Should I use put extra money toward paying off my student loans or investing in an index fund?
"First, I'd like to congratulate you on your financial discipline in paying off your loans and living well within your means.  I have friends who make more than twice your salary with similar debt obligations, and they barely scrape by month to month. If we combine your student loan debt and unallocated income each month, we get about $1,350.  You say that $378 per month is the minimum payment for your loans, which have an average interest rate of about 3.5%.  Thus, you have about $1,350 a month to ""invest."" Making your loan payments is basically the same as investing with the same return as the loan interest rate, when it comes down to it.  An interest rate of 3.5% is...not great, all things considered, and barely above inflation.    However, that's a guaranteed return of 3.5%, more or less like a bond.  As noted previously, the stock market historically averages 10% before inflation over the long run. The US stock market is right around its historic high at this point (DJIA is at 20,700 today, April 6th, 2017 - historic high hit just over 21,000 on March 1, 2017).  Obviously, no one can predict the future, but I get the feeling that a market correction may be in order, especially depending on how things go in Washington in the next weeks or months.  If that's the case (again, we have no way of knowing if it is), you'd be foolish to invest heavily in any stocks at this point. What I would do, given your situation, is invest the $1,350/month in a ""portfolio"" that's 50/50 stocks and ""bonds,"" where the bonds here are your student loans.  Here, you have a guaranteed return of ~3.5% on the bond portion, and you can still hedge the other 50% on stocks continuing their run (and also benefiting from dividends, capital gains, etc. over time).  I would apply the extra loan payments to the highest-interest loan first, paying only the minimum to the others.  Once the highest-interest loan is paid off, move onto the next one. Once you have all your loans paid off, your portfolio will be pretty much 100% stocks, at which point you may want to add in some actual bonds (say a 90/10 or 80/20 split, depending on what you want).  I'm assuming you're pretty young, so you still have plenty of time to let the magic of compounding interest do its work, even if you happen to get into the market right before it drops (well, that, and the fact that you won't really have much invested anyway). Again, let me stress that neither I nor anyone else has any way of knowing what will happen with the market - I'm just stating my opinion and what my course of action would be if I were in your shoes." "From a purely financial standpoint (psychology aside) the choice between paying off debt and investing on risky investments boils down to a comparison of risk and reward.  Yes, on average the stock market has risen an average of 10% (give or take) per year, but the yearly returns on the S&P 500 have ranged from a high of 37.6% in 1995 to a low of -37% in 2008.  So there's a good chance that your investment in index funds will get a better return than the guaranteed return of paying off the loan, but it's not certain, and you might end up much worse.  You could even calculate a rough probability of coming out better with some reasonable assumptions (e.g. if you assume that returns are normally distributed, which historically they're not), but your chances are probably around 30% that you'll end up worse off in one year (your odds are better the longer your investment horizon is).  If you can tolerate (meaning you have both the desire and the ability to take) that risk, then you might come out ahead.   The non-financial factors, however - the psychology of debt, the drain on discretionary cash flow, etc. cannot be dismissed as ""irrational"".  Paying off debt feels good.  Yes, finance purists disagree with Dave Ramsey and his approaches, but you cannot deny the problems that debt causes millions of households (both consumer debt and student loan debt as well).  If that makes them mindless ""minions"" because they follow a plan that worked for them then so be it. (disclosure - I am a listener and a fan but don't agree 100% with him)" Yes, it's a risk. To put it in perspective, If we look at the data for S&P returns since 1871, we get a CAGR of 10.72%. But, that comes with a SDev (Standard deviation) of 18.67%. This results in 53 of the 146 years returning less than 4%.  Now if we repeat the exercise over rolling 8 year periods, the CAGR drops to 9.22%, but the SDev drops to 5.74%. This results in just 31 of the 139 periods returning less than 4%. On the flip side, 26 periods had an 8 year return of over 15% CAGR.  From the anti-DS article you linked, I see that you like a good analogy. For me, the returns of the S&P over the long term are like going to Vegas, and finding that after you run the math of their craps (dice rolling game) you find the expected return is 10%. You can still lose on a given roll. But over a series of a larger number of rolls, you're far ahead.  To D Stanley - I agree that returns are not quite normal, but they are not so far off. Of the 139 rolling returns, we'd expect about 68% or 95 results to be 1 SDev away. We get 88 returns +/-1SDev. 2 SDevs? We'd expect only 5% to lie outside this range, and in fact, I only get one result on the low side and 4 on the high side, 5 results vs the 7 total we'd expect. The results are a bit better (more profitable) than the Normal Bell Curve fit would suggest. Not all debt is bad. If it carries a reasonable interest rate, you don't need to clear it immediately. As for investing in an index fund, they're an affordable, easy way to spread your money over various assets. However, asset allocation is just one of many investment strategies. Ideally, you want to invest according to your goals, tax situation, and risk tolerance. You want a portfolio that dynamically allocates to various investment strategies, both beta and alpha, according to changing market conditions. Most importantly, you want systematic risk management for every aspect of your investments.
