I received this e-mail from Bristol:
I am in love with your debt cascade idea, I was stuck in an internal conflict about paying off debt or investing for years until now. I would like to apply your debt cascade to my financial situation and need your help.
I have an extra $2000.00 after minimum payments per month that I dont know what to do with.
StudentLoan $15000 @ %4.25
StudentLoan $15000 @ %3.75
StudentLoan $8000 @ %3.5
Mortgage $130000 @ %5
What amount would you put on these loans and what amount would you invest?
Help me help a reader; what advice would you give?
Assuming that the reader has (i) a degree of job security and the income is steady and (ii) an emergency fund of sorts (if needed – these are pretty wasteful) and also (iii) that there are no bullet payments due on any of the leoans, I would invest it all and not make any early debt repayments. Five percent (the most expensive debt – assuming it is not tax deductable) is a pretty low threshold rate of return to beat and mortgages and student loans are unlikely to be called early unless you miss a payment.
Whether the right investment is starting a side business, saving for a down payment on a property investment, individual equities, low cost index funds or something else will depend on the reader’s risk tolerance, available spare time, knowledge and experience.
Dave Ramsey would not approve but paying off low cost debt instead of making higher returning investments is, to my mind at least, a good way to ensure that it takes a long time to achieve financial indepenence.
Needless to say we don’t know enough about the reader’s circumstances and there are a number of assumptions which are implicit in my suggestion.
Thank you for your comment! Additional info: I have a degree and stable job. Have $10000 in a savings account and an additional $10000 in a few blue chip stocks. Looking for the next step.
I don’t think we have enough information to make a wise recommendation.
I agree, just make the minimum payments on all of those and invest the 2k per month, then live the dream sooner.
“I don’t think we have enough information to make a wise recommendation.”
I’m seeing some pretty wise advice, here 😉
But, I agree – I have asked Bristol – by e-mail – for a little more info and will be doing a follow-up post. In the meantime, keep the suggestions coming!
Ok, now that we have that “extra information” 🙂 Personally, I would pay off the debt first. Not sure how old Bristol is but packing $2,000 a month on his debt, not the mortgage however, would take less than 18 months to be done with it. Then he can start investing and accumulating wealth from a position of strength. For most of us 15-18 month is nothing. “Stuff” can and does happen in real life. Achieving wealth involves many things such as balancing risk/reward, security/opportunity. I just think he could be more aggressive with his investments if he was debt free, not including the mortgage.
Seems like he can pay off his loans in 19 months
However, if he is a risk taker he can also invest in a company or start a company and from any profits pay off his debts
Personal Finance is so personal it’s never a one way answer
Well What I would do for the next four months is apply the 2,000 to the 8,000 student loan debt. By doing this you will have eliminated it, and freed up the cash you were using to pay the minimum payments on it, and then apply the 2,000 to one of the 15,000 student loans while banking the minimum you were paying on the 8,000 student loan debt.
Who cares about your debt at this time! What do you want to do with your life? Tell us what you want, then we can tell what you should do. Think 5 year increments. What do you want in 5,10,15,20 years. Until you can verbalize what you want out 25 years from today just pay the min. and sit on your nest egg. Saludos,
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I would put $1,000 towards investments, and the other $1,000 towards debt reduction (lowest debt balance 1st)that way you are strengthening both side of your personal balance sheet. Hopefully your investments will return more than the highest interest rate you are paying.