Pay your pops.

A reader asks…

My husband and I are doing fairly well financially, but we wanted to see what we could be doing better. My husband is very big into investments and I was always very big into liquid savings (I watch a lot of Suze Orman). After meeting with our financial adviser, he said he felt like we should only have 5-10k in an Emergency Fund and max out our Roth, invest more in our 401k and lastly invest in our mutual funds. I can get behind this, it makes sense to invest our money as opposed to having it sit in a savings account not earning interest.

The one area I’m unsure of though is that he told us there was no need to be throwing money at our debt because the interest rates are so low and we are making much more in our investments. He didn’t say it was “bad” to pay off the debt, just said he thinks we should focus on the investments.

As far as debt, we have our home, two cars and then about 25k in student loans. My father paid off my student loans, so I’m actually just paying him back at 4%, so it is fairly “secure” debt. I personally would rather get rid of all of our debt, but also see his point on the fact that we would be earning more on our money if it is invested.

As of right now this is a rundown of our finances, we make about 140k combined gross income, our house is 216k with 3.5% interest on 30 year mortgage, one car has 4k left and the other 13k both under 4% and then the 26k in student loans i’m paying my father for. Right now we have about 18k in liquid cash, although we are expecting to have to pay 5k in taxes this year. 

What are your thoughts on investing vs paying down the debt?

As always, I’ll provide advice on what I would do in this situation, and then you all should chime in with what YOU would do in this situation.

1) Is your financial advisor fee-for-service or commissioned base? If he works off a commission fire his butt and find a fee-for-service advisor. Seriously, do that.

2) I’d be cautious of the sales pitch your advisor gave you about the stock market. Yes, it’s true savings account interest is pathetic. Yes, the stock market was up 25% last year. But don’t forget, the markets just lost 326 points yesterday. They were down heavily from 2007 to 2011.

Tread carefully when you write things like “but I also see his point on the fact that we would be earning more on our money if it is invested.” Sometimes that’s true. Sometimes it’s not.

3) I would pay off my student loan ASAP. Even though the interest rate you’re paying poppa bear is ony 4%, I’d get rid of it fast. Why not the car or mortgage first you ask? One reason.

I hate owing family money.

Super nice of him to offer to cover your loans for you, so why don’t you return the favor and pay him back quickly. This immediately removes any potential awkward business/family relationship. With $140k/yr in income you can knock this out in a few months.

4) After paying dad back, do whatever the heck you want. I’d probably pay off my cars and then start investing more heavily. That said, if you want to focus on investing and keep the car loans around a little longer I don’t have much beef with that. Contrary to what many may say, you can have debt and still be financially stable.

That’s all I got.

What say you dear readers?

24 thoughts on “Pay your pops.

  1. I agree with Ninja. Pay back your dad right away! I would also cite “family awkwardness” as the reason.

    From there, do you pay off your debt? Or do you invest more? Really, you can do either and be well off. Just make sure that you are focused intently on one or the other: Just don’t get side-tracked and not do either one.

    The choice is yours. Personally, I think that you should pay off your debt. You get a huge sense of relief and freedom by not having the debt in your life.

    If you make some sacrifices now, there’s no reason why you couldn’t pay off all of your debt (minus the mortgage) in a year or year and a half. Then, spend the rest of your life investing!

  2. Great advice Ninja.
    Owing money to family sucks. It makes for awkward holidays and family dinners.
    Any debt is a burden. Even if you can afford the repayments there’s no reason why you should be maintaining any level of debt. Getting rid of it will give you more cash flow to invest and ensure that you don’t have too many liabilities should an emergency occur like illness or loss of job. No debt equals peace of mind.
    But you have to figure out what you’re most comfortable with.

  3. I tend to agree with what everyone is saying. Pay off your Dad first. Super nice of him to take on those loans on your behalf! If you are really itching to get invested in the stock market I would just start really slowly so that you can focus on paying off your debts. Maybe like $100-200 each month to invest in an EFT? Just an idea.

  4. Pay back the father, then the cars, then the house. At 140K a year you don’t get all the cool wonderful “you own a house, here’s money back” from the IRS but it still works well for you as a long-term debt. The other thing is the longer you have debt on record thaty you are paying off on time, the better your credit score stays in case you need to take on new debt. and houses are better than cars for that. (besides family awkwardness, dad does not report to the credit bureaus – another reason to pay him first.)

