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Low interest debt repayment vs more investment?

4K views 14 replies 9 participants last post by  My Own Advisor 
#1 · (Edited)
Hello,

I'm a 26yo new grad, annual income ~110K, and have been working for the past year. I've managed to aggressively pay off half of my student loans in this time (lots of overtime, 60-70+ hour weeks). I have $60K remaining on a LOC at 3.2% interest, accumulated from student debt (tuition, living costs away from home, etc).

I have an emergency fund of $5K. After my employer match (3% of gross pay) and my portion, I contribute $500/month to a RRSP with GWL.

I've read countless personal finance books so far (wealthy barber, wealthing like rabbits, millionaire teacher etc) however I'd still like some guidance on my situation:

1. Where the interest rate is so low on my remaining LOC balance should I keep hammering it down as the main priority (I can put 10-15K every 3-4 months on this debt), or increase long term retirement savings in a TFSA for example?

2. If I continue to focus on LOC repayment without additional retirement savings, I'm worried about missing out on significant compounded interest in the next 1-2 years. Will it make much of a difference? Is $500/mo in a RRSP "enough" retirement savings at my age until I'm debt free?

I'm just very eager to get started with some index funds in a tangerine TFSA if it makes sense, or whether I should really keep focusing on debt repayment until it's gone.

Thanks!
 
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#2 ·
Excellent idea to get started on the TFSA. Regarding the RRSP, I suggest just keeping on with the employer matching plan as you are still young and likely need money for other things in life.

I don't know the nature of your outstanding debt. It would be a good idea to familiarize yourself with CRA's rules on deductible interest for investments which allows a tax benefit for money borrowed for interest, income, or dividend investments - outside of a registered account. I have a LOC I use only for investment purposes, other loans and credit are separate. Paying down the debt now on the 3.2% LOC is like getting a permanent 3.2% return on an investment, while not paying it down risks interest rates rising and the debt becoming unmanageable. So just judge where you are in this regard and let that help you decide how aggressive you want to be paying down debt.
 
#3 · (Edited)
I'm a 26yo new grad, annual income ~110K, and have been working for the past year. I've managed to aggressively pay off half of my student loans in this time (lots of overtime, 60-70+ hour weeks). I have $60K remaining on a LOC at 3.2% interest ...

I'm just very eager to get started with some index funds in a tangerine TFSA if it makes sense, or whether I should really keep focusing on debt repayment until it's gone.


vortex i took a peek back through your 4 earlier posts & i'm re-posting the very first one from 2014 so everyone can promptly send you their congratulations. I mean, have you done good or have you done good!

this is a lovely story, especially since you say you did not come from a privileged background & you had to earn your way through both the undergraduate & the graduate degree all by yourself. Mille félicitations à vous.




Hey everyone,

'll be finishing school early next year and I'm just looking for some advice. I'm 25 and I've been in school for the past 8 years and will have 2 degrees. I come from a very low-income family so they weren't able to help me get through school, so I did it on my own with government student loans and a line of credit. I definitely have a lot of debt to pay back, but I don't regret any of it and I'm very excited to be entering my chosen profession!

I'm looking for advice from those of you who may have been in my situation at one time. Yes, absolutely I'll speak to a financial adviser at some point but I want to know how you got rid of your student debt and juggled real life expenses (I've never had to yet!).

Some questions:
- Should I make paying off my loan and LOC the top priority above saving for retirement or investing? Get that out of the way first?
- I want to get a house sooner than later, should I get a mortgage at the same time or like above, pay off debt first?

I feel really naive about actually soon having to manage money (as I said before just lived off LOC/loans, small amounts I made from jobs) - I just want to make sure I approach it correctly and am looking for any advice at all in getting started with "real life". I really appreciate it!

Thanks!


coming back to the present & re paying off your student debt, one can read between the lines & see that you're itching to jump onto the investment stage these days.

but i'm wondering if those GWL investments in the RRSP are truly returning north of 3.2% these days? such an accomplishment has been difficult to pull off. Even with the generous employer matching rate, it might be challenging to keep the $60k loan, keep up the RRSP contributions & still come out ahead.

in addition, the tangerine funds won't bring on that friendly matching boost from the employer. Are those funds truly returning north of 3% these days?

you can see what i'm getting at. Me i'm debt averse so i'd be one who would work to pay down that debt in one year. Unlike a home mortgage, there's no equity you can build out of carrying a student loan perpetually, so they are dead end obligations. I'm with those who view long-term student debt as an albatross. You've mentioned you can spare $10-15k every 3 or 4 months, so with a little careful budgeting you could shed that albatross in one year.

you've been so patient & you've worked so well for so long now, are 12 more months paying down that still-large student debt really going to be such a hardship?

stock markets are not going to quit on you. They're like buses, a new one comes along every second. Every enticing financial product you can imagine will still be there, waiting for you, a year from now.


.
 
#4 ·
@humble_pie:

Thank you for your very thoughtful and detailed post! I really appreciate the congratulations, it certainly has been a lot of work.

The last time I checked on my GWL investments the average earning has been 7.5-8% and they have a very low MER <1%.

You make a very good point about investments and coming out ahead or not. Say tangerine fund does grow 7%, 7 - 3.2% (LOC interest) = only net 3.8% ahead. I realize it's not amounting to much while I still have debt. I also have the same feelings toward debt as you do - debt is an albatross. I want it gone ASAP.

