1) 401k up to the match
2) Minimum monthly contributions to
– Two Roth IRAs
– Two Coverdells and one 529 for our kids

Beyond that we boost our emergency fund to 6 months. Our retiremet fund is already on track. So if there’s money left over after all that we use about 80% of it off against our high interest debt (a HELOC) and then the rest against one Roth or Coverdell fund.

In this way we maximize the guaranteed return but don’t completely miss out on the possible opportunity in the market right now.

Probably if the market tanks we’ll shift more to 50/50 to buy more equities esp. if our HELOC rate continues to drop.

-Frank

Also, I get paid bi-weekly so two months of the year I get three paycheques. I took that into account for my calculations but don’t know if you would have. That could be where the difference comes from as I’ll invest much more in those months.

In that case if you’re not investing significantly more than $250 a month, I view that as a waste.

I had been investing while slowly paying off my debt. Then I looked at the numbers, it just didn’t add up. I was hemorrhaging money towards interest, way more than I was even putting into my 401K. I decided to look at my financials as one entity, not compartmentalizing debt over here, and assets over there. Once I did that, I saw how dismal my net worth was and how scary my budget was going to be for the next 15 years. I cashed everything out, stopped investing, killed all the debt in a few months, and I’m investing at a greater rate NOW than I would have been able to achieve in the next 15 YEARS if I was still paying off my (relatively low interest) debt.

My net worth is already moving upward rather than “3 steps forward, 2 steps back”. I’m even able to save up for a down payment while continuing to invest and put money towards retirement.

Again, situations determine the rules. But in my case (single, no house), paying off the debt quickly was the best financial decision I could have possibly made.

Besides, Trent, with all due respect, you recently wrote a couple of posts indicating a pattern of pulling out of the market when it goes down and waiting until it starts going back up to get back in. With that in mind, I really don’t think you’ll be hitting that 13% annual benchmark. You’d be best to get the guaranteed return on paying off your debts.

It looks like you have about $1000 to put towards debt and/or savings each month, and $6000 in your savings account. Give or take. In any case, let’s use that amount for this exercise.

In scenario 1, say you put a minimum payment of $215/mo on the debt while depositing the remaining $785 into your savings account gaining interest at 5% (remember, the $6K is already in there). In 10 years, you’ll have ($130,491.11 saved – $25,841.86 spent on the loan) = $104,649.25. Not bad…. but…..

In scenario 2, you put a payment of $775/mo on the debt for two years, and save the remaining $225, upping that to the entire $1000 after the debt is paid off. In 10 years, you’ll have ($134,216.03 saved – $18,639.37 spent on the loan) = $115,576.66.

You’re way better off paying off the debt as fast as you can. Even if you take the total paid to the loan out of the equation, you’re still ahead.

Plus, you jettisoned the risk of the loan after the two years; you’ll be breathing easy for eight.

I think, in the end, most people have it right: personal peace of mind has its own value. If you’re exposed to risk that makes you seriously uncomfortable, that’s a cost in itself. And–as long as you’re aware of the other costs–that can and should be factored in. Note that even though I have strongly disagreed with the idea that you should never borrow to invest, I also said I agreed with Trent’s plan to at least partially accelerate his debt repayment (and I myself am doing the same). I will feel so much better when I don’t feel that I can only work in one very narrow (and demanding) segment of my profession. The freedom to–when the time is right–take a job that pays less, but offers different personal satisfactions, is one of my biggest goals, and I’m willing to give up a few percentage points towards that goal.

In scenario 1, I put 20% of my income to paying off my student loan and 5% to savings, it will be gone in 2 years. However, my savings will only have grown to $11,500 (assuming 5% return). I will have paid $1500 in interest.

In scenario 2, I only pay the minimum amount on my loan and invest the rest. In two years my loan debt will still be $14,500 but I will have $26,000 saved.

That means I could still pay off my debt anytime after this point if I so choose but I have the added security of having much more in the way of assets. This means I am more secure than if I had paid off my debt fast.

However, this is just looking at two years from now. I decided to see what would happen in the long run. So after my debt is paid off, for scenario 1 I start saving 25% of my income while scenario 2 stays the same.

10 years from now when my debt will be paid off in scenario 2, I will have assets of $148,500 for scen. 1 and $145,000 for scen. 2. I will have paid $6600 more in interest but only have a net worth that is $3500 lower.

Sure, $3500 is a lot to me now but over a period of 10 years this is almost pennies (less than 2.5% of my future theoretical net worth).

For my situation, it completely makes sense to only pay the minimum amount on my debt and invest the rest. I think this is the key point. If I don’t have the self-control to invest the money then yes, it would be much better to pay off the debt. But this won’t be a problem.

Another couple of points: 5% is pretty conservative – I almost get that from my bank account – and I get tax credits on my interest from my student loans.

Both routes have advantages, but many people retreat to paying down debt or acquiring fixed income investments during a down or turbulent market when historically speaking they are better off buying securities. A sensible person balances investing and debt reduction until he is in a position to make debt profitable.

http://www.diehards.org/forum/viewtopic.php?t=4263&highlight=poll

It looks like most would say around 6% is the magic number.