Paying down debt vs. investing

Saying that all investment is speculative may be theoretically true, but it isn't in practice. We all know that stock market is going to continue generating returns over the long term unless WWIII wipes us out, in which case it doesn't really matter. So let's throw out the idea that investing is speculative. That faulty premise is what encourages a lot of people to not invest, and they miss out on millions of dollars in returns.
 
@slushie, now you're just making yourself look foolish. Let's look at the return of two people, both retiring at the age of 65 after beginning their careers and their investing at the age of 25. One retired in 2005, the other in 2008.

The 2005 retiree began investing in 1965. Investing in an S&P 500 index fund, reinvesting dividends, he saw a compounding annual return at retirement of 10.25%.

The 2008 retiree began investing in 1968. Investing in the same S&P 500 index fund, also reinvesting dividends, he saw a compounding annual return at retirement of 8.92%.

Now, clearly anyone would be happy to get an extra 1.32% per year. But the returns were not "speculative." Both investors got big returns on their money, far exceeding inflation. And that's despite the fact that the second guy retired at the worst possible point.

As @NickH said, long term is long. Individual market corrections, even big ones, don't matter all that much over long periods of time, even if you start withdrawing your money at the bottom of that correction.
 
The only thing the snowball thing does, is free up cashflow short term.. And some people (a lot of people) need a short term reward to stick it through.. So a couple points would be better here or there? It won't matter if they never pay off that first debt...
 
Indeed. I stupidly followed the snowball theory. Paid off all my debt with my aerial survey job, and in the last three years, I missed out on about 3 grand in growth by my estimate so far. Not a lot in the grand scheme of things I suppose, but by age 60, that number will be an entire BMW 3 series! :)

I still don't know jack about investing, but one thing I do know for sure, debt is a tool, not a burden. It frees up lots of your income for stashing away
 
ATN_Pilot said:
@slushie, now you're just making yourself look foolish. Let's look at the return of two people, both retiring at the age of 65 after beginning their careers and their investing at the age of 25. One retired in 2005, the other in 2008.

The 2005 retiree began investing in 1965. Investing in an S&P 500 index fund, reinvesting dividends, he saw a compounding annual return at retirement of 10.25%.

The 2008 retiree began investing in 1968. Investing in the same S&P 500 index fund, also reinvesting dividends, he saw a compounding annual return at retirement of 8.92%.

Now, clearly anyone would be happy to get an extra 1.32% per year. But the returns were not "speculative." Both investors got big returns on their money, far exceeding inflation. And that's despite the fact that the second guy retired at the worst possible point.

As @NickH said, long term is long. Individual market corrections, even big ones, don't matter all that much over long periods of time, even if you start withdrawing your money at the bottom of that correction.
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What tool did you use to calculate that? I'm sure the negative returns of 2000, 2001, and 2002 were devastating to this theoretical portfolio that is 100% invested in an SP index fund. Obviously, it's pretty stupid to expose yourself to that much risk that close to retirement.
 
mojo6911 said:
What tool did you use to calculate that? I'm sure the negative returns of 2000, 2001, and 2002 were devastating to this theoretical portfolio that is 100% invested in an SP index fund. Obviously, it's pretty stupid to expose yourself to that much risk that close to retirement.
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You know, there are about 5,000 calculators on the interwebz that will let you check this. You might want to consider checking one before making yourself look foolish next time.
 
ATN_Pilot said:
You know, there are about 5,000 calculators on the interwebz that will let you check this. You might want to consider checking one before making yourself look foolish next time.
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How did I make myself look foolish, when I simply asked you a question? You can't simply average out a return with compounding interest and call it a day. For example, a year 1 loss of 50% and a year 2 gain of 50% would average to a break even return, but that isn't really what happens with compounding interest. Also, I don't believe you are accounting for inflation in your calculations.

I would just like to see where you came up with your numbers, that is all. No need to be such a prick all the time.
 
mojo6911 said:
How did I make myself look foolish, when I simply asked you a question?
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Perhaps I read you wrong, but it seemed to me like you were refuting the data, which is irrefutable.

You can't simply average out a return with compounding interest and call it a day.
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Actually, yes you can. That's all that matters, in fact.

For example, a year 1 loss of 50% and a year 2 gain of 50% would average to a break even return, but that isn't really what happens with compounding interest.
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That's incorrect. Your example would result in a 25% net loss, or a compounding loss of 13.4% per year. In order to break even, you would have to have a 100% return in the second year.

I would just like to see where you came up with your numbers, that is all.
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I can't remember which calculator I used, but as I said, there are tons of them on the internet. Find one and run the numbers yourself. As I said, they are irrefutable. It's just basic math.
 
Don't forget your own human factor. The fact is that most people, when given expendable income will spend it instead of save it. That's why you should continue to save regularly as you pay down your debt. Set up investment deductions that come out without ever thinking about it. The less you have to think about your own retirement money the better off you'll be.
 
