About a week ago, I mentioned my investment plans now that we have a house. This post happened to be at the top of the site when my wife visited it, and it spurred a week long discussion between the two of us on whether we should be focused on building up that investment or focused on paying off all of our debts first, potentially freeing one of us to be a stay at home parent (a definite possibility for at least a few years in the future, especially if we have more than two children).
We currently have three student loans and our house debt outstanding, with the highest debt being a student loan at slightly above 7%. All of these loans are locked in permanently at their current rate. We carry no credit card debt, own both of our vehicles, and have some significant savings towards our next vehicle purchase.
Essentially, we have to be able to beat a 7% return on our investment to put us money ahead with the investments, but that’s over the long term. If we invest now and decide to have one parent move to a stay at home situation, we’ll want the money sooner rather than later, and we both have bad feelings about many investments over the next few years.
Stocks are a great investment over the long term, but over the short term they can be incredibly risky. If you put some money in the stock market today, I’ll bet you anything that you’ll have a gain ten years from now, but I certainly wouldn’t make the same bet over just the next year.
So we’ve mutually decided to put the investment plans on hold and instead pay off our debts for the time being. We look at it this way: it’s a 7% return on our investment, period, both in the short term and in the long term. We’ll start with our highest interest loan and use the savings account method of paying it off: put the money we’re going to use to pay it off early in a savings account and use it as an emergency fund until it’s well past the value of the loan, then pay it off with one check.
Of course, this may be reevaluated in a few years when it’s clear whether or not a stay-at-home situation is best. If we decide that it’s not, then we’ll perhaps look more seriously at investing. Until then, we’ll focus on paying off those debts.
I’m still going to tinker with investment ideas on here – my goal is to seek out the best possible plan for when we do delve into investing. For right now, though, paying off our debts looks like the best road for us and we’re going to go down that road with our usual gusto.
What’s the lesson here? A person or a family may have an individual situation that makes their best financial route different than the financial route others might take. For example, if we were not thinking at all about having one of us be a stay-at-home parent, we might go for the investment route because we’d be far more interested in long-term gains that could easily exceed 7% a year.
In the end, this is a perfect example of the importance of specifying goals right off the bat. When we sat down and talked about our goals, we realized that eliminating our debts looked like the best route for us. If I stuck with my initial investment plan, we may have been making moves that didn’t match the goals we had as a couple – and thus we could have been stuck out in the rain.