Hi Money Minder,
Alright, so I’m about to come into some cash. I’ve got around $15k in student loans with a 4.25% interest rate and another $17k in car loans at a 1% interest rate. The amount I’ll be receiving is more than enough to cover both of these debts. My emergency savings are all good, and there’s no other debt hanging over my head.
Now, I’m torn between two options here:
1 – Paying off all my loans and then investing the rest.
2 – Keep paying off the loans as I normally would and invest all the extra cash.
On one hand, Option 1 seems like the way to go for peace of mind. But when I look at those low interest rates and the potential returns from a mutual fund, it makes me wonder if holding onto the debt a little longer might actually benefit me in the end – boosting my net worth, credit score, and setting up my future self nicely.
I also considered Option 3, where I pay off the loans and then up my contributions to my 401k/ HSA by the amount I would have been paying towards the loans. Or there’s Option 4 – opening an IRA and funding it all at once.
Feeling a bit stuck here. Can you help me sort through this decision? Thanks a bunch.
Farewell,
Money Minder’s Helper
Response from THE MONEY MINDER:
Hello There,
Congratulations on receiving a significant amount of money soon, it’s always a good feeling to have some financial relief coming your way. In your situation, with student loans at 4.25% interest and a car loan at 1% interest, along with fully funded emergency savings and no other debt, you are in a great position to make a thoughtful decision on how to allocate this money.
Given the current low interest rates on your loans and the potential for the returns on mutual funds to surpass those interest rates, a practical approach would be to consider investing the money while continuing with regular loan payments. By investing the money instead of paying off the loans, you may potentially grow your net worth over time, especially if the returns on your investments outpace the interest rates on your loans.
However, the psychological benefit of being debt-free is also significant and shouldn’t be dismissed. Option 3, where you pay off the loans and redirect those payments towards increasing contributions to your 401k or HSA, is a balanced approach that combines debt reduction with wealth-building for your future. Similarly, opening an IRA and funding it in one go with the money can also be a wise choice for long-term financial growth.
Ultimately, the decision should align with your financial goals, risk tolerance, and personal preferences. Consider speaking with a financial advisor to assess your specific situation and create a detailed plan that suits your needs. Your credit score and future financial well-being can benefit from a carefully crafted strategy that balances debt payoff and investment growth. Best of luck with your decision-making process and financial journey ahead.
Farewell from THE MONEY MINDER.
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