I’m in a decent spot, I’ve got a car loan (1.9%) mortgage (2.5%) and a home improvement loan that I really stress…6.9% where I owe about $16K.
I’ve been very aggressive with my TSP. I’m at about $250K putting in about $1200 a month. I only have 4 more years in the military to get my 20, so I really want to put in more…but I’m already paying 25% more monthly to my home improvement loan.
Should I just cut my tsp down tremendously, and try to get that $16K paid off, or keep chipping away at it like I’ve been doing.
Thanks
Another pay off debt vs invest post.
byu/Uneeda_Biscuit inMilitaryFinance
Posted by Uneeda_Biscuit
3 Comments
Yes
The decisions are based on a 3% inflation rate average and a 10% average on the S&P 500.
there are a few generalizations a lot of people make with interest rates:
Under 3% – cheap money. Don’t pay it off.
Between 3-5% – If you got extra cash, pay it off, but you’re fine to pay off the loan over time. (Average mortgages/car loans)
5-10% – not great for long-term loans. Try to make payments up front to cut down on interest paid over the course of the loan.
10% or more – aggressively focus on paying off loan.
At 6.9% (nice), you are in the grey zone. At this percentage, you are just playing a guessing game of opportunity cost. If we assume you are full C fund, on average, you’ll net 10% return. For me, I would focus on the loan because I have a guaranteed hit of 6.9% (nice) vs a potential 10% gain.
Provided you did Roth TSP, you’re better off paying off the debt with a TSP loan vice making lower contributions.
This is because the loan allows you to replenish the money, whereas if you dial down contributions you can’t go back to 2024 and make them back up.