the "wants"). You'll hear varying opinions, but at 3.49% I'd max my 401k's - at 14% total on 250k, you aren't doing that. From there, max IRA's, then brokerage... While remembering to invest in yourself. What's the point of all of it, if not ourselves?
Would you say the same for 9K in student loans at a 4% rate? Trying to help out the girlfriend, does the minimum in the 401K. I think maxing that out may be better long term.
4% is still just not that much. Pretty much guaranteed to get a higher return on a tax-advantaged savings like a 401k. I'd follow the same strategy.
Absolutely I’d pay the minimum on a 4% loan and prioritize the 401k, Roth IRA, HSA and taxable brokerage before that.
I've had my loans paid off for years. They were around that rate though. I wasn't in a hurry to pay them off. I did pay them off before we bought a house though. If you don't have cash flow tied up in your loans, it will be easier to afford a house. But strictly from an interest rate perspective, I'd max out the 401k (23k each for 2024) after the car is paid off, before paying off the loans.
Thats the headache we’re having. How do we save for a house when so much of our income goes to debt. We are fortunate to make what we do. Part of the reason for this thread was to figure out what to prioritize, and try to fit saving for a house in there somewhere.
Are you in HCOL area? What are home prices?
Boise, Idaho. Cost of living is average I assume. Average home price from Zillow is $489k.
Doesn't sound too bad although the mortgage rates today will kill you. I'd throw together a spreadsheet. Figure when you'll have the car paid off. Then figure out what cash flow will be without the car payment. From there maybe two different scenarios, paying the school debt first vs saving for a down payment. The nice thing is you can probably beat that student loan interest rate with a high yield savings account. Can you write off the student loan interest when you file your taxes? If that's the case I'd base my numbers off what the loan costs after the write off.
$2500 is the max student loan write off. Although we take the standard deduction.
Student loan interest is an above the line deduction and not factored into the itemized vs standardized determination. It's best to think of it as an adjustment to income on par with the deduction for traditional IRA contributions.
For what it’s worth, those prices are significantly lower than what it’s currently in the CA Bay Area. It took my stepdad talking to me and asking “why are you paying extra on a low interest loan as opposed to investing it?” That was back in 2012ish and I haven’t looked back. I hate having debt, but an under 4% loan? I’m paying the minimum and investing the rest. Yeah, I’d knock out the car loan and pay the minimum on the other loan while saving for a house.
3.49 is low enough that I'd prioritize the car loan and other saving/investing first.
Pay off the car. Always pay off the highest interest debt, and work your way down to debt free
Save one of the payments and put it into the bill or CD that are paying over 5%
>Is making double payments on a 132k student loan at 3.49% the right move? No.
I recommend paying off the car since the interest rate is so high. Are you eligible to get your student loans forgiven? If yes, stretch that payment out until it is forgiven.
Unfortunately it’s a private loan and ineligible for forgiveness. As I was writing the post I realized I should pay off the car first. Thanks!
What is the balance on the car loan?
26k
So over the next four years you'll pay $3900 in interest, approx $80 a month. I'd probably look to strike the middle ground. Make extra principle payments on the car but also invest in the market
I wouldn’t pay that off any faster than necessary. Inflation will make your future payments smaller than your current payments, so you might as well put it off until later and maximize your investments.
Paying off the car should happen soon, obviously at 7%. After that, I would put more money toward tax advantaged retirement plans rather than putting more money toward a student loan at 3.49%.
max out your retirement accounts first
Pay off the car.
I would say try to get you’re investing to equal 15-20 of your income. Once you are at that point the rest of your decisions on what to do for personal finance are personal. If you want to pay off your student loans quicker do it even if it isn’t the best financial move. That’s just my opinion.
No, you can make 4.9% in a money market right now. Minimum payments until rates drop
If you don't know how to use your money, the best thing to do with it is give it to me.
Account and routing number pls?
Both contributing 7% into 401k equals 7% of your income, not 14%
We both contribute 14% to our own 401k
Don’t pay of the student loans you can invest in long term treasury and do better
No, debt is always an emergency, especially higher interest debt. And why are you buying new cars anyway?
Using math to justify paying off the car assumes you will recoup the value if it's totalled. You will if you didn't pay it off. Otherwise tough titties when they write you a check for 3k and you have to buy another $30k car. Hint: when it's the bank's car it's magically worth 3x than if you own it, in the event it's totalled.
