A reader asks…
My husband and I are doing fairly well financially, but we wanted to see what we could be doing better. My husband is very big into investments and I was always very big into liquid savings (I watch a lot of Suze Orman). After meeting with our financial adviser, he said he felt like we should only have 5-10k in an Emergency Fund and max out our Roth, invest more in our 401k and lastly invest in our mutual funds. I can get behind this, it makes sense to invest our money as opposed to having it sit in a savings account not earning interest.
The one area I’m unsure of though is that he told us there was no need to be throwing money at our debt because the interest rates are so low and we are making much more in our investments. He didn’t say it was “bad” to pay off the debt, just said he thinks we should focus on the investments.
As far as debt, we have our home, two cars and then about 25k in student loans. My father paid off my student loans, so I’m actually just paying him back at 4%, so it is fairly “secure” debt. I personally would rather get rid of all of our debt, but also see his point on the fact that we would be earning more on our money if it is invested.
As of right now this is a rundown of our finances, we make about 140k combined gross income, our house is 216k with 3.5% interest on 30 year mortgage, one car has 4k left and the other 13k both under 4% and then the 26k in student loans i’m paying my father for. Right now we have about 18k in liquid cash, although we are expecting to have to pay 5k in taxes this year.
What are your thoughts on investing vs paying down the debt?
As always, I’ll provide advice on what I would do in this situation, and then you all should chime in with what YOU would do in this situation.
1) Is your financial advisor fee-for-service or commissioned base? If he works off a commission fire his butt and find a fee-for-service advisor. Seriously, do that.
2) I’d be cautious of the sales pitch your advisor gave you about the stock market. Yes, it’s true savings account interest is pathetic. Yes, the stock market was up 25% last year. But don’t forget, the markets just lost 326 points yesterday. They were down heavily from 2007 to 2011.
Tread carefully when you write things like “but I also see his point on the fact that we would be earning more on our money if it is invested.” Sometimes that’s true. Sometimes it’s not.
3) I would pay off my student loan ASAP. Even though the interest rate you’re paying poppa bear is ony 4%, I’d get rid of it fast. Why not the car or mortgage first you ask? One reason.
I hate owing family money.
Super nice of him to offer to cover your loans for you, so why don’t you return the favor and pay him back quickly. This immediately removes any potential awkward business/family relationship. With $140k/yr in income you can knock this out in a few months.
4) After paying dad back, do whatever the heck you want. I’d probably pay off my cars and then start investing more heavily. That said, if you want to focus on investing and keep the car loans around a little longer I don’t have much beef with that. Contrary to what many may say, you can have debt and still be financially stable.
That’s all I got.
What say you dear readers?