Paying down debt vs. investing

kevmor99

kevmor99

Well-Known Member
I'm sure this is an easy question and I'm just not seeing it, but I'm trying to decide which is better, paying down debt or investing. Here's some questions:

If your mortgage is around 4%, even though it's still almost the full 30 years left, wouldn't it make sense to invest if you could get around 6-7% annual return? The mortgage interest is tax deductible as well.

What if you have low interest debt (say student loans from 4-6%), but the amount is say 30k. If you're investing only around 10k, is it still beneficial to get that 6-7% even if it's a smaller amount? Does the amount owed or invested even affect it?
 
SFLAX

SFLAX

Well-Known Member
Do the math, if you have a low debt load like you do, you can invest, like a company 401k match. Don't leave money on the table. I believe in the Dave Ramsey view of student and mortgage debt, pay it off as fast as possible . The mortgage tax reduction is very small compared to what you pay in interest to the bank. And let's say you are paying $200 a month for student loans and $1000 for mortgage . If you pay off the student loan in 5 years, and you add the $200 to the mortgage you will pay the mortgage off in 15 years. Let's say you then have 20 years of working left. If you put the 10k In today, you would have 116k in 35 years. But if you paid off debt, in 15 years and put the $1200 into the same account for 20 years, you would have $625k in it. So the key is pay it off as fast as possible then max out all retirement accounts and then put as much into other investments.
 
SFLAX

SFLAX

Well-Known Member
Do the math, if you have a low debt load like you do, you can invest, like a company 401k match. Don't leave money on the table. I believe in the Dave Ramsey view of student and mortgage debt, pay it off as fast as possible . The mortgage tax reduction is very small compared to what you pay in interest to the bank. And let's say you are paying $200 a month for student loans and $1000 for mortgage . If you pay off the student loan in 5 years, and you add the $200 to the mortgage you will pay the mortgage off in 15 years. Let's say you then have 20 years of working left. If you put the 10k In today, you would have 116k in 35 years. But if you paid off debt, in 15 years and put the $1200 into the same account for 20 years, you would have $625k in it. So the key is pay it off as fast as possible then max out all retirement accounts and then put as much into other investments.
 
NickH

NickH

Uber Driver
If you have a guaranteed 6-7% annual return, then yes, this certainly makes sense. Also, please direct me to this guaranteed return investment.

If you are using the market, such as the S&P and using historical data to predict the future, then that's a little more dubious. Would you take a loan at 4% just to use the money to invest?

There is a tipping point between the risk of investing and the return. A 2% loan (like a car loan) would be a no-brainer to invest instead. A 6% loan would be far too risky.
 
NickH

NickH

Uber Driver
NickH said:
If you have a guaranteed 6-7% annual return, then yes, this certainly makes sense. Also, please direct me to this guaranteed return investment.

If you are using the market, such as the S&P and using historical data to predict the future, then that's a little more dubious. Would you take a loan at 4% just to use the money to invest?

There is a tipping point between the risk of investing and the return. A 2% loan (like a car loan) would be a no-brainer to invest instead. A 6% loan would be far too risky.
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And I would add, maximise your 401K every year, and consider filling an HSA also. That's about tax avoidance far more than a couple of points of interest. Don't do the Dave Ramsey Snowball, that's for people who can't do math.
 
NickH

NickH

Uber Driver
The 'Snowball' method for paying down debt popularised by Dave Ramsay involves paying off the smallest debts first and working up to larger debts. The correct way to pay off debt is to send extra money to the debt with the largest interest rate (Both methods involve making the minimum payments to all debts no matter what). Since the goal with paying off debt is to spend the smallest amount on interest, the failing of the snowball method should be obvious.
 
SFLAX

SFLAX

Well-Known Member
I would agree with the interest rate method more then smallest balance. But most people don't know interest, but understand balance. But paying off debt fast is key to saving and saving for the future.
 
drunkenbeagle

drunkenbeagle

Gang Member
Do not pay off a 30 year fixed mortgage at 4% any faster than necessary. Given the tax break, it is free money.

The dividend yeild on the S&P 500 funds is about 2%, and has also managed to be up 10% this year on top of that. Buy S&P index funds, I promise that will well outperform your mortgage interest over 30 years.
 
