Paying off old debt versus savings

[Gerrardfan]

Random question, I'm just working on my financial plan right now and currently owe about $18,000 for student LOC. Should I try to get this down more or should I save instead, just submitted my applications this year, have a somewhat slim chance to get in, but I'm a planner and wanted other opinions. I did previously talk to the bank and they basically said that I would need to apply my new loan onto a previous one.

[Mithril]

Obviously if you can pay it off then do so in order to accumulate a lower debt load overall, but if you need money for other things then just pay it off later. It all depends on your financial circumstances.

[rmorelan]

Random question, I'm just working on my financial plan right now and currently owe about $18,000 for student LOC. Should I try to get this down more or should I save instead, just submitted my applications this year, have a somewhat slim chance to get in, but I'm a planner and wanted other opinions. I did previously talk to the bank and they basically said that I would need to apply my new loan onto a previous one.

 

what interest are you paying on this? What is your marginal tax bracket?

[future_doc]

Pay down only if in so doing, you can continue to access LOC for further financial needs, thereby reducing interest - otherwise, save funds for current/future needs, delaying any repayment.

[cnb88]

It's all about the math.

 

1. How much are you (will you) be paying interest per month if you don't pay off your debt?

 

2. What/how are you planning to save? Putting it in the bank? Investing of some sort? Hiding it under a matress?

 

3. If investing, long term? Short term? Stocks? GICs?

 

4. How old are you? Where are you in life? What do you want to do in the next year? 2 years? 5 years?

 

5. Are there any other debts you may be accumulating in the near future?

 

6. What specifically do you want to save up for?

 

After you ask (and answer!) these and other questions you'll be able to figure out what's best for you financially. Draw up a couple plans to figure out what's best for you. Saving might be better than paying off debt, but you HAVE to do your math.

 

For example:

 

Obviously you're going to have to keep paying at least your minimum payment per month, but let's ignore that for a moment and assume that you can make the minimum payment regardless. For ease of calculations, let's say your loan is $10 000. And interest is at 1% compounded annually. That means in the year there will be $100 you'll have to pay in interest. Yikes. That's $100 you're paying to the man. You have $10 000 right now, let's pay off that loan!

 

But wait!

 

If you invest in something, there are chances that you can double your money. So invest in something! $20 000 in a year?! AWESOME! You just made 10k!

 

But wait!

 

What if the market crashes and you "make" -1% instead of doubling your money? You just lost $100. Should have paid off that loan I guess.

 

But wait!

 

Invest in something a little less risky perhaps? GICs? Canadian Equity Funds? Something else random that doesn't fluctuate too much? Let's say it averages 2% interest over the entire year. Boom. That $10 000 is now $10 200. You're $100 up from where you would be if you paid off your loan a year earlier.

 

However, if you're planning on buying a house, car, wedding (planning a wedding, not buying one!), you might need that $10 000 instead of doing any of the above. If you don't want to go through CMHC (and you don't, trust me), you need 20% down. That 10k could come in handy. A wedding? Well, instead of that 10k going into credit cards (at 18 or more percent interest a year!) you can pay that with the cash instead.

 

 

It all really depends on what you want to do in the forseeable future.

 

If you have the cash and no expenses (like a car, home, or wedding), it might be beneficial to do a 50/50 type thing. Pay off with 50%, and save with the other 50% (I'm talking disposable income here, I'm not saying not to have any money for food or whatever. This is 50% after you pay everything else you need to).

 

You might want to go talk to someone at a (or several) banks. They might be able to at least give you more information on your options. Or an accountant. Or maybe a fortune teller. Maybe she can tell you where/in what to invest to double that money;)

[Gerrardfan]

Thanks so much everyone! Especially cnb88! Very thorough questions (I laughed more than once), ones I feel I ask of myself a lot as I am approaching 30 this year. I make a decent income and can put more than $1000 a month onto savings and LOC, until this last year I hadn't put much thought into saving, I was incredibly focused on debt repayment. Now that I have decided to actively pursue a medical career I have begun to think more about savings because I am a "mature applicant" and have a car, apartment and am single. Financial advisors all suggest contributing to savings just for the reasons stated, if I don't get into medical school I will start my "real life" and get a house etc, and focusing on savings would give a decent down payment. I'm just nervous about having a debt load if I do get in, which only adds to the HUGE expense of medical school (and I HATE debt!). Thanks so much everyone, and if anyone does know a good fortune teller.....

[future_doc]

As a med student, I a,lssure you the debt load is bearable and can be paidof in a reasonable time frame. For sure, the LOC does not create any stress, on the contrary, it makes med school affordable.