The option to stay home with your children is highly valuable – that’s what I’ve done, so I’m completely biased. But I know that kids will value the time spent with their parents more than any college fund. Having a parent at home adds a quality to life for the whole family and I think it’s well worth the financial sacrifice. Plus, there are numerous ways to be creatively thrifty.

I would not worry about paying down a mortgage, though, at this point in your life. I’d keep extra money in your savings account, especially with a growing family. Once again, this gives you options.

Let’s say you put the money in a money market at 5% and your tax bracket is 25%. The interest is taxed at ordinary income rates, so that return is really 5% x (100%-25%) = 3.75%, meaning the “cost” of paying off the debt this way is 7% – 3.75% = 3.25%. In fact, if you look at it in reverse, paying off the debt is equivalent to finding either a 9.33% money market fund (9.33% x (100%-25%) = 7%) or a 15%-tax-rate capital gains investment returning 8.23% (8.23% x (100%-85%) = 7%), because that is the return that you’ll need to pay taxes on your gains while covering the accuring interest as you are waiting to pay off the debt.

I respectfully disagree with your decision to forgo investments in favor of paying down tax-advantaged and relatively low interest debt.

In your particular situation (it appears that you are already maximizing your retirement plan contributions) you suffer no grievous damage by your choice. However, most Americans have a tendency to pay down debt prior to funding tax advantaged accounts…which by admission of the Fed is a mistake. I agree that you have to take into account your individual circumstances, but look at both sides of the issue.

Here are three resources that may be helpful.

http://www.cmpsinstitute.org/images/HowtoSafelyManageHomeEquity.pdf
http://www.finra.org/PressRoom/NewsReleases/2004NewsReleases/P012717
http://www.chicagofed.org/publications/workingpapers/wp2006_05.pdf

MDJ makes a great point of considering the tax difference. However, since long-term capital gain can be 15%, I’m not sure you’d have to make the 10%+ that he mentions. It may be closer to 8.5% – still quite do-able.

To be honest, though, I don’t think the “savings account” method will make much difference in total return, but it gives you the ability to deal with any emergencies that may happen in the future. Once you throw money at installment debt, you have to find other, sometimes more expensive, debt to replace it.

Keep up the great work!

Question, is your student loan debt tax deductible?

We all know the story of the twin brothers. One started investing at age 22 and put in $2000 a year for 6 years. The other brother didn’t start until the 7th year and he put in $2000 for the next 37 years. With the same return, at the age of 65 their investments are worth the same amount. Even though the 1st brother only invested $12,000 while the second brother invested $74,000. Waiting can be pretty costly.

And, at least for me, watching investments increase is more motivating than watching debts decrease.