    • Actually they still do, the limit is 150k. Plus that is AGI, so anything they put into deductible retirement accounts or health savings accounts will reduce the 140k even more.

      • Yea unfortunately it’s not really helping us given that we have to pay in 5k this year. It’s our first year married, so obviously going to have to make some changes on our deductions for next year. I had no idea we were going to owe so much.

  5. Thanks for your response to my question. I actually find it really interesting that everyone is citing to pay back my dad first because of “family awkwardness” that honestly never crossed my mind. I completely agree with you, but not because of the awkwardness. Probably because we set up very specific boundaries when he gave the loan. 1. I never asked for it, he basically came to me and said “what if I told you that I found a way for you to pay off your loan sooner at a lower interest rate.” This was before I was married and I made much less money 2. We signed and notarized paperwork just like I would with any lender, along with payment schedules and due dates and 3. I deposit the money in a separate account each month, it’s just like paying another bill to me. That being said, it is the debt I want to get rid of the most.

    Our financial adviser is fee for service, so no worries there. I get what he is saying, but I also personally just greatly dislike having any debt. I agree with Kasia, better frame of mind and freedom once all the debt is gone. We both put 10% in our 401k’s, fully fund his Roth (I don’t have one) and then the mutual funds are a back up as well. Originally our plan was to get all of our debt paid off in 2-3 years, but perhaps we’ll sit down this weekend and discuss a plan to see if we can get it paid off sooner. There are definitely places that we can cut back. Thanks for everyone’s insight!

      • Honestly we haven’t talked about it. He hasn’t touched the money since I started putting it in there. I think, not sure, that he might be using it as an emergency fund for himself. It was awesome that he did that for me and I’m very blessed to have been given that opportunity. That is one of the things I was wondering though, if I pay him back early, do I pay him the full amount that I WOULD have owed him with the interest, or just what the loan was? I think he took the money out of his retirement and was charged a penalty on it, so I feel like I need to pay him back the full amount with interest, if I paid him back early and just the money that he used to pay the loans, I think that would hurt him more financially. I was younger when he paid off the loan, had I known at the time he had taken it out of his retirement, I wouldn’t have let him do it. When I took out the loans to pay for graduate school I don’t think my dad realized the parameters of that loan and when he found out I was on a 20 year payment schedule it freaked him out (as it should have freaked me out) which is why he “looked into other options”

        • Interesting question on whether you would pay back full interest or not. With a money lender you wouldn’t but then depending on the loan you may incur penalties for paying it off early. 🙂 If you have decided that you for sure would like to pay your dad first, why don’t you sit down with him and discuss so that you come to a place that you guys are both the happiest with?

          I think it’s a great idea to pay your dad first – if I was in your shoes I would do the same, not so much for an awkwardness reason (it sounds like you guys worked it would really responsibly) but just for the sheer fact that I’d feel like I was done a favour and would like to do one back.

    • If your dad took a loan from his retirement to pay your student debt I would make paying him back an absolute priority. Think about the last 12 months and how he missed out on an incredible year in the stock market because he had that money loaned out to you. Not saying it’s your fault, it’s a choice he made, but I know that I would not want to be the reason he missed out on those potential returns any longer.

      • I agree. I don’t know how many times I’ve written on this blog about the irrational obsession so many have these days with debt, which is not “slavery” or any nonsense like that, but really nothing more than an economic decision to acquire an expensive asset (such as a house, education, car) and pay it off in installments for a larger purchase price than if one had all the money upfront. But here there is a question of a relative having put his own retirement money at risk to help you. I don’t think it was a good decision on his part, but in this case I think you should accelerate the repayments as soon as you can. Perhaps $5-8K out of the emergency fund would be a good start; you could always replenish that, and I wouldn’t worry if you’re below the 8-month limit stipulated by the Silly Sooooooze. That woman’s advice on financial matters, in my opinion, is sometime even more preposterous than her outfits.

  6. If it were me, I’m paying off my dad first, then paying off the car loans, then investing. And depending on the circumstances, I’m probably decreasing the emergency fund a bit, but that’s totally up to the individual’s preferences and risk tolerance.

