Scott asks …

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  • August 4, 2008

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Scott asks …

I have my old house leased out now, I’ve almost finished paying off ALL consumer debt for good (should be complete in the next 2-3 months) and feel like I’m ready for the next step on to Money Making 201, however, I do still have my student loan. The challenge I’m having is whether or not to pay off the student loan entirely before moving on to Money Making 201. This challenge is because my student loan is locked in at a fixed rate of 2.85% and my monthly payment is only $614.70 for the next 28 years (I’ve paid 2 years already of the minimum payment on the loan since it kicked in for repayment, which has knocked it down from almost 150k to 141k). Any suggestions would be greatly appreciated!

Scott is essentially asking two questions:

1. Whether to get his financial house in order before moving on?

2. Whether to pay off a low interest loan?

Now, both of these depend on Scott’s overall financial plan – which depends upon his Number / Date combo … but, for now let’s assume that these are Large / Soon 😉

Making Money 101 and Making Money 201 are not mutually exclusive … in fact, since we have a smaller audience here than over at 7million7years.com I can let you in on a little secret:

Making Money 101 is not very important IF your Number is Large / Soon …

Gasp!!?!

There, I’ve just laid it out there for you … Making Money 101 is a back-stop  … but, if you want to get rich it does THREE very important things for you:

1. It provides a small source of capital to buy houses, start a business, or kick-start your investment portfolio – if you are willing to use it for these purposes,

2. It provides a small fall-back in case your plans go horribly wrong

3. It helps build healthy money habits that will stop your from spending all of your Making Money 201 income instead of using it to quickly build your Number.

Think about it … look at your Number / Date combo. How can saving 15% of your salary in your 401k ever get you there? If it can, don’t waste your life away here … go out and have some fun  – as long as that doesn’t involve spending money 😉

So, Scott, start now!

As to your Student Loans …. think about your Making Money 201 strategy. Does it involve borrowing money?

If so, where are you ever going to get a 2.85% loan again?

Instead of paying off that loan, put the money that you had ear-marked for it to work!

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Reader Comments

Comment Number:
1
Written by:
Di Eats the Elephant
Posted on:
August 4, 2008 at 2:37 pm

Good question and post, Scott and Adrian!

It raises another question for me. If my company is paying me 4% on 8% paid into my 401k and I’ve been trying to put away 10% because I have “no retirement” otherwise, it sounds as though the quick answer is minimally drop to 8% (after all I get a 50% ROI, pre-tax, to be paid at later income tax rates, not today’s). But, given that my number IS large enough and needed soon (LARGE/SOON) and my consumer debt is still hovering near $30k, should I be trying to use all of that to get it paid down or continue to look at it by the % on each of the deals to see where the money does the best for me?

Comment Number:
2
Written by:
AJC
Posted on:
August 4, 2008 at 3:12 pm

@ Di – First I would consider ‘utility’ – a concept that I introduced in this post [ http://7million7years.com/2008/08/02/why-the-wrong-people-are-rich/ ] THEN I would consider after-tax interest rates LAST I would consider employer match.

Comment Number:
3
Written by:
Scott
Posted on:
August 4, 2008 at 8:37 pm

Thanks for the advice Adrian. I had the same idea in mind to leave that student loan alone and just make the minimum payment on it and invest the rest. I just wanted to hear it from someone else who has already taken the journey, the same way I would tell myself if I were already worth 10 million and could go back in a time machine and give myself advice on how to get there quicker.

As of this month, the credit card debt is now gone, car loans have been history forever and never to return again as long as we live and all we have left in consumer debt is the stupid personal loan of $14,200.00 at 11.9% interest (I bet you would tell me to kill it too though before moving on to Money Making 201 🙂 , which is my plan unless you think that isn’t a smart move…

Comment Number:
4
Written by:
AJC
Posted on:
August 4, 2008 at 9:59 pm

@ Scott – You tell me: what can you do with $14,200 that will return you better than 11.9% after tax?

Comment Number:
5
Written by:
Scott
Posted on:
August 5, 2008 at 5:33 am

Yeah, that’s what i’m racking my brain with…to be honest, now that I have my first residential rental, I am really salivating over picking up a good commercial property that is undervalued ASAP, particularly the building that my practice is in…

Comment Number:
6
Written by:
AJC
Posted on:
August 5, 2008 at 9:33 am

@ Scott – … that can be a great way to go. At least you know the tenant is good 🙂

Comment Number:
7
Written by:
luis
Posted on:
November 17, 2008 at 10:43 am

Scott,

I am facing a similar situation with student loans. My wife paid her off and we are considering oaying off mine now. My rate is around 4.0% with payments of $448. The different is that my wife started a business a few years a go and has been rapidly expanding lately. So sould we just ivest that money or pay part of the loan off (a few thousand dollars every month).

Comment Number:
8
Written by:
AJC
Posted on:
November 17, 2008 at 11:49 am

@ Luis – You’re in luck; this post should point you to your answer: http://7million7years.com/2008/11/17/the-correct-way-to-look-at-debt/