Invest or pay off student loans?

[TN_POKER_MAN]

I would not "invest" the cash that i was planning on using for a down payment on a home inside of 3 years.

Sure, go ahead and invest for growth inside your 401(k)and other long-term accounts. However, money that you plan to use inside of 3 years does not need to be invested.

One other thing to consider: I don't ever recall a person saying that paying off their debt was a dumb move. I've met plenty of folks that have invested money instead of paying off debt and felt it was quite dumb. I think it has something to do with the psychology of risk-aversion.

[Sniper]

3 years is a long time and there's no reason why he should forgo 3 yrs of market returns just because he's going to buy a house.

I dont recall saying paying off debt was dumb, though paying down debt and investing at the same time is better, especially when the debt is only low rate student loans.

I'll refer you to Automatic Millionaire by David Bach as an example of one of many authors suggesting that.

[Maulik]

[ QUOTE ]
3 years is a long time and there's no reason why he should forgo 3 yrs of market returns just because he's going to buy a house.

I dont recall saying paying off debt was dumb, though paying down debt and investing at the same time is better, especially when the debt is only low rate student loans.

I'll refer you to Automatic Millionaire by David Bach as an example of one of many authors suggesting that.

[/ QUOTE ]

while doing both is good advice, reading David Bach isn't good advice.

[wildwood]

[ QUOTE ]
3 years is a long time and there's no reason why he should forgo 3 yrs of market returns just because he's going to buy a house.

[/ QUOTE ]
With all due respect, I have to disagree with this for several reasons (based on where we are in the current intermediate and long term cycles):
1. OP doesn't have alot of market experience.
2. Current market upcycle began approx mar03. I'm not so sure the next 3 yrs are looking up, but of course anything can happen. (buffett has said that the kind of mega bull we had in the 90's only happens about every 50 yrs or so) That means bull market time frames will tend to revert back to the mean which is about 3 to 4 years in length and the gains will be smaller.
3. I believe we are in a commodity bull that began in 99, and historically they last an average of 18 years. Based on history, stocks don't tend to do all that well during these time periods although they will have periods of outperformance. Of course there will be exceptions such as energy, natural resources etc. Buffett is investing heavily in energy and non-dollar investments. He is bearish on the dollar, and it's always dangerous to bet against this guy.
4. House prices are high. Of course they can go higher, but I expect they will be lower in 3 yrs so OP's money will buy more house.
5. On a historical basis, the market is overvalued. Of course that dosn't mean it couldn't go up and become more overvalued, but at least some caution is warranted.

A few more comments. I generally like to stay away from giving financial advice specific to any individual because I don't know their experience, total financial situation, risk tolerance, etc. and I certainly have no financial advisor qualifications. I also don't want to get into a food fight like I see so often on these forums. Just wanted to give everybody some fat to chew on. fwiw

[Sniper]

What didn't you like about David Bach's books?

[Jim Kuhn]

I would strongly suggest a Roth IRA if you have the cash. You can place up to $4000 this year in a Roth. You pay taxes on the money up front but withdraw all without paying taxes (earnings are tax free). The principal can be withdrawn at any time but the earnings must be kept for retirement or a penalty is assessed.

The Roth is also a good place for an emergency fund. Experts suggest you keep 3-6 months expenses in case something comes up. This is also a good place to start saving for a down payment on a house.

IRA's and 401k's are non-liquid in that you must keep all money in until you reach retirement age (I think 59 1/2) or pay penalties and taxes. Those accounts you fund tax free but pay taxes on principal and earning upon withdrawal. A Roth you pay taxes up front but withdraw principal and earnings tax free. Thus, the earnings are never taxed and principal can be withdrawn at any time.

Thank you,

Jim Kuhn
Catfish4u
[img]/images/graemlins/spade.gif[/img] [img]/images/graemlins/diamond.gif[/img] [img]/images/graemlins/club.gif[/img] [img]/images/graemlins/heart.gif[/img]