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Hello Personal Finance!

So about 8 years ago, I got into a bad car accident which was not my fault, and which I sued the driver because they tried to drive away afterwards. I got a large settlement of about $32k, of which I did the following with:

  • Put 16k in a CD (stupid, I know. I was 18.)
  • Took the other 16k and paid off my car and used it to finance my college years so I didn't have to work part-time and could focus on my studies (not that stupid since I was in engineering).

After I got out of college, I put the 16k that was in CDs into mutual funds/stocks managed by a FA, which is where it is now and where it's been for about 2.5 years. It has grown to about 24k now due to the bull market we've had. I pay taxes on the gains year after year, so it is not tax-advantaged.

However, I also now have the following debts:

  1. Car loan - $8,626.87 at 3.54%. Minimum payment of $234 a month.
  2. Student Loan - $24,792.05 at 5.8125%. Minimum payment of $181 a month.
  3. Student Loan - $30,193.13 at 5.75%. Minimum payment of $300 a month.

I have been thinking of cashing out of my investment account and using it to wipe out my $24k student loan debt (debt 2) so that I could get out of debt quicker. I have been reading about PF for a while, and have come to the realization that I have no goals for my non-retirement investing since I did it when I was younger. I am not getting married, sending any kids to college, or buying a house any time soon. I also think that this bull market is not going to last much longer, and putting it into a guaranteed 5.8% return isn't such a bad idea.

So PF, tell me if my idea is crazy or great.

  • Do you have any spare funds to use in time of needs ? If no then let the $24k where it is or only encash a small part of it if possible. And how much tax do you pay on your gains in the MF ? – DumbCoder Jun 1 '15 at 14:22
  • I have 1k as an emergency fund, and all my extra disposable income every month is going into paying down my debt. – Lawrence Aiello Jun 1 '15 at 14:32
  • How much are you paying those debts down each month? Knowing when those debts will be eliminated will give us a better idea of how much interest you'll accrue vs. investment gains. What are your other short to medium term goals? Buy a house? – NL - Apologize to Monica Jun 1 '15 at 16:11
  • I don't really have any goals as far as buying a house or getting married (yet). I am putting about $1k extra into my loans every month so I anticipate being out by the end of 2018 or so (2019 for pessimism) and that's if I don't get any bonuses or raises. – Lawrence Aiello Jun 1 '15 at 16:29
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If what you are paying in interest on the debt is a higher percentage than what your investments are returning, the best investment you can make is to pay off the debt.

If you're lucky enough to be paying historically low rates (as I am on my mortgage) and getting good returns on the investments so the latter is the higher percentage, the balance goes the other way and you'd want to continue paying off the debt relatively slowly -- essentially treating it as a leveraged investment.

If you aren't sure, paying off the debt should probably be the default prefrence.

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You could pay off a portion of the debt and your minimum payments should also go down proportionately.

Your investment managers may be able to continue making returns in the markets in a sideways and a bear market.

So you have 24k contributing to your net worth, and ~50k giving you a negative net worth.

At best, you can bring this down to a negative 25k net worth, or you can start and keep using some of the gains from your investment account to supplement your credit payments (along with your income). This is based on chance that your investment managers can continue making gains, compared to paying down 24k and having possibly zero liquid savings now, but having more of your salary to start saving and make the lowered minimum payments, assuming you don't borrow more.

Those are the options I've thought of, I don't see either option being necessarily quicker than the other.

  • I have received a 25% ROT on my investments, so I will keep them in there. Thanks :) – Lawrence Aiello Jun 1 '15 at 14:49
  • @LawrenceAiello who is your FA? – CQM Jun 1 '15 at 15:20
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    A company called First Investors. They have a guy managing my accounts and he has been doing well. – Lawrence Aiello Jun 1 '15 at 15:21
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Paying off debts will reduce your monthly obligation to creditors (less risk) and also remove the possibility of foreclosure / repossession / lawsuit if you ever lost access to income (less risk). Risk is an important part of the equation that can get overlooked. It sounds like pulling that money out of the market will reduce your yearly tax bill as well.

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