Another ~12 months of being patient and knocking it out of the way wouldn't be hard. I just hope by not starting now, in that one year of not having additional investments even if I was only coming out 3.8% ahead with index funds, hopefully I'm not missing out on too much compounded interest, etc? That's my main concern, as irrational as it may be. I just feel I spent so much time in school, accrued a ton of debt, now further delaying savings to pay off debt... I worry that I'm very behind with retirement/life savings and want to get caught up as soon as possible.
 
#5 ·
^^


vortex what is the interest or the investment return for one year on $60k at 3%, compounding quarterly in increments of $15k? perhaps $1,000?

you are worried that your old age might be compromised because half a century previously you had neglected to earn $1,000 in a mutual fund run by a long-forgotten company named after some citrus fruit? .:peach:

the way i see it, your career is where it's at. Your biggest financial boosts over the next few decades will come from increasing responsibilities & pay increases, not from a few shekels saved right now.

however, i can see you are hell-bent on owning & managing a TFSA instantly if not sooner. Might you consider a 50-50 compromise? pay down debt this year with 30k, start up a TFSA with the remaining 30k, carry on to the zero-debt finish in year 2?

at the end of the 2 years, you'll still be the springiest of chickens. Not even 30 years of age. No worries about getting caught up, imho. You are light years ahead of the peers.

.
 
#6 ·
Thank you for bringing me back down to reality and putting this in better perspective. I feel a lot more at ease after reading your response.

I will continue getting rid of this debt so that I no longer need to worry about it. I still have tons of banked tuition credits after my last tax return this year, so what I will do is continue aggressively paying debt this year. Next year when I get my tax return, I will take 10-15K of that return to start a TFSA before putting any toward remaining debt (which should be very minimal by next March).

Thanks again for all your insight!
 
#7 ·
Very good advice from humble_pie, and I wanted to add that one of the very best feelings in the world for me is to know that I don't owe anybody anything. I'm so debt averse that if I owe a dollar in late fees to the local library, I will drive there immediately to pay it off! I'm a bit extreme, I know, but it gives me so much pleasure to know I have no debts, so I would definitely get that student debt paid off!
 
#8 ·
Making head way! Total debt down to $45,000. Hoping to make it $35,000 by January. With tax return and savings by April 2017 aiming for $15-$20K left owing. I think once down in the 'teens' of debt owed I will slow things down, extend the remainder over a year or so. Focus on building my TFSA, RRSP, and saving for travel. My debt anxiety was incredibly high when owing >$100K but I feel much more comfortable if it was <$20K. Can't wait to experience being debt free!
 
#11 ·
Update:

I now have 25K remaining on my LOC!!! I currently have about 29K saved between both my chequing and savings accounts. I really, really want to press the transfer button to finally be rid of this LOC that has been dragging me down for the past 2 years.

I worry about only having 4K left as an emergency fund/cash on hand to make this happen so I think I want to wait at least a couple months to build more of a buffer. It's also so difficult to just send 25K that I've worked so hard for to pay off a 3.2% LOC. Am I making the right decision paying off a low interest LOC all at once like this and not investing a portion of it? Psychologically I think it's the best choice for me, but I just need a little more reassurance that I'm not missing out on a better opportunity for this money right now.
 
#12 ·
Update:

I now have 25K remaining on my LOC!!! I currently have about 29K saved between both my chequing and savings accounts. I really, really want to press the transfer button to finally be rid of this LOC that has been dragging me down for the past 2 years.

I worry about only having 4K left as an emergency fund/cash on hand to make this happen so I think I want to wait at least a couple months to build more of a buffer. It's also so difficult to just send 25K that I've worked so hard for to pay off a 3.2% LOC. Am I making the right decision paying off a low interest LOC all at once like this and not investing a portion of it? Psychologically I think it's the best choice for me, but I just need a little more reassurance that I'm not missing out on a better opportunity for this money right now.
Would you go take out a loan to invest it? Same situation. When you rearrange the question and ask it to yourself, it becomes clear. The interest rate is irrelevant in my opinion, I don't care if it's 2% or 20%. It's debt. You owe money to someone and you have the cash to clear your name. To take part of that money and dabble in the market to try to make money off BORROWED money... is that worth keeping this debt in the back of your mind every time you go to sleep? Your income is GREAT, especially for someone your age. Do you know how quickly you can stock pile mountains of cash to get back to 29k? Without owing anyone a penny?

Just be done with it and build your wealth, debt-free.
 
#13 ·
Hey Vortex, nice job knocking down so much debt in a short period of time. I say hit that transfer button now and make that cloud hanging over you disappear for good. Then reward yourself with something nice for hitting a major milestone.

Don't worry about the emergency fund being a bit low. With your salary and savings rate, it will be replenished in no time.

With zero debt, your next problem will be what to do with all the cash that just keeps piling up in your accounts. :)
 
#14 ·
Also, assuming you have access to that line of credit (ie: you could always re-borrow against it) I think the emergency fund factor becomes much less important.

What I mean is if you pay it off and then need $20K for an emergency, could you not re-borrow on that line and be in the exact same situation you're currently in anyway?
If the answer is yes, you may as well pay it all off and avoid the interest in the man time.
 
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