Let’s say you have $300k in mortgage debt and $150k in student loan debt. You also happen to have $100k in a savings account or stuffed under your mattress. Even better, you may have that $100k invested, either in real estate or in stocks/index funds.
So what should you do? Should you continue saving or should you use the current savings and pay off some of the debt? The answer depends on what your long-term plans are. So, depending on which best describes you here are a few options to consider.
You have no plans on retiring anytime soon:
In this scenario continue adding to your savings every month and put the rest of your disposable income towards your student loans and mortgage. Remember that in the case of financial catastrophe you could file bankruptcy and get rid of your mortgage but your student loan, much like genital herpes, is forever. With that in mind, make sure to use a condom AND start paying more towards student loans before you attack a secured loan (the mortgage).
Also, if you have your money under your mattress consider putting it at least in a pathetic savings account. But, as you know, investing your money is wiser – granted you do it in an intelligent manner. If it was the 1980’s I would tell you to just put it in CD’s and maybe in 2030 I would tell you to invest in peer-to-peer lending accounts. Right now index funds seem to be doing well (yes, even though they have eaten shit recently). Is it safe? No, nothing is safe and that includes your mattress.
You want to retire as soon as possible because you hate your job:
Reach under your mattress, take your moldy bills to the bank and put $20k in a savings account. Once the teller has peeled the money out of your kung-fu-grip take the other $80k and use it to pay down your student loans. It’s 2016 (as of this posting) so your mortgage most likely is in the 3-4% range which means it’s a lower priority than your student loan debt.
Make it your mission to pay down your student loans as soon as possible. Forget about investing altogether, send any disposable income towards your student loans. Your goal is to be debt-free as soon as possible. Once you do that then you can start attacking your mortgage. However, because your mortgage is a secured debt it would be good idea to put maybe 25%-50% of your income towards investments and the rest towards paying down the mortgage.
You are in a very tough personal situation and unsure of the future:
Well, in this case you may want to hold onto as much of the $100k as possible. And again, you should be investing that money and not just keeping it in a low-interest savings account and definitely not under your mattress among the many bed-bugs.
So how should you ‘invest’ this money since I keep throwing that word around. Well, if you want it to be truly liquid then there are very few options you have available to you. A CD sucks but is better than nothing and though you will forfeit your profits you will never lose the principal.
Investing it could make sense if you know that you won’t need all the money right away. All we can do is go off of history and historically the market will drop down by as much as 50%… yea, that can definitely give you some diarrhea but then again it does tend to bounce back and often times even give you a decent profit. So, if you think you could be okay watching your $100k go down to $50k then invest it on wall street. If that’s too risky for you then a money market account, a CD or worst case scenario a savings account might be the next best thing. These account are FDIC insured so you have some protection there against a full loss.