The Great Debt Debate

Debt is one of those weird things.  It can be useful, if you use it properly.  Most times it’s bad.  It’s kind of like the opiates of personal finance.  Good if used in moderation for the proper purpose, really bad used in any other way.

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?

  1. 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]
  2. 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.


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:

Status QuoDo Nothing. Already Donepaying $1,200 a month
Pay it OffDebt FreeUse up $12,000 in cash reserves
Reduce PaymentsMore cash to invest nowDraw out debt payments.

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?


  • Katie September 12, 2018 at 5:08 am

    Get rid of that debt! We recently went through a similar situation. We had about $15,000 left on a car loan, at 2.2%. My husband wanted to leave the money invested and I wanted to pay the loan off and be DONE with debt (except of course for our mortgage ha ha). We wound up compromising: we pulled money out of investments to pay off the loan in full (SUCH an amazing feeling!!), and I upped my 401K contributions another 5% (which is about equal to what the monthly car payment was). A win all around! 🙂

    • Mr WoW September 12, 2018 at 8:02 am

      We don’t have a mortgage as we’re renting, so we don’t have that one to worry about. This would make us completely debt free. We’re just not quite sure where to go. I feel like this is a limbo range that people fall into. I know the math works for leaving it alone, but it’s one of those rush to the finish line things.

  • Freedom 40 Plan September 12, 2018 at 5:34 am

    Argh – I feel like I’ve had (have) this exact same conundrum! The balances are small and the interest rates your paying are low. But it gets annoying looking at the balances each month in your Net Worth spreadsheet – even if they are getting lower.

    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?
    Freedom 40 Plan recently posted…Hacking 10 or More Years off Your 30 Year Mortgage

    • Mr WoW September 12, 2018 at 8:06 am

      Yeah, we’re right around the corner from the finish line and it’s right there!! I know it makes sense financially but really at this point it’s a flip of the coin. Even if the market jumps 30%, we’ll miss out on like $4,000, which we will make up in 3 more months of saving the payments.

  • 5am Joel September 12, 2018 at 5:47 am

    My vote is #2. Pay it off with your cash reserves and simplify your life. In 10 months you’ll be whole again, or maybe 11 if you include some ‘opportunity cost’ between now and then. My 2cents!

    • Mr WoW September 12, 2018 at 8:08 am

      Good point. We’ll be whole quickly, and it’s not even really invested now, so it’s just sitting in cash. But your 2 cents will make it a little less on the repayment, so thanks 😉

  • Young FIRE Knight September 12, 2018 at 6:10 am

    Ha! I’ve been having this exact same debate lately and I’m not sure what to do either! I’ve got a car loan at 1.9% with $6,500 left and a $300/month payment. I’ve got plenty of cash reserves to pay it off now, but think I can get better returns with that money elsewhere (heck online savings account interest rates are at 1.85% themselves!) But it would feel great to be completely done and have the extra monthly cash flow… the struggle is real #firstworldproblems

    • Mr WoW September 12, 2018 at 8:10 am

      This is exactly the struggle!!! I know what the math says. But, it’s just a matter of the psychology of the thing. Which means I’m going to have to delete personal capital when the next market dip hits. HA

  • Josh September 12, 2018 at 6:25 am

    The difference between “almost free money” and actual guaranteed free money (by paying it off in one fell swoop) is a couple hundred bucks. I wouldn’t worry too much over ~2% charge on $12k debt. Just stick with the debt payment plan that you’re on, and let the worrying subside.

    • Mr WoW September 12, 2018 at 8:11 am

      This is exactly the issue. I think the laziness might very well be getting the best of me.

  • FullTimeFinance September 12, 2018 at 6:45 am

    I treat debt payments as an asset allocation to risk free investments . Ie in lieu of my contribution to bonds each year with a requisite rebalance factor as well. After all reducing future commitments and risk free return are roughly equivalent.
    FullTimeFinance recently posted…Job Changes and Imposter Syndrome

    • Mr WoW September 12, 2018 at 8:13 am

      That is a great way of looking at it. I should look into it, but at this amount, that seems like a lot of effort.

  • Mr. SSC September 12, 2018 at 7:41 am

    We had this same problem with Mrs. SSC car loan. At 0% interest we took the bulk of $$ for it and put it into the market and just paid loan, not even double pay. When it got to about $8k we were just tired if making payments and had the same discussion as you guys.
    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!
    Mr. SSC recently posted…My Dad’s Suicide: 10 Years Later

    • Mr WoW September 12, 2018 at 8:15 am

      Thanks!! It seems as though that is the suggestion. So, maybe we lean that way. It’s like we can see the finish line, so we might as well sprint and just get it over with.

