Save, Invest, or Pay off debt?

By | February 26, 2017

I have a BIG decision to make.  Should I save for a down payment, invest in dividend growth income (DGI), or pay off student loan debt? Save, invest, or pay off debt? That is the question.  So many people are confronted with a similar dilemma. I even asked myself a similar question last year in this post. Of course, the answer depends on each person’s unique situation.  I hope that my struggle, and thought analysis, will help the reader come to a solution that works for them.  Here we go:

Save For Down Payment?

Although I created this blog about my dividend portfolio, I have other investments that hopefully will one day enable me to achieve financial independence. I bought my first house in 2016. So far, things with that house are going well. However, I plan on having multiple real estate properties. When I leave my full-time job, I hope not to ‘have’ to work again for the rest of my life. I like DGI, but I don’t want to put all my eggs in one basket.  I like the diversity of alternate streams of income. Real estate is a personal favorite of mine.  There are many people who became millionaires simply from investing the right way in real estate.  I hope to be one of those people some day.

Even though I have my first house, which I’m currently renting to two other roommates, I want a second one. I figure, if one house was such a good investment, why not two? However, in order to buy this second house, I would likely have to come up with 20% of the purchase price. That’s because it would definitely be an investment property. I’ll be out of the country for a while (work related), and so, I can’t purchase another residence anytime soon.

That being said, if I were to save for a down payment on a house, I would likely not buy the house before December 2018. That’s a very long time, relatively speaking. Also, if I’m still out of the country (for work) then I might have to wait even longer before I purchase the house.  So, the question is, do I try to save for a down payment on a house that I realistically won’t be able to execute for another year-and-a-half to three years from now?

Generally, financial gurus will tell you that if you plan on using money in the short term (such as 1-3 years), you probably shouldn’t have that money invested in the stock market due to risk.  So, if I chose to listen to those gurus and keep my down-payment out of the stock market, I won’t be earning any interest on that money.  But, in 1 1/2 to 3 years, I’ll be able to buy a second house. Decisions, decisions.

The other thing I’ll mention, which I’ll expand on in another post, is that I will come into some money so that, depending on the size of the house, I’ll already have the down payment in about 4 months.  So, if I chose to keep that money for a down-payment, that cash will just be sitting in a savings account which is less than ideal.

Invest in Dividend Growth Income

Investing in my Dividend Portfolio is very tempting.  Rather than have the money sit for the next year and a half to three years, I would be contributing monthly to my dividend portfolio for dividend growth income. Moreover, even though I would be investing on a monthly basis, my goal would still be to buy a second house when I’m back in the United States.  So, I would get the best of both worlds if I’m able to do both.  My thinking is that whenever I buy my next house, I would qualify for the FHA loan because I intend on living in that next property.  I wouldn’t need 20%, although if I wanted to avoid private mortgage insurance, I would need to put down 20%.

However, Dividend Growth Income (DGI) appeals to me.  I like the idea that my money is working for me on a monthly basis and it’s not just sitting idle doing nothing. Moreover, with DGI, I get the benefit of compounding since the dividends I receive will be able to buy more shares in whatever stock or investment I own.  If you’re unfamiliar with dividend growth investing, I encourage you to check it out. The problem is that you will need A LOT of cash or sizable portfolio to be able to live off your dividends.  However, if you can pull it off, then you will either be able to live off the dividends you make or be able to supplement your income.

Investing in my dividend portfolio is definitely a possibility.

Payoff Student Loan Debt

I have two student loans, but only one is of any consequence.  One of my student loans is at a balance of $10,000 with an interest rate of 5.2% The other student loan has a balance of $20,000 with an interest rate of 2.25%.  The first loan of $10,000 will be paid off by the end of May 2017. So, I’m not really counting that student loan in my analysis. The main question is whether I should concentrate on getting rid of the $20,000 student loan at 2.25%.

The 2.25% is a VERY LOW interest rate and I should be able to make more in the stock market. However, the student loan is debt, which can’t be discharged in bankruptcy.  Folks like Dave Ramsey will probably tell you that shouldn’t keep the student loan around like a pet. You should just pay it off. I definitely have the means to get rid of that second student loan within a year, but I’m not sure that’s the best approach given the low interest rate.

So, does it make more sense to pay off that $20,000 student loan? Or should I save for a house or invest in DGI? In case it matters, (and I think it does), the monthly payment on the $20,000 student loan is $97.  Interestingly the monthly payment of the $10,000 is $1174 starting in 2020.

Conclusion

Whether to save, invest, or pay off debt is an important decision that average Americans face on a regular basis. In my opinion, it doesn’t have to be an all or nothing approach. But, it is one that has to be based on your unique situation. Honestly, I haven’t decided what I’m going to do. I am leaning towards dividend growth investing with the idea that the $97 in monthly payments isn’t killing me. Plus, I hate the thought of just dumping $20,000 into a loan. Instead, I could have used that money to invest in DGI or buy a house.  I’ll report on my decision later, but if you have any thoughts, please advise.

If you are faced with a similar dilemma, I hope things works out, no matter what you choose.

 

6 thoughts on “Save, Invest, or Pay off debt?

  1. vivianne

    If you’re working oversea and making over 6-figures. I’d pay off that 5.2% ASAP, then pay the minimum on the 2.25% loan, while I’d build up my cash. I suspect the stock market might crash at some point, I’d have the cash ready then. If it doesn’t cash, you’ll have a handsome amount for down payment.

    I know not paying off $20K is hard, like when I have $300K in my portfolio, I hold off on making my student loan (rate 1.88%), but I’d put everything down to pay off my rental. If I would taken out a loan for that, the rate wouldn’t be less than 4.5%.

    My order of priority when I first graduated was: 1. paying highest loan first 2. saving up for downpayment 3. then save for emergency fund (LOL). It was a little risky, but I have life insurance from work, and short term disability. I was confident that my lifestyle wasn’t inflated from when I was in college, that 1/2 of my paycheck will cover my expense.

    Reply
    1. Data Lore Post author

      Hey Vivianne,

      Thanks for stopping by and for the detailed response. I wish I was making over 6-figures, but I will definitely be paying off that 5.2% loan ASAP. In fact, that loan should be gone by the end of June this year. Building up cash to wait for the stock market the crash is not ideal for me because I’m not even sure I’ll know when the market has crashed, versus simply pulling back before starting another bull run. And, by the time I figured out that there was a market crash, it would probably be too late. However, the idea of saving the money for a down payment is not a bad idea. The only thing though is that the down payment for my next property would likely not exceed 3.5% of the purchase price. That’s because I can get an FHA loan for example. I guess I could still pay down on the house more than the 3.5% (or whatever the interest rate is), but that would tie up my liquidity into that house.

      There are a number of different ways to look at this issue and I recognize it’s a good problem to have. You’ve made some valid points.

      Thanks.

      Reply
    1. Dividend Portfolio Post author

      Porter thanks for the question. I want to ensure that I don’t misconstrue what you’re asking. But, if I were in a position where I couldn’t pay my debts I would do everything in my power to get back to a situation where I can. So, if that meant to hold back on savings and investing, then so be it. If that meant negotiating with my creditors to give me a break then so be it. A lot of Americans are not just living pay check to pay check, but are in the negative every month. So, being in a position to be able to ask the question of whether to save, invest or pay off debt is not a bad problem to have, but I also realize that not everyone is in a position to ask that question. I hope that helps.

      Reply

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