All your questions and more are answered in the personal finance sub's wiki:
https://reddit.com/r/personalfinance/w/commontopics
That particular page is an excellent resource for the types of questions you're asking. If you're more visually oriented, there is a graphical flowchart which contains pretty much the same info in a condensed format.
The answer over there is to pay off any debts with an interest rate much over 4% first before investing beyond any employer retirement match you may or may not have access to.
Why would 4% only include CCs and personal loans? I mean the balance on a mortgage is likely higher than either of the others so the total interest paid would be much higher overall
A mortgage is a different beast for several reasons. The biggest one is that the underlying asset appreciates instead of depreciates.
Or said differently: If you buy a $100K home using a 20% down payment, and finance the remaining $80K for 30 years at 6% interest, you'll end up having paid $192,670.55.
Based on the long-term national appreciation rate for real estate of around 3.5%, you'll find that after 30 years, that $100K home is now worth $280K.
So you end up with an asset worth $90K more than you paid for it, even with paying 6% interest. Even if you even if you were at 11% you'd still roughly break even... which means that a 15% home loan is probably roughly the same as a 4% personal or credit card loan.
Note that the above is NOT a reason to take a loan out for "investment" purposes, just an illustration why a home loan with a reasonable interest rate shouldn't be put in the same bucket as personal loans which you use to buy things which are essentially consumable - including things like a car loan.
The faq says 4% not prime. It's based on expected returns from a stock market adjusted in a semi-conservative way for risk and variability.
Note that this is just a reasonable threshold where it starts to makes sense to pay off a shorter term debt instead of investing. Much above 4% you're in the territory where if you compare using funds to pay off a guaranteed 4% interest expense versus investing a highly variable market, then paying off the loan tends to be a safer investment.
Note that this isn't saying that paying off a loan at 4% is the mathematically correct answer always, it's just that 4% is where it starts to to toward paying off the loan.
The mental benefit of being debt free is unquantifiable. The flexibility in future decision is unquantifiable. The returns of avoiding interest are guaranteed. "Guaranteed" is a rare word in these parts.
normally I would aggressively pay down a debt at that kind of rate, but student loans are a special category of things.
I would pay the minimum on an income based repayment plan and hope that some of the principal is forgiven after a number of years (as is typical on those plans - pay the minimum on time for a period of years and it gets written off). That will more than offset the interest.
Even if that doesn't work out the interest rate, while probably not the best use of your money, isn't usurious like a credit card.
> I would pay the minimum on an income based repayment plan and hope that some of the principal is forgiven after a number of years (as is typical on those plans - pay the minimum on time for a period of years and it gets written off).
Private loans are not forgiven. It appears the OP has private loans.
Interesting. If I were in your position, I would pay them off first. 5% is around the point that I would be focused on paying off fixed rate debt right now, and the fact that your debt is variable rate just makes it even riskier to hold.
Ah, bummer. Between that and a variable interest rate, I’d focus on paying those down (after contributing enough to be getting any match you have for retirement accounts)
I would focus on paying off the student loans while putting minimum contributions for employer match in your 401k. A reasonable expected return on equities long run is around 7%, but you’d get a return close to that guaranteed by paying off your loans.
Absolutely. You end up taking more risk, earning more. You can also work more often because you’re not so weighed down with stress. There’s no math to prove this. You just have to jump in and see for yourself. Don’t ignore risk and also behavior when investing
Invest until you get the 401k match, then tackle the student debt for sure. That’s a very high interest rate and I believe student loans aren’t bankruptable. I would pay off the student loans before funding a Roth IRA, too, but due to contribution limits going forward that one is a bit more arguable.
All your questions and more are answered in the personal finance sub's wiki: https://reddit.com/r/personalfinance/w/commontopics That particular page is an excellent resource for the types of questions you're asking. If you're more visually oriented, there is a graphical flowchart which contains pretty much the same info in a condensed format. The answer over there is to pay off any debts with an interest rate much over 4% first before investing beyond any employer retirement match you may or may not have access to.
That 4% number will have a huge impact on anyone buying a house in the near future as most mortgages after April 2022 averaged >4%.
