That being said, we have some debt. Not all that much, but enough.
We have some debt.
Yeah, that's debt, but what is it exactly?
- A Car Loan - I know, I know. An FI blog with a car loan, WTF? But at 1.79% I couldn't turn down a used car loan. We also used the down payment to cap off our minimum spend for both of our Chase Sapphire Reserves (yes, both, we have his and her CSR's from when there was the $1,000 signup bonus). [Mrs.Wow: It is also my office that I spend all day in]
- A Student Loan - Again, How the hell do I have student loans when I've been out of Grad school for over 12 years?? Ahhh... the American higher education system. I mean it's a little ridiculous, but it's there.
The Great Debate:
As we're moving closer and closer to FI, we're becoming more aware of these things. We've decided that we want to have all of our debt eliminated before we officially hang it up.
Not that I wouldn't consider this horribly bad debt, but it's still debt nonetheless. The worst interest rate is 2.625%, which really isn't horrible. The balance isn't awful either, but here's where the conundrum lies.
Let's take a look at the predicament we find ourselves in.
Options:
The Status Quo:
Currently we are servicing the debt. The car loan we pay $300 every two weeks, if you don't know about the bi-weekly payment trick, maybe I'll write about it sometime. And we pay ~$550 toward my student loans every month (they don't allow bi-weekly payments).
Yes, astute readers will realize that we are over paying the payments every month. It's been set up like this for a while, and it's just a part of our budget at this point. But it's almost $1,200 a month that is going to debt servicing.
Pros- We're doing it now. I'm lazy, I don't have to touch anything and we will be done with the entire balance in about a year.
Cons - $1,200 a month in debt service is getting to me. I see it auto withdraw every month and I don't like it.
Pay off the Whole Balance:
As you can see from the above screen shot, the debt isn't all that much. At this point we can wipe out the entirety of the balance with the swipe of a pen, or more appropriately a couple of clicks on a mouse.
So, we have the cash to wipe this out. It would hurt a little, but we would make it up quickly considering we would be saving about $1,200 a month in cash. Our reserves would be back up to speed in about 10 months, or we could simply invest that as we go, and worry about re-building the cash cushion further down the road.
Pros - The debt is gone. We're done with it, finished. No more, and we would be completely debt free. That's a huge psychological relief. Rolling monthly credit card balances don't count, as they get paid in full every month.
Cons - We deplete some of our cash at the moment, and we're potentially missing out on the growth of that $12k over this period of time.
Reduce the Payments to the Minimum:
The other thing you can notice in the screen shot above: the interest rates on these loans is negligible. I mean 1.79% and 2.625% is almost free money.
So, understanding that, we can dial back the debt payments and pay the minimums every month. Doing so would free up about $600 a month in cash that we can save now. Then we can arbitrage the difference by investing it in the market. If we so desired, we could postpone our payments for up to a year, since we are so far ahead on all the payments.
Pros - Free up over $600 a month to invest now, use the arbitrage between the interest rate and the market rate to juice our investments.
Cons - Draw out the payment schedule a little longer, so that we would have the debt for over 2 more years.
In Summary:
[table id=6 /]
Where does this leave us?
Well... I'm not quite sure. This is exactly why I wanted to ask you, our readers. We've been having this discussion for little while now. We're still at an impasse, so I'll pose it to you, what would you do in this situation?
💬 36 comments
A while back we decided to just bite the bullet and wipe out my wife's student loans. They were only at 2% or something like that, and I didn't regret it. It was nice to just not have to think about them anymore. From a "decision fatigue" perspective - maybe the thing to do is just pay it all off, and then you won't keep thinking about it and worrying?
Our conclusion was to wipe it out and move on. It was easy to do once we decided but it was a few months of going back and forth in it. Good luck choosing!
The funny part is this is just cash, so it's not gaining anything anyway... we'll replace it shortly.
I have to imagine finishing off the student loans is a great feeling. A mortgage we aren't interested in taking on at the moment. Maybe if it makes more sense in the future.
This is one of those times you should follow your heart because either way is fine. I wouldn't make it about the math. I would make it about what makes me rest easier.
This was a really great read!
Thanks for sharing;
I'm the opposite of Mrs. Groovy in that I always make these decisions about the math.
It really is a numbers game. The question is: can you take the psychological effect of seeing the debt on personal capital every month? (or day if you are addicted)
Debt isn't necessarily bad. Just has to be used in the right capacity.
Carl makes a great point though... decisions, decisions... haha
I think if you have the money in cash, it's unlikely growing at a rate higher than your debt is costing you. You will likely make more money by using that cash to pay off the debt.
Good luck on your decision. By the way, after I gave up on that struggle and paid off my low interest loan, I felt a relief of a burden I didn't know was on my shoulders. Debt free feels very good! Don't discount that unmeasurable investment return.
If you are still wondering which way to go, read my book, The Doctors Guide to Eliminating Debt, and see if it will sway you.
See you in Cuba!
Dr. Cory S. Fawcett
Prescription for Financial Success
I think the way we go is to maintain the emergency fund and just use excess cash flow to rapidly kill the debt. Wont be as fast as doing it all at once, but we keep our emergency fund and standard investing. But channel the excess into the debt for the time being.
At this point i feel like the burden is weighing more than the math.
Regardless, I was lucky enough to consolidate them and refinance them into a fixed rate that matched the current variable rate at the time.
My dad made me do it. I'm thankful now that I understand what he made me do.