Pay off debt or invest?

[Droopy]

I'm seriously thinking about starting a Roth IRA, but I also want to pay off debt. The Roth IRA will cost me $333 a month if I want to contribute the $4000 yearly maximum.

I have three debts. $33,000 mortgage at 6.25%. $5100 in credit card debt at 5%. And a $4800 student loan at 8%. The reason I mention this is that I've been told that the stock market historically yields 11% a year on average. So, technically speaking, if that trend continues it would actually be to my benefit to open the Roth IRA and pay off my debt at a more modest pace.

But I really want to be debt free, including my mortgage, and being able to throw another $4000 a year at it will get me there a lot quicker. What would you do?

[AlCzervik]

1. i would pay off the credit card and the the student loan.

you're getting some tax benefit from the mortgage so i would continue to carry it. Once you pay off both those things you can make principle only payments on your mortgage in addition to your regular mortgage and you'll have your home paid off in less time.

[Common Sense Party]

6. Agreed.

Pay off the unsecured debt first.

The mortgage, as you say, you get a tax deduction on your interest. Plus, your home is, long-term, an appreciating asset.

I would start the Roth as soon as the credit card and the student loan were goine.

[Droopy]

7. I hadn't thought about the tax deduction for the mortgage

So you would pay off the two smaller loans and then invest while paying down the mortgage? Or just pay off all of the debt first starting with the two smaller loans and then invest?

[Common Sense Party]

9. I answer that below...

Yes, I would pay off the two smaller loans and then start investing.

[AlCzervik]

13. yes to your first sentence.

[Bunny]

2. Pay off debt.

[auntAgonist]

3. my uneducated opinion is to pay off cc debt first

before doing anything.


:hug:

aA

[SteppingRazor]

4. get out of debt. The amount you pay in interest will almost certainly eat up anything you earn. n/t

[LeftyMom]

5. I would say you're more stable with less debt.

So while the technically correct answer is probably to do the IRA, I'd either pay off the debts first or pay off all the debts save the mortgage (as said above, you're likely gaining tax benefits from that) and go from there.

[Common Sense Party]

8. Your credit card debt will not remain at 5%.

It never does. You're probably paying more than that now, with all the extra layers of fees the banks slip in. You'd probably be paying 12% or higher before you know it.

Historically, the stock market has averaged about 10.5% annually. But that's over the past 80 years. That gives the market time to smooth out the huge dips from recessions and depressions. The market could go down 20% this year, and another 30% next year. Then where would you be? Still in debt.

Pay off the credit card debt and the student loan first. Take the $333 you were going to put toward the Roth, and instead attack the debts. You'll have those two paid off in no time. I wouldn't worry too much about paying off the mortgage in a hurry. If you get bonuses or windfalls, sure, send in some extra principal payments. But you have a good rate, you get a deduction for your interest, and you may need to get time and compunding working for you by starting a Roth as soon as you're out of debt.

How old are you/or how long until retirement?

[Droopy]

11. I'm 35

The credit card debt is fixed. It was a balance transfer from another card that charges 4.99% for the life of the transfer. I have another card that I use for convenience that I pay off every month so I'm not racking up more credit card debt.

[Common Sense Party]

16. I'd still pay it off.

And I know for a fact that the credit card companies can jack you around, and there is NO guarantee it will remain at 4.99% forever.

Did you know that if you credit score goes down--because you're late with a student loan payment or a mortgage payment or whatever reason--that bank can jack up your 4.99% rate? They can crank it up to 22% if they want. I'm not saying that will happen, but it can and it has. Google "Universal Default Provision" to see what I'm talking about. Credit card companies are, quite often, scum.

On edit:
And since you're young, I'd pay off the credit card and student loan ASAP and start the Roth as soon as you can. You've got three decades until retirement. You can now put up to $5000 a year away in a Roth (assuming you don't earn too much to qualify).

[NewJeffCT]

25. You got that right -

with mergers and acquisitions and reorganizations being common, it's very easy for your low rate to be changed in some new bank's program, or some new program within the bank.

[BOSSHOG]

24. You are 35

don't wait another day to open an IRA. One can spend a life time thinking up reasons not to start saving money and then we are old and gray with naught but memories.

[swag]

12. Good advice.

[Deja Q]

10. Debt.

My two cents on investment might be paranoia, but debt is rarely good.

[Momgonepostal]

14. I don't know what you're making, so this may be bad advice...

If possible, I think you should both save and pay off your debt. Generally, conventional wisdom says to pay off debts with the highest interest first, so I'd most heavily concentrate on the student loan. Mortgage interest is usually tax deductible, although your mortgage amount is small enough, I'm not sure if the amount of interest you pay is enough to help you itemize. I'd concentrate 2nd on the credit card, because that rate seems too good to last, and there is no financial benefit to paying credit card interest like there may be with the mortgage.

