Hello, I’ve been listening to the bigger pockets podcasts for a while, and it seems that Brandon, Mindy, Scott, and David always encourage getting involved. That said, I made an account and have a question.
There always seems to be debate about investing early to capitalize on compounding interest vs paying off debt ASAP.
I have a significant student loan debt but my wife and I have been able to put ourselves in position to pay it off in a little over a year from now (using about 50-60% of our combined incomes to pay down loans).
I don't have a job that matches in a 401k, but I have a Roth IRA. I've contributed 3k this year so far, so 50%. I have relatively few other assets at age 31 (less than 20k).
I do have interest in real estate, so trying to learn more as advised by the podcasts...particularly because I don’t currently work where I live and want to buy property. I do short term contract work around the country.
Any recommendations to help pursue real estate or other investment options?
Thanks in advance!
I sympathize with your position. I was in significant student loan debt a little over 10 years ago. It's really tough feeling like you're "throwing money into the fire" paying down that debt rather than using it to invest. In my case, the interest rate on my loan was 9% and as you know, it's rarely possible to refinance into a lower interest rate.
The advice I would have for anyone in your position, and forgive me if you've got this handled, is to first make sure you have a small emergency fund, doesn't need to be huge, $1,000 is fine to start. It's one of the baby steps from Dave Ramsey I really agree with. Just something to keep you from going in to more debt if an unexpected expense arises.
The next step really depends on your specific situation. What's your interest rate on the student loan? If it's above 6%, I'd say you're better off just paying down that loan as quickly as possible. It's like "earning" 6% on your money, guaranteed, every year. Sure, you could probably get better returns in a low cost index fund or buying an investment property, but it's not guaranteed.
If real estate is a preferred investment vehicle for you, it's also important to remember that your Debt To Income (DTI) ratio will be a major factor in whether or not you're able to secure financing on a property. The quicker you pay down that student loan debt, the quicker your DTI will improve.
If you absolutely feel like you must invest now, I would suggest putting money into a Health Savings Account (if able), and DON'T spend on it if at all possible. Save your medical receipts and cash out the HSA later using those receipts. DISCLAIMER: I am not a CPA. Please seek the counsel of a qualified tax expert.
If your DTI is low enough to allow you to purchase a property, I would encourage you to buy something you can house hack. Duplex, Triplex, Fourplex where you can live in one unit and rent out the others. Few things will accelerate the growth of your networth more than house hacking your way to lower housing costs.
I know it's hard feeling like you're missing out by paying down debt, but it's a lot like preparing for a long road trip. Better to make sure you've got a car that can handle the journey, than to set off into the unknown and breakdown in the middle of nowhere with no one to help you but a sketchy looking trucker named Red.
Good luck to you!
Thanks for your thoughtful response! My current situation is consistent with your recommendations. I’m happy to receive your reassurance. HSAs are a relatively new concept to me, but unfortunately not available. Gonna plow through and get it done! Thanks again!