SlumTodd_Millionaire

SlumTodd_Millionaire

Most Hated Member
kevmor99 said:
I'm sure this is an easy question
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It is. And don't listen to anyone who uses the words "Dave Ramsey" in his post unless it is immediately followed by "is a complete moron." :)

If your mortgage is around 4%, even though it's still almost the full 30 years left, wouldn't it make sense to invest if you could get around 6-7% annual return? The mortgage interest is tax deductible as well.
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Unless you're approaching retirement, yes, the investment is the smarter move by a country mile. Expected annual return of an investment in the broad overall market will generally equal GDP + CPI + Yield. GDP can be expected to grow at a rate of around 3% over the long term. Inflation probably around 2%. Dividend yield of the broad market stays around 2% over the long term. Therefore:

3% GDP growth
+2% inflation
+2% dividend yield
=
7% expected rate of return in the broad overall market.

You can factor in a risk premium to discount your future cash flows, although I would argue that it's probably overkill if you're investing in the broad market. But if you did, you would probably discount it by about 2%. That would still give you a very conservative expected return of 5% per year

So, anything that you're paying an interest rate of less than 5% should not be paid off any sooner than you're required to do so. Take the money that you would use towards paying off that debt and instead invest it in something like SPY, which gives you the entire S&P 500 index with virtually no expense ratio.
 
SFLAX

SFLAX

Well-Known Member
Most Americans are complete morons and cant understand a simple loan terms. And most will have nothing in savings and have debt when they should be retiring. Once you get into spreads, indexes, GDP, inflation..etc, you have exceeded 95% of most peoples knowledge. I do appreciate your opinion of a man that has a simple way and wants people to be debt free, and save something. Now, if your implying that I am a moron. Please don't, I actually do the math for many small business looking to acquire debt to create cost savings. A lot of people I work with, who have successful business, don't understand this stuff as well. But my opinion is, in the long run, I want all my money to go towards me as fast as possible. That means paying off debt fast.
 
SFLAX

SFLAX

Well-Known Member
Depends....many reasons to pay off all debt and many reasons not to. Can the liquid cash be used to enhance profitability or allow for a better debt ratios, I have seen 6% 15 years loans moved to 8% 20 year loans to free up cash. I do agree a 4% loan is basically free money. But my opinion will always be that I would rather take that free cash and put it into something that makes me money. Also, how old you are plays a roll in what you do.
 
CoffeeIcePapers

CoffeeIcePapers

Well-Hung Member
SFLAX said:
Most Americans are complete morons and cant understand a simple loan terms. And most will have nothing in savings and have debt when they should be retiring. Once you get into spreads, indexes, GDP, inflation..etc, you have exceeded 95% of most peoples knowledge. I do appreciate your opinion of a man that has a simple way and wants people to be debt free, and save something. Now, if your implying that I am a moron. Please don't, I actually do the math for many small business looking to acquire debt to create cost savings. A lot of people I work with, who have successful business, don't understand this stuff as well. But my opinion is, in the long run, I want all my money to go towards me as fast as possible. That means paying off debt fast.
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I learned about interest rates in middle school and I went to a pretty bad public school. This is easy math, with a million online calculators. Anyone with a middle school education and 5 minutes and can educate themselves about interest rates and debt. If you want to pay off debt fast, then doesn't it make more sense to pay off your $2000 credit card at 19%, rather than paying off your $300 gas card payment with an introductory rate of let's say 2%?

I agree that it's obvious there is a certain segment of the population who shouldn't be responsible for handling their own finances and who act on impulse rather than logic when it comes to financing and debt, but Darwinism takes care of them eventually. Sink or swim.
 
SFLAX

SFLAX

Well-Known Member
Your right, but most kids these days don't pay attention and could careless. My generation created this housing bubble why, we wanted it now. Leason learned. Agree with the interest way of doing things. But again, sometimes the simple way is the best way.
 
slushie

slushie

F2TH C56X C500
drunkenbeagle said:
free money
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:::facepalm:::

I agree with the bulk of this conversation.
Mathematically: highest interest debt first.
Psychologically (for some...I'm guessing not the types who become pilots): lowest balance "snowball" bologna.

Debt repayment has a guaranteed ROI. All other investment is speculative. However, a conservative business model can provide a (speculative) ROI that's exponentially higher than any mortgage or credit card.
 
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