Starting a new job. Help me with retirement/debt planning please!

Question

For context: I am about to be 27 (M) and am starting a job later this month. I have been considering various different methods to attack my debts, which are below:

Student Loan - $24,288.77 @ 5.75%

Car Loan - $7,749.51 @ 3%

Here is what I'm thinking: I consolidate my student loan to be a 5-year payment term with a variable interest rate of around 3.25% (this is around what I am getting offered). Since both of my debts are now low interest, I can afford to max out some retirement vehicles (401k, Roth IRA, maybe HSA). I got offered a 6% full match on my 401k from my employer, which is very generous and will help a lot. I will be making a 90k salary at this job as well. I don't have many expenses, so I will throw any extra money at my debt instead of investing in any after-tax accounts.

This sounds good in my head, but the only caveats I see are:

1. The stock market is risky - It's been good for the last half-decade or so, but if it drops I'm going to lose out big time where I could have made a guaranteed 3% ROI on my debt.
2. The Federal Reserve may be raising interest rates soon - This will increase the cost of my debt and may add risk if I lose my job or something.

My alternative idea is obviously to contribute to the match, pay down the rest of my debt as fast as possible, and then once all my debts are paid, to max out my retirement. However, this seems a bit like I'd be sacrificing a lot of future money due to compound interest.

So PF....how does this sound?

Answer 1

I would go with your alternative idea: get rid of the debt as fast as possible.

You have $32k of debt. It's a lot, but with your new $90k salary, do you think you could get rid of it all in 12 months? See if you can make that happen. Once the debt is gone, you'll be in a position to invest as much as you want and keep all your gains.

You are worried about sacrificing future money in your investments, but if you eliminate the debt over the next year, this will be minimized. Just lose the debt.

Answer 2

Your initial plan (of minimizing your interest rate, and taking advantage of the 401(k) match) makes sense, except I would put the 401(k) money in a very low risk investment (such as a money market fund) while the stock market seems to be in a bear market. How to decide when the stock market is in a bear market is a separate question.

You earn a 100% return immediately on money that receives the company match -- provided that you stay at the company long enough for the company match to "vest". This immediate 100% return far exceeds the 3.25% return by paying down debt.

As long as it makes sense to keep your retirement funds in low-risk, low-return investments, it makes more sense to use your remaining free cash flow to pay down debts than to save extra money in retirement funds.

After setting aside the 6% of your income that is eligible for the company match, you should be able to rapidly pay down your debts. This will make it far easier for you to qualify for a mortgage later on. Also, if you can pay off your debt in a couple years, you will minimize your risk from the proposed variable rate. First, there will be fewer chances for the rate to go up. Second, even if the rate does go up, you will not owe the money very long.