    That’s really nice of her father to pay off the loan and charge her less interest 🙂

  7. I agree. I’d focus on paying off the debts. Dad would be first. You could take at least 10K of your saving and give it to him today and then start a budget and come up with a big amount each month to knock the rest out.

  8. In the minority here – but my father just loaned my brother enough money to buy a condo because it was a better investment for my parents! My brother pays a lower interest rate to my parents, my parents get a better interest rate than the bank, and we are all happy. (They did ask if my feelings would be hurt if they did this for him and I said NO! my feelings will not be hurt. I think it is the best move for all.) So unless your dad *needs* the money back quickly, in my family there is no awkwardness about owing money and my father would tell me to pay off the car loans first (no tax credit there), then worry about paying him back, then focus on my mortgage. So really I think your best bet would be to sit down and have a serious heart to heart with your father and your husband. Go in with a couple of plans of attack and see what is best for all involved. Best of luck with whatever you end up doing…

    • My dad paid off my student line of credit for me as well. This was for several reasons. One, my parents were co-signers and this was also seen as their debt. Two, my dad was making next to no interest in his previously high-interest savings account so offering me a 3.5% interest loan got him a much better deal than what he was making on it. And or course the obvious, it helps me save money on interest going from 6.75% to 3.5% interest. My dad is alright with me focusing on my higher interest car loan first, and once that is paid off he is alright with me splitting my payments between his loan and my rrsp, which will get me a better tax refund that I can apply to the loan. So the deal I made with my dad works out positively for both of us, but he didn’t dip into stock investments, this was what he had in a high-interest savings account.

  9. I hate debt too. It is slavery to me. It worries me. Being debt free is extremely empowering. More cash flow in and lesser need of an emergency fund = power! Power to invest more and play harder is the way to go IMHO 🙂

  10. I’d pay down the debt as soon as possible. You don’t have to go crazy doing it and live like a poor person or anything, but there may be a day when something happens and you just don’t have the same income as you do right now. It’s all about cash flow. The more you can pay off now, the better. What if the stock market does tank? What if one of you loses your job? If you’ve still got all of those bills sticking around each month, things will be tight to say the least. Yeah, dad could wait on his and you could make sure that you keep everything else caught up. But wouldn’t it be so much easier if all or most of those things were already paid off?

    Like Ninja said, you can have debt and still be financially stable. But you don’t want to forget to plan for exceptions and bumps along the way.

  11. If you can’t pay off your student loans and car loans in one year making $140K, then you need to take a hard look at your standard of living.

  12. Here is what I would do in your situation…

    1. Pay taxes
    2. Determine a dollar figure for a comfortable emergency fund.
    3. Use any remaining liquid funds to pay off father.
    4. Fix your withholding issue at work.
    5. Sell the expensive car and buy a cheap, reliable car. This will get the ball rolling for you on the debt repayment.
    6. Live on a bare-bones budget and use extra liquid cash each money to AGGRESSIVELY pay off debts. At 140K a year you should be able to do this in less than a year.
    7. INVEST, INVEST, INVEST
    8. Payoff house.
    9. Love life.
    10. Payoff my house (I can send you the address if you need it).

    Lutus

  13. I’m not sure I agree with everyone when they say pay off your dad first. My husband is just finishing grad school & we’ll probably borrow $20k from grandparents to pay off student loans. It’s cheaper for us (better interest rate) and they like the surety (compared to stock market) and it’s a better interest rate than they could get with CDs. So if we pay them off early, it’s not really helping them. I think it would be better to talk with your dad and ask what he would prefer.
    I personally would prefer to get the car loans paid off quickly, then add to retirement and mutual funds. I also like a higher emergency fund (at least $10k), but that’s just for my own peace of mind- I’m the only one working right now & if I lost my job, I want a few months worth of living expenses. It will be a little different when both of us are working; one lost job wouldn’t have as much of an impact.

  14. +1 for Lutus’ comment – especially #5 and #6. Sounds like you are both young. I wish someone had told me that when I was young. Seriously examine your goals first, then start adjusting the lifestyle down as far as possible. This will help you out now. It will also help you 20 years from now.
    My opinion on whether to pay debt or invest? You should be doing both. For me, paying down debt is slightly more important because I’ll be more secure when (not if) the wind changes. With 140K income it is within reach if you are careful with the money.
    I vote for paying dad in full with all the interest.

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