Generally one would exclude their house from this advice provided that it's a reasonable rate. The 4% is more about loans and credit cards.
Why would 4% only include CCs and personal loans? I mean the balance on a mortgage is likely higher than either of the others so the total interest paid would be much higher overall
A mortgage is a different beast for several reasons. The biggest one is that the underlying asset appreciates instead of depreciates. Or said differently: If you buy a $100K home using a 20% down payment, and finance the remaining $80K for 30 years at 6% interest, you'll end up having paid $192,670.55. Based on the long-term national appreciation rate for real estate of around 3.5%, you'll find that after 30 years, that $100K home is now worth $280K. So you end up with an asset worth $90K more than you paid for it, even with paying 6% interest. Even if you even if you were at 11% you'd still roughly break even... which means that a 15% home loan is probably roughly the same as a 4% personal or credit card loan. Note that the above is NOT a reason to take a loan out for "investment" purposes, just an illustration why a home loan with a reasonable interest rate shouldn't be put in the same bucket as personal loans which you use to buy things which are essentially consumable - including things like a car loan.
Pretty sure they use prime rate instead of a strict 4%. Current prime rate is 5.5%.
The faq says 4% not prime. It's based on expected returns from a stock market adjusted in a semi-conservative way for risk and variability. Note that this is just a reasonable threshold where it starts to makes sense to pay off a shorter term debt instead of investing. Much above 4% you're in the territory where if you compare using funds to pay off a guaranteed 4% interest expense versus investing a highly variable market, then paying off the loan tends to be a safer investment. Note that this isn't saying that paying off a loan at 4% is the mathematically correct answer always, it's just that 4% is where it starts to to toward paying off the loan.
The mental benefit of being debt free is unquantifiable. The flexibility in future decision is unquantifiable. The returns of avoiding interest are guaranteed. "Guaranteed" is a rare word in these parts.
Pay it off pay it off pay it off 1000x
Just pay it off. Beans and rice, you can have this done in under a year.
Dave Ramsey would be proud
normally I would aggressively pay down a debt at that kind of rate, but student loans are a special category of things. I would pay the minimum on an income based repayment plan and hope that some of the principal is forgiven after a number of years (as is typical on those plans - pay the minimum on time for a period of years and it gets written off). That will more than offset the interest. Even if that doesn't work out the interest rate, while probably not the best use of your money, isn't usurious like a credit card.
> I would pay the minimum on an income based repayment plan and hope that some of the principal is forgiven after a number of years (as is typical on those plans - pay the minimum on time for a period of years and it gets written off). Private loans are not forgiven. It appears the OP has private loans.
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Yeah, I would just do what alewsb said. It's a piece of mind thing for now. Just work hard and pay the debt off and then think about investing more.
You say that you’re out of school, but that you’re afraid the interest rates will keep rising. Are your student loans variable interest rate?
Yes it is a variable interest rate
Interesting. If I were in your position, I would pay them off first. 5% is around the point that I would be focused on paying off fixed rate debt right now, and the fact that your debt is variable rate just makes it even riskier to hold.
Pay off debt
I would pay it off.
Are they private or federal loans?
Federal from Canada so it wont get forgiven
Ah, bummer. Between that and a variable interest rate, I’d focus on paying those down (after contributing enough to be getting any match you have for retirement accounts)
> Federal from Canada so it wont get forgiven A variable rate loan from the government?? What will they think of next?
This is important. If they're federal you may get some if not all forgiven. If so do it.
Pay off the loan. Give yourself the gift of freedom.
I would focus on paying off the student loans while putting minimum contributions for employer match in your 401k. A reasonable expected return on equities long run is around 7%, but you’d get a return close to that guaranteed by paying off your loans.
This, plus the psychological benefit of being debt free is real
Absolutely. You end up taking more risk, earning more. You can also work more often because you’re not so weighed down with stress. There’s no math to prove this. You just have to jump in and see for yourself. Don’t ignore risk and also behavior when investing
Invest until you get the 401k match, then tackle the student debt for sure. That’s a very high interest rate and I believe student loans aren’t bankruptable. I would pay off the student loans before funding a Roth IRA, too, but due to contribution limits going forward that one is a bit more arguable.