"Although there is no single best answer to your situation, several other people have already suggest it in some form: always pay off your highest after-tax (!) interest loan first! That being said, you probably also have heard about the differentiation for good debt vs. bad debt. Good debt is considered a mortgage for buying your primary home or, as is the case here, debt for education. As far as I am concerned, those are pretty much the only two types of debt I'd ever tolerate. (There may be exceptions for health/medical reasons.) Everything else is consumer debt and my personal rule is, don't buy it if you don't have the money for it! Meaning, don't take on consumer debt. One other thing you may consider before accelerating paying off your student debt, the interest paid on it may be tax deductible. So you should look at what the true interest is on your student loan after taxes. If it is in the (very) low single digits, meaning between 1-3%, you may consider using the extra money towards an automatic investment plan into an ETF index fund. But that would be a question you should discuss with your tax accountant or financial adviser. It is also critical in that case that you don't view the money invested as ""found"" money later on, unless you have paid off all your debt. (This part is the most difficult for most people so be very cautious and conscious if you decide to go this route!) At any rate, congratulations on making so much progress paying off your debt! Keep it going." It looks like the rate on that first loan is 6-2/3%?  When I look at $72000 principal and a $500 payment, I'm seeing a long term, 24 years. Not 60, but not good either.  Yes, as you pay a bit of principal, the next payment has less interest and even more principal.  I hope your degree is in a field that's lucrative. Or that you're able to get a job that qualifies you for loan forgiveness over time. I'm sorry that advice might seem weak, but aside from that, the best I can offer is to live well beneath your means, i.e. continue to live like a student, and make additional payments.  As far as bi-weekly goes, the lender may not accept partial payments. Set aside the money every two weeks and when you have extra money just make an extra payment amount toward principal.  To pay this off as fast as possible, I'd make as high an extra payment as I could each month to the loan with the higher rate. If the rates are the same, pay it off to the one with the lower balance.  With respect to the debt snowballers, followers of The David, say the rates are simply close, say .25% apart, with the lower balance having the lower rate. If you were to pay this one first, it would occur sooner, of course, and free up that monthly payment, helping your cash flow. But, it comes at a cost.  Note - if, as Noah suggests, the rates are the same, I'd advise to make all extra payments toward the lower balance. That will get you to the point where you've freed up that cash flow for other purposes, whether it's to focus on the higher loan, or anything else you need this for. Basically you have 4 options: Use your cash to pay off the student loans. Put your cash in an interest-bearing savings account. Invest your cash, for example in the stock market. Spend your cash on fun stuff you want right now. The more you can avoid #4 the better it will be for you in the long term. But you're apparently wise enough that that wasn't included as an option in your question. To decide between 1, 2, and 3, the key questions are:  What interest are you paying on the loan versus what return could you get on savings or investment?  How much risk are you willing to take? How much cash do you need to keep on hand for unexpected expenses? What are the tax implications? Basically, if you are paying 2% interest on a loan, and you can get 3% interest on a savings account, then it makes sense to put the cash in a savings account rather than pay off the loan. You'll make more on the interest from the savings account than you'll pay on interest on the loan. If the best return you can get on a savings account is less than 2%, then you are better off to pay off the loan. However, you probably want to keep some cash reserve in case your car breaks down or you have a sudden large medical bill, etc. How much cash you keep depends on your lifestyle and how much risk you are comfortable with. I don't know what country you live in. At least here in the U.S., a savings account is extremely safe: even the bank goes bankrupt your money should be insured. You can probably get a much better return on your money by investing in the stock market, but then your returns are not guaranteed. You may even lose money. Personally I don't have a savings account. I put all my savings into fairly safe stocks, because savings accounts around here tend to pay about 1%, which is hardly worth even bothering. You also should consider tax implications. If you're a new grad maybe your income is low enough that your tax rates are low and this is a minor factor. But if you are in, say, a 25% marginal tax bracket, then the effective interest rate on the student loan would be more like 1.5%. That is, if you pay $20 in interest, the government will then take 25% of that off your taxes, so it's the equivalent of paying $15 in interest. Similarly a place to put your money that gives non-taxable interest -- like municipal bonds -- gives a better real rate of return than something with the same nominal rate but where the interest is taxable. 1) How does owning a home fit into my financial portfolio? Most seem to agree that at best it is a hedge against rent or dollar inflation, and at worst it should be viewed as a liability, and has no place alongside other real investments. Periods of high inflation are generally accompanied with high(er) interest rates. Any home is a liability, as has been pointed out in other answers; it costs money to live in, it costs money to keep in good shape, and it offers you no return unless you sell it for more than you have paid for it in total (in fact, as long as you have an outstanding mortgage, it actually costs you money to own, even when not considering things like property taxes, utilities etc.). The only way to make a home an investment is to rent it out for more than it costs you in total to own, but then you can't live in it instead. 