The clock seems to be ticking faster.
My wife and I have a little less than 16 months to get my student loans paid off so that we can move and get my little girl into a different school. This has placed us into a bit of a financial crunch when it comes to debt. This timeline is firm, and I cannot change it. My mindset to pay off our student loans before we buy a house is also firm.
So, the question becomes this: How do I pay off my debt faster? The answer might seem strange: By changing my investment philosophy for a year and a half.
Am I going back on my Roth 403B argument?
Many of you know that I have argued the merits of making your 403B/401K contributions via a roth method over a standard (pre-tax) method. I think this allows you to put more money into your retirement accounts ($18,500 post tax is equivalent to a little more than $30,000 pre-tax for me).
The other benefits include it being better to leave Roth money to your heirs; and it can help you to bridge the early retirement gap. There really is a lot of benefits to Roth contributions.
However, something has recently changed my mind…. for now. I realized that my investment philosophy was impacting my ability to pay off my debt.
I’ve been reading a great book by Dr. Cory S. Fawcett called “The Doctor’s Guide to Eliminating Debt.” (Full book review here). This book has re-invigorated my hatred for debt. As I began reading the introduction, I started thinking about ways I could pay down my student loans faster.
After all, my family is on a tight time-line to get my little girl into a new school by third grade. That’s only 16 months away.
What about the math?
Previously, I had been putting $18,500 via post-tax (Roth) contributions into my 403B at work. In order to put this amount of post-tax money in, I was using approximately $30,000 of pre-tax money (state + federal tax).
By switching to pre-tax contributions in my 403B, I will have an additional $11,500 that will come home to my paycheck each year I keep it this way. And this doesn’t count the money I am saving on taxes.
This equates to an extra $575 post-tax dollars per month. Over the next 16 months, that’s an extra $9,200 towards my loans. I currently pay $5,000 each month on my loans.
So, this move will allow my family and I to be student-loan free an extra two months earlier! That’s a win-win in my book. That’s also an extra $10,000 that I can put towards our (admittedly heart happy, yet financially stupid) car loans or more money towards our down payment on the house.
What I’ve learned
I hate to admit it, but sometimes I’m wrong.
I think I was wrong on this one (for now). What this thought experiment has taught me is that there are many reasons that it can be good to put your money into your retirement accounts via a standard pre-tax method.
For one, it’s the typical boglehead’s way. If you are in your peak earning years and are a high-income earner, most people recommend placing your dollars in via pre-tax methods into retirement accounts. If you are not in your peak earning years (i.e. training) then you should contribute via Roth.
More importantly, it has shown me that for the early medical professional swimming in debt, it just makes more sense to be balanced and contribute your maximum dollars via a pre-tax method. It decreases your tax burden, and allows you to chip away at your debt faster. It’s going to help accomplish both of my wealth building goals (destroying debt and investing aggressively).
Don’t you worry, though, my friends. I’ll be back on the post-tax Roth contributions band-wagon once my debt has been obliterated.
The take home here is pretty simple.
Think about all the ways you can destroy your student loans (and other debt) as fast as possible. Live like a resident during and after you finish training for a couple of years. Take a balanced investing approach and put enough into your 401K/403B to get the full match and put the rest towards your debt.
Or, like me, you should probably invest your money pre-tax so that you have more post-tax money to pay off the debt faster.
It’s all about balance. Get it right and you can build both sides of the wealth equation (increasing assets, decreasing debts). Get it wrong, and you could be upside down. Take a step today to think about how you can pay off your debt more quickly.
What do you guys think? Smart move? Bad move? What were some of your unique tactics that you used to combat your student loan debt? Leave a comment.