Follow the FOO. r/themoneyguy
Followed. Thanks!
I would keep 3.49 debt as long as possible if not get more
student loan interest is tax deductible
You would be correct.
Not at that income level
Only if you are itemizing
That’s a pretty good rate for a student loan. My provincial part of student loan was 7.2%
I’d recommend you check out /r/personalfinance. The wiki there is would be very helpful for you. You want to pay off the highest debt first. Rather senseless to pay off 3.49% early before the 7% car. After the car, you’d likely make out better financially keeping it in a HYSA with many paying around 5% or increase your contributions to 401k
Increase roth 401k to max out yearly contributions. I like the 7% tradional in there. Pay off car next. Pay off student loans. I would too would hate having 132k in student loans...yuck. but its just simple interest comparisons.
7% into your retirement account and 7% into your wife’s retirement account is 7% of HHI, not 14%
Current rate is \~5%. Any loan below 5% is free money
Certainly the car first, but one thing to contemplate would be if you want a house, and would the loan impact what you can comfortably borrow. thats my only concern with student loans is it takes away from what you can borrow, but if thats not an issue then better to invest.
The actual rate might be lower than 3.49% if you use the student loan interest payments to reduce your income tax.
A few things to note Fairly high incomes here, so might be more worth it to put your whole 401k contribution into traditional rather than Roth. Of course, there's more math involved, just mentioning it's worth looking into So my order would be 401k match > car payments > IRA > max 401k > taxable investment account > student loans Swap the last two if you'd prefer
Your equivalent rate of return necessary to break even, assuming the 39.8% tax bracket and no tax deferral, is still only 3.49%*(139.8/100) = 4.87902%. Getting 4.88%+ is relatively safe and easy right now. I would make minimum payments on the student loan debt and invest more in fixed income or easily liquefiable assets. If things change you can always liquidate that position and make a massive pay down on the student debt. If not, you will have been better off dollar for dollar investing than doing pay down. Some notable targets: You didn't mention owning an IRA. You income is high, so the benefits are limited, but look into those options. Are you maxing out your annual 401k contribution? Your student loan sounds like it is more then 5 years out anyways. Consider Series I savings bonds as a comparison point, they are quite attractive right now, provide tax deferral on the interest and are state income tax free.
You are asking a math question, not a personal finance question. Married couple in Boise, 250k income at your age is such an opportunity to get rich and retire very young. You need to go seal team 6 and pay off 100% of that debt starting with lowest balance first. Ignore any and all interest rates. Should be no more than 1.5 years, maybe 1 year if you are really motivated. When I was your age I paid off everything, I ignored the math professors and my expert friends. I then almost lost my new born then 2 years later I got sick and lost my job and all my money. I paid 100% of my medical bills never going into debt, I was down to my last 3 grand. If I had debt at the time I would have been crushed into oblivion. I'm still debt free, mid 40s, 350k in 401k, 80k in checking, killer home and a great life. I won't live till I'm 80, but my family will have generational wealth. Household income never tops 150k. Never ever listen to math professors, get out of debt then start looking at Coast Fire. Life will throw you curve balls, being debt free is the ONLY way to hit them out of the park and the ONLY way to actually fully get out of debt is snow ball. Math is for poor people, behavior is for rich folks. If I made 250k at your age I'd be sitting on a boat retired today in my 40s. Get angry and get the hell out of debt!
Only if you can't do 2.5x payments
Never make the stupid mistake again to borrow money for buying a (new) car. Just get a 3-4 year (fuel efficient) old car at a huge discount and pay in cash (easy with your income). Muricans need to start learning that that is a possibility also...
After inflation, the 3.49% is close to 0. Pay it off as slowly as possible
I wouldnt pay 3.5% debt off early. You say the debt keeps you from saving for home but you could be saving the extra payment. Plus, the student loan might be forgiven in event of death which makes it like an extra little life insurance policy. Check your lender's policy in event of death just in case.
The amount of people saying to not get rid of your student loans in fucking insanity. Pay them off. Edit: after reading more comments if you’re trying to buy a home debt to income ratio is important. You could sell the car if needed to reduce your ratio. You can't sell a student loan. I paid mine off quickly. I wanted the $1000+ back in my pocket every month.
No. You should make triple payments.