Financial Decision: Deck Addition vs. Accelerated Repayment of Student Loan Debt
Option #1: Accelerated Repayment of Wife’s Student Loan Debt of $5,500 at 3.5% interest
Option #2: Saving enough cash for a Deck Addition to our house at $9,000 at 0%
Option #1: Accelerated Repayment of Student Loan Debt – We are currently focused on paying down my wife’s student loan debt ($5,500 remaining at ~3.5% interest). The minimum payment is $280 per month, of which approximately $20 goes toward the interest payment.
Based on the current, accelerated plan to pay down this student loan debt, we will be free and clear of the loan in January 2017. This would result in saving $260 ($20*13 months) in interest between January 2017 and March 2018. The additional $280 cash flow that we will have per month adds up to $3640 between January 2017 and March 2018 ($280*13 months). We can allocate this $3640 to other areas (my student loan repayment, investing more in my 401(k), etc.). With the future allocation of the $3,640, there is the potential for additional interest savings or for market returns on any money invested into my 401(k).
|Option 1 – Student Loan||Cost||Change in Net Worth|
|Future Option (Other Student Loan, Car Loan, Investment)||$3,640||$3,640|
|Total||$9,140||$9,400 + $?|
Option #2: Deck Addition – We currently have no savings set aside for building this deck addition. We had a contractor provide an estimate for us during the Spring of 2015. The estimate was for $8,000 so I am now accounting for inflation and estimating that it will cost $9,000.
Our goal is to have the deck built for the Spring of 2017. This timeline gives us 9 or 10 months to save $9,000 (or $1,000 or $900 per month) which is a significant amount of money to save every month.
I looked at different realty and home improvement sites to see how much value a deck adds to your home. The range was from “it doesn’t add any real value only an additional perk to the buyer” to 80% to 90% of the cost of the deck. To be fairly conservative, I will split the difference and say that it will add 40% of the cost of the deck to the value of our home. 40% of a $9,000 deck is $3,600.
|Option 2 – Deck||Cost||Change in Net Worth|
And the winner is…?
The best financial decision is clearly to continue aggressively paying down my wife’s student loan debt. The cost compared to the impact on our net worth is better than $1 for $1. We spend $9,140 and watch our net worth increase by at least $9,400. Compare this to the $0.40 per dollar return we get on the deck ($3,600 / $9,000) and the decision is pretty clear. Additionally, knocking out the student loan provides more flexibility in our monthly budget by providing additional cash flow.
The decision becomes more interesting when you introduce the idea of the emotional “want”. For the majority of people, there is no enjoyment from paying down student loan debt. This is because there is nothing visible or tangible that you can see or use. Said differently, you can’t host a party or enjoy lunch on your paid off student loan. But, you can host a party or enjoy lunch on your new deck.
It is very easy to say that it is a clear-cut decision based on the financial aspect. This neglects the “want” of having a new deck and the benefits that come along with it. There definitely is a balance that needs to be found between making the absolute best financial decision every single time and enjoying life to the fullest. Is having this new deck worth $5,800 ($9,400 less $3,600)? Will it be used enough to make it worthwhile? These are the real questions that need to be answered when making this decision.
Also, there is always the potential that we could move. We plan to stay in our home for at least five more years so this is unlikely. However, you never know when something unexpected happens and you have to move. On the other hand, student loan debt will stay with you until you pay it off.
What would you do in this situation? Please comment below and let me know.
Stay tuned for our decision……
Ultimately, my wife and I decided that we should continue to pay down her student loan debt. The focus is reducing our expenses to free up cash flow so my wife can work part-time and stay at home with our daughter.