pay off debt or invest?

I’ve made a lot of progress up to this point. I’ve increased my net worth by roughly 200k in the last 5.5 years. Its been a fairly steady road without two many bumps. Currently I have about $17k in student loans and $6k in an auto loan (we own one car). On the flip side I’ve got 35k in cash (although 15 of that is set aside for our emergency fund). This pile of cash is growing at roughly $1,300 a month. If you do the math I’ve got just about enough to pay off all my non-mortgage debts. The main question I’m asking myself right now is, what should I do?

Option 1 would make Dave Ramey’s followers happy. I could pay off all my debts and be debt free other than my house. Its been a while since I’ve been a Dave Ramsey fan but I believe that’s a baby step. My debt payments currently total about $320 per month and the average interest rate is roughly 4%. I’m only getting 1% in my savings account so I’d be winning that battle as well. Although, I am a fan of having cash on hand and depleting all my cash other than my emergency fund would be a tough pill to swallow.

Option 2 is to keep making the monthly payments and hoarding cash. This would allow me to continue to save and know I have some money in case something happens. I’d continue saving at my current pace. One thing I like about this is that I can wait and see what my family income situation I after we have baby #2.

Final result of option 1 would be to pay off all my non-mortgage debts, have zero non-emergency cash, and increase my monthly cash savings to roughly $1,600. Final result of option 2 would be to still have roughly $23k in non-mortgage debt but be sitting on a pile of cash that is growing fairly quickly.

I’m currently wrestling with this question and don’t quite know what I’m going to do. What do you think? If you were me, what would you do?

9 thoughts on “pay off debt or invest?”

  1. You could go with Option 1.5 and split the difference? It seems you like parts of both options, and while you wouldn’t get the full cash flow benefit of a full paydown, you would (a) still keep some extra cash on hand for the added security and (b) you get to see that debt balace cut in half. From there you can make the same decision again and either focus on accelerated (or immediate) loan paydown or build up your reserves.

    Congrats on the progress to date!

    1. That’s great advice. That compromise of “option 1.5” is appealing for all the reasons you pointed out. Thanks for the help!

  2. I like to split the difference also. Say I has $6,000 in checking and a $6,000 loan. I would send an extra $1,000 a month until I paid it off. 6 more months of interest would not be to much. And if I found a better use for my money, I still have the option of changing my mind halfway through.

  3. I say pay it off. Having the freedom to peace out whenever you want is invaluable. Also companies aren’t loyal you could walk into work tomorrow and told you’re being let go even if you are the top performer. It’s less stressful to deal with a scenario like that when you are debt free.

  4. Pay off the student loan now because you don’t need “ol” aunt sally may around when kid 2 is born. Second double up on the car loan payments that way you will keep some funds around for a emergency and while still adding to it. With those 2 debts out of the way you wont need that big of a emergency fund and you can start maxing out those investment accounts.

    1. Thanks for the advice! I’m not a huge fan of maxing out all my retirement accounts because I can’t easily touch that money for decades. What’s your take on it?

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