2) How should one view payments on a home mortgage? How are they similar or different to investing in low-risk low-reward investments? Like JoeTaxpayer said in a comment, paying off your mortgage should be considered the same as putting money into a certificate of deposit with a term and return equivalent to your mortgage interest cost (adjusting for tax effects). What is important to remember about paying off a mortgage, besides the simple and not so unimportant fact that it lowers your financial risk over time, is that over time it improves your cash flow. If interest rates don't change (unlikely), then as long as you keep paying the interest vigilantly but don't pay down the principal (assuming that the bank is happy with such an arrangement), your monthly cost remains the same and will do so in perpetuity. You currently have a cash flow that enables you to pay down the principal on the loan, and are putting some fairly significant amount of money towards that end. Now, suppose that you were to lose your job, which means a significant cut in the household income. If this cut means that you can't afford paying down the mortgage at the same rate as before, you can always call the bank and tell them to stop the extra payments until you get your ducks back in the proverbial row. It's also possible, with a long history of paying on time and a loan significantly smaller than what the house would bring in in a sale, that you could renegotiate the loan with an extended term, which depending on the exact terms may lower your monthly cost further. If the size of the loan is largely the same as or perhaps even exceeds the market value of the house, the bank would be a lot more unlikely to cooperate in such a scenario. It's also a good idea to at the very least aim to be free of debt by the time you retire. Even if one assumes that the pension systems will be the same by then as they are now (some don't, but that's a completely different question), you are likely to see a significant cut in cash flow on retirement day. Any fixed expenses which cannot easily be cut if needed are going to become a lot more of a liability when you are actually at least in part living off your savings rather than contributing to them. The earlier you get the mortgage paid off, the earlier you will have the freedom to put into other forms of savings the money which is now going not just to principal but to interest as well. What is important to consider is that paying off a mortgage is a very illiquid form of savings; on the other hand, money in stocks, bonds, various mutual funds, and savings accounts, tends to be highly liquid. It is always a good idea to have some savings in easily accessible form, some of it in very low-risk investments such as a simple interest-bearing savings account or government bonds (despite their low rate of return) before you start to aggressively pay down loans, because (particularly when you own a home) you never know when something might come up that ends up costing a fair chunk of money. This is a case where human nature and arithmetic lead to different results. Depending on the your income, the effective interest rate on the mortgage is probably right around 2.5%.  So purely by arithmetic, the absolute cheapest way to go is to put the $11k to the bigger car loan, then pay off the mortgage, then the smaller car loan. The Debt Snowball is more effective however, because it works better for people. Progress is demonstrated quickly, which maintains (and often enhances) motivation to continue.  I can say as a case in point, having tried both methods, that if does indeed work.  So, I am with you ... pay off the car loan first, and roll that payment into the bigger car loan. If you add no extra dollars, you should get the small loan paid off in 6 to 8 months and the bigger car loan in another 16 to 18 months. It sounds like from your message that you have another $1500 or so a month.  If that is the case ... small loan paid off in two months, bigger loan paid off in another year.  If you stick with the Ramsay program, you then build an emergency fund and start investing. Good luck! "Math says invest in the Market (But paying off your mortgage early is a valid option if you are very risk averse.) You are going to get a better return by investing in the stock market.  In the US in 2015/2016, mortgages are 3%-4%, and give you a tax break.  The rate of return on the stock market is ~10%, (closer to 6% after you subtract out inflation, taxes, fees, etc.) Since 10 > 3, (or 6% > 4%, to use the pessimistic numbers)  investing in the market is the better deal. But... The market has risk, and your mortgage does not.  If you are very risk averse paying off the mortgage may make sense. As an example:  Family A has a single ""breadwinner"", who works a low skilled job. Family B has 2 working spouses, both in high skill white collar positions.   These two families are going to have wildly different risk tolerances.  It may make sense for family A to ""invest"" its extra money in paying off the mortgage, after they have tackled high interest debt, built an emergency fund, maxed the 401k, etc. Personally I would not: in the US you cannot recoup pre-payments if you lose your job.  If I was very risk averse, I would keep my extra money as cash, so I could pay my mortgage after I lost my job.  It is never going to make sense for family B to pay the mortgage early.  At that point, any decision to pre-pay is going to be based on emotion and not logic." I don't know much about how student loans work, so there might be some caveats (e.g. does the interest rate stay constant, do you get a discount if you pay off early etc.). Ignoring those caveats: The interest on you student loan looks quite small. Depends a bit where you are in the world, but it seems very likely that you can get more interest than that on a 100% guaranteed investment form, e.g. term bank deposits. So, it seems a no-brainer to not pay back you student loan and invest the money securely for a higher interest rate instead. Similar situation when you think about taking the money as a down-payment for a house. More factors come into play here: Its almost always better to pay off loans sooner rather than later.   Being debt free is amazingly liberating.   However, in your case, I'd be reluctant to make significant headway on a loan repayment program.  Here's why: The best investment you can make, right now, is in yourself.  Completing your education should be the top priority.  The next would be to meet the requirements of a job after received after school is complete.  So what I would do is estimate the amount of money it would take to complete school.  Add to that an estimate of an amount to move to a new city and setup a household.   That amount should be held in reserve.  Anything above that can used to pay down loans. Once you complete school and get settled into a job, you can then take that money and also throw it at your loans.