To Invest or Pay my Student Loan?

I’m going to stop investing for one year.  WHAT!? You say?  Let me explain…

For the last couple years, I have been taking the approach of investing, saving, AND paying down my student loan.  I was paying a lot more toward my student loan (1100/month) than I was toward investing for retirement (600/month) or saving (400/month), but this weekend, I decided to change that.

I was trying to play it safe.  I didn’t want to lose out on the power of compound growth, and I figured it would take long enough to pay off my student loan that compounding was a significant issue.  I also didn’t like the idea of having no savings, because this made me feel sort of “unsafe”.  I worried about not having any cushioning if something were to happen.

This weekend I sat down and ran some numbers, and I realized that if I took all of this money that was being auto-transferred to various places each pay (twice per month), and just put it all (2100/month) toward my student loan, that I could be DONE paying it off in ~13 months!  ONE YEAR!  I also calculated that because the interest rate on my student loan is a whopping 4.95% AND I am paying 19$ of “insurance” on it each month, that if I accelerated my repayment, it would amount to a guaranteed return of almost 7% on my money, which is as good (or possibly better) as I can expect to do in the stock market in one year (which could be either higher or lower, and where nothing is guaranteed).  For these reasons, I have decided to move all of this money to my student loan each month, and to put a pause on saving and investing for one year.  I am going to leave the money that I have saved and invested where it is, because once I have invested something into my “retirement” accounts, it is gone forever (forever meaning until I retire), and the savings already serves as my emergency fund and auto maintenance fund.  This will be necessary for me to succeed if anything “unforeseen” comes up, which it almost always does.

If I succeed, when the year is out I will have paid off my student line of credit, which originally accounted for the largest portion of my student debt.  The total, when I began paying all of this off, was -66,571.07$.  This student loan currently has 25,882$ remaining.  If I succeed in paying off this loan in 1 year, then I would have one loan remaining, but since it is a government student loan (low interest rate), and because it doesn’t have much of a balance in it, I will reevaluate my strategy at that point.  For now, my plan will likely be to continue paying a lower payment on that one remaining government student loan, and to dedicate the rest of my money to investing for my retirement, and saving for other life goals. But for now the goal is getting rid of the largest student loan!

My overall net worth currently stands at -22,208.77$.  While this might seem to be a discouraging number for some, this is actually an awesome accomplishment for me, because when i started 3 years ago with no job, my net worth was -66,571.07$.  This means that I have increased by net worth by 44,362.30$ in 3 years!  When you consider how little I was making in my original job, I consider this to be pretty darn good. 

So this is my plan for the next year.  Anything can happen in a year, so I don’t know if I will succeed or fail, but I am heading into it hoping for the best.

Wish me luck!

What are you goals for the year?  The month?  The week?

As always, thank you for reading.

Debt Dummy

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