    • NWA-non September 15, 2018 at 11:00 am

      I will always try to keep a 0% loan as long as I can. That’s the finance company giving you money AND you getting the that money as long as you can.

      • Mr WoW September 15, 2018 at 4:43 pm

        I fully agree. 0% is a different game. But at 1% I’m still paying them. So, I don’t know, even though it’s minuscule, it’s still a cost.

  • My Sons Father September 12, 2018 at 8:27 am

    While it isn’t the mathematically sound choice, I’d write the check and be done with the debt. I know it’ll likely cost you some money over the long term, but I was always willing to pay that money for the feeling of being debt free. Ultimately I don’t think there is a wrong decision and it’s probably a choice based more on lifestyle then it is on math anyway.
    My Sons Father recently posted…Throwback Thursday – Mini Challenge #1

    • Mr WoW September 13, 2018 at 6:28 am

      I think you are exactly right with there not being a right or wrong decision. It seems like everyone is agreeing with you. Just be done with it and move on. We’ll make up the difference in a matter of months anyway.

      The funny part is this is just cash, so it’s not gaining anything anyway… we’ll replace it shortly.

  • freddy smidlap September 12, 2018 at 9:45 am

    i had an even cheaper car loan at 0.9% until last year. i only paid it off when mrs. me lost her job and the extra cash flow was convenient in keeping our life the same. if you paid it you would have the option of dropping or changing the mandatory collision coverage that comes with a loan, but i don’t think it’s that much money/month. we’ve been debt free for awhile and it’s very liberating from a mind set point of view. paying off the student loans felt better than paying off the mortgage.
    freddy smidlap recently posted…Good Eats for Cheap #5 – Free Pears and Muffuritos!

    • Mr WoW September 13, 2018 at 6:25 am

      I think the mental benefits are starting to look more and more beneficial. As for insurance, I we’re pretty well optimized there.

      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.

  • Mrs. Groovy September 13, 2018 at 11:43 am

    It’s personal. But personally, for me, there’d be no contest. I’d pay it off.

    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.
    Mrs. Groovy recently posted…The Groovy Guide to Financial Independence Has Launched!

  • priyanka September 14, 2018 at 8:48 pm

    Very impressive!!
    This was a really great read!
    Thanks for sharing;

    • Mr WoW September 15, 2018 at 4:45 pm

      Sure Anytime!

  • Carl September 15, 2018 at 9:55 am

    Am I the only one who loves debt? My online bank account (AmEx) is paying me 1.80% and rates are going up up up. If you can earn s higher rate than your paying on your debt, you’re giving away free money by paying it off.

    I’m the opposite of Mrs. Groovy in that I always make these decisions about the math.

    • Mr WoW September 15, 2018 at 4:45 pm

      I believe you are the only FI blogger that LOVES debt. I’ll say I don’t mind it. I think it has it’s place. And I am getting more and more interested in some of these business deals that pertain to leverage, etc. It’s interesting. But I think that’s a different type of debt. That’s for a possible gain, this is just garbage debt, and not that much at that.

    • Kevin Nielsen September 27, 2018 at 2:39 am

      Nope I love debt too!

      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)

      • Mr WoW September 28, 2018 at 4:25 am

        That truly is the question and it weighs on us every month. I think we just kill the thing.

        Debt isn’t necessarily bad. Just has to be used in the right capacity.

  • Mrs.Sweetspot September 19, 2018 at 12:20 pm

    From reading this, it seems like your goal is to pay it off ASAP, so if you can afford it, just do it! It will probably feel really good!

    • Mr WoW September 19, 2018 at 3:06 pm

      We are certainly leaning that way.

  • Steve September 20, 2018 at 9:45 am

    Definitely think it depends on how you feel about debt. My vote is definitely number #2 and follow the same advice as Mrs. Groovy.

    Carl makes a great point though… decisions, decisions… haha
    Steve recently posted…Average Household Income – Best & Worst States

    • Mr WoW September 20, 2018 at 5:34 pm

      Good points all around, I think were going with some funky hybrid of all.

  • Dr. Cory S. Fawcett September 21, 2018 at 8:27 am

    I’m not sure I would agree with your comment “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.”

    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

    • Mr WoW September 21, 2018 at 9:38 am

      Yeah, so we would be depleting a good amount of our emergency fund. Everything else is invested, so that’s why I’m having the struggle.

      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.

  • FIRECracker September 22, 2018 at 2:49 am

    Wow, your interest rates are really low? How did you manage that? Most of the readers who write in to us have loans with interest rates in the 6-12% range. I’ve never seen student loans with less than 5% interest.

    • Mr WoW September 22, 2018 at 6:39 am

      So, these are federal loans. And at one point these were variable rate loans. I believe in 2007 they changed so all newly issued loans were fixed at 5%, or higher for different stuff.

      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.


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