So, again, just me, but I'd make payments on all of them, but extra on the student loan. When you get that out of the way, put the money you were spending on it toward the Roth IRA. At that point, I'd put any extras I had toward the credit card. When you get the card nailed, put what you were spending on that toward the IRA.

I think being debt free is a worthy goal, but a mortgage, because of the tax deduction isn't terrible, especially a small mortgage.

Good luck to you, whatever you decide!

[Lance_Boyle]

15. Invest near the bottom of the recession,

not right now when we're falling but we can still see the top. Pay down the debt first.

[Wcross]

17. I vote for FREEDOM. Pay off your debts, stay out of debt & then save. n/t

[RebelOne]

18. I'm sure that if you asked Clark Howard, the consumer guru,

he would tell you to pay off the debt first. He believes that everyone should be debt-free.

[Droopy]

19. Clark is a good man. I used to listen to him frequently.

That also calls to mind another financial radio show guy. I think his name is Dave Ramsay. He would say the same thing.

[Rabrrrrrr]

20. Always pay off debt first.

You have no guarantee that investment income will be more than your rate of debt. And since a Roth IRA is not tax deductible, it's not worth doing while you hold a debt load.

Your plan of action should be -

1) Save enough in cash to last up to 6 months without a job or income; don't invest this money, except maybe in a CD or other quickly liquidated form with guaranteed return. Unfortunately, this emergency money will never do much work for you in terms of earning income, but it will be necessary if you ever caught without income.

2) Live simply for a year or two, not making big purchases and shoving as much money as possible into debt payment.

3) Pay down all non-mortgage debt, making bigger payments than necessary. As big as you can make.

4) Once non-mortgage debt is paid, then invest while also making double or triple or more payments on mortgage.

(in your case, your mortgage rate is less than your student loan rate; if it were reversed, I'd say pay the mortgage down first, then work on student loan - in essence, always pay off the highest interest bearing debt first, then work your way down).


One thing you can do during all this is, if you have 401(k) through work, put as much as into that as possible, even before paying down your debt. That's almost free money for the most part - it gets deducted from your taxable income, and your take home pay will be almost the same as if you didn't have any money taken out. When I had a 401(k) doable job, I was socking away something like $800 a month into the 401(k), and my take home pay only went down about $300 a month because of the tax savings.

Carrying debt is never a good thing - it will sit on your shoulders like an albatross and haunt you. Mortgages aren't as bad, since they're actually a debt for something physical that can be resold if need be, but they're still expensive loans. Even a small percent stretched out over 15 or 30 years means you're paying at least twice for the house.

[SeattleGirl]

21. Definitely pay off the debt first.

You could still save, but at a lower dollar amount. Put the bulk of the money toward paying off your debt. Looking at your figures, you would still come out ahead, the combined interest of your three debts is more than 11%.

[gmoney]

22. getting in to the market now is almost certainly "buying high"

I'd pay off the CC first, then student loan, at least until the big, overdue "correction" takes place.

That John Commuta Debt into Wealth thing they constantly advertise on AAR basically says to stop buying on credit, apply as much money as you can to pay off your smallest debt first (your student loan) and pay the minimums on everything else. Once the student loan is paid, take the amount you had been paying monthly and add that to the minimum for the credit card, and pay the minimum on the mortgage, until the credit card is paid off. Then take the amount you'd been paying on both the student loan AND credit card and add that to pay down principal on your mortgage until it's paid. Ta-dah!

You can also start the Roth or a regular IRA, maybe with a smaller amount, just to get the ball rolling. One thing about socking money into an IRA is that it's essentially GONE, and if something presents itself (good or bad) that money is out of reach. So, consider your cash flow, and just how much you can afford to have flow away from you for the next 30 or 40 years.

Honestly, I'm a little scared that if things hit the fan, inflation will spiral to the point where a $100,000 in an IRA will be rendered almost worthless, or at least inflation will offset any appreciation or tax savings.

Paying off debt is a guaranteed rate of return, and has mental health benefits galore.

Good luck.
G

[BOSSHOG]

23. Open the Roth IRA ASAP.

You don't have to max out on it but the sooner you open it the harder it will work for you over the years. Rule of Money - PAY YOURSELF FIRST. Alot of people put off paying themselves first because they have debt; and then badabing they are 58 with squat saved. Chances are we will always have debt so jump in to the IRA now. Pay off the student loan first, then the credit cards (however you most likely will use the cards again sometime.) Throw a few extra bucks each month on your mortgage principal and watch it all melt away on a monthly basis. Did I mention PAY YOURSELF FIRST.