USAviationRecruiter said:
Don't forget your own human factor. The fact is that most people, when given expendable income will spend it instead of save it. That's why you should continue to save regularly as you pay down your debt. Set up investment deductions that come out without ever thinking about it. The less you have to think about your own retirement money the better off you'll be.
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Pay yourself before paying everyone else.

It's amazing to tell people that I invest 25% of my income after debt and they look at me like I'm crazy. We'll see who's crazy when i can retire at 60 if I want.
 
Great idea, but if I paid myself first, the people I owe would take it. I believe how can you invest at 8% ROI, while paying off CC debt or other high interest stuff. Now for mortgages and other low interest long term loans, I plan on accelerating my pay off. But that's just me.
 
ATN_Pilot said:
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
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Here is an actual model, to keep us all honest. This assumes a $100,000 mortgage, with either and extra $400/month going to mortgage principle, or going into a ROTH IRA investing only in an S&P 500 Index fund, dividends reinvested. I assume a worst case of the S&P returning only a 2% dividend yield, and an average case of the S&P having a total return of 9% (average over that last 90 years or so). I also assume a marginal 28% tax rate, with cumulative savings on the interest deduction. I also assume the tax savings aren't invested (but should be).

Year Cumulative Cumulative Balance Cumulative Yearly Interest Tax Savings Cummulative S&P 2% S&P 9%
Interest Principal Payments Payments Tax Savings
1 3,968.04 1,755.96 98,244.04 5,724.00 1,755.96 3,968.04 1,111.05 14689.92 15734.88
2 7,864.54 3,583.46 96,416.54 11,448.00 1,827.50 3,896.50 1,091.02 19783.71 21951.0192
3 11,686.58 5,485.42 94,514.58 17,172.00 1,901.96 3,822.04 1,070.17 24979.39277 28726.61093
4 15,431.14 7,464.86 92,535.14 22,896.00 1,979.44 3,744.56 1,048.48 30278.98062 36112.00591
5 19,095.05 9,524.95 90,475.05 28,620.00 2,060.09 3,663.91 1,025.89 35684.56024 44162.08644
6 22,675.03 11,668.97 88,331.03 34,344.00 2,144.02 3,579.98 1,002.39 41198.25144 52936.67422
7 26,167.65 13,900.35 86,099.65 40,068.00 2,231.37 3,492.63 977.94 46822.21647 62500.9749
8 29,569.37 16,222.63 83,777.37 45,792.00 2,322.28 3,401.72 952.48 52558.6608 72926.06264
9 32,876.47 18,639.53 81,360.47 51,516.00 2,416.90 3,307.10 925.99 58409.83401 84289.40828
10 36,085.11 21,154.89 78,845.11 57,240.00 2,515.36 3,208.64 898.42 10103.83 64378.0307 96675.45503
11 39,191.27 23,772.73 76,227.27 62,964.00 2,617.84 3,106.16 869.72 70465.59131 110176.246
12 42,190.77 26,497.23 73,502.77 68,688.00 2,724.50 2,999.50 839.86 76674.90314 124892.1081
13 45,079.27 29,332.73 70,667.27 74,412.00 2,835.50 2,888.50 808.78 83008.4012 140932.3979
14 47,852.25 32,283.75 67,716.25 80,136.00 2,951.02 2,772.98 776.43 89468.56922 158416.3137
15 50,505.00 35,355.00 64,645.00 85,860.00 3,071.25 2,652.75 742.77 96057.94061 177473.7819
16 53,032.62 38,551.38 61,448.62 91,584.00 3,196.38 2,527.62 707.73 102779.0994 198246.4223
17 55,430.02 41,877.98 58,122.02 97,308.00 3,326.60 2,397.40 671.27 109634.6814 220888.6003
18 57,691.88 45,340.12 54,659.88 103,032.00 3,462.13 2,261.87 633.32 116627.375 245568.5743
19 59,812.70 48,943.30 51,056.70 108,756.00 3,603.19 2,120.81 593.83 123759.9225 272469.746
20 61,786.71 52,693.29 47,306.71 114,480.00 3,749.99 1,974.01 552.72 17300.27 131035.121 301792.0231

The extra principle payment allows the non-S&P investing homeowner to pay off his mortgage in 10 years. Which sounds great, but in the worst case, the ROTH S&P investor owes $78,000 on the mortgage, but has $64,000 in his IRA, and $10,000 in savings on his taxes. He could just remove the principle from the IRA and pay off the mortgage. But that would be stupid. In the average case, he has $96,000 in the IRA, and $10k in tax savings... Hmmm, he could pay off the mortgage and still have $30k in a tax free retirement account. But either way, the IRA is yielding $2k/year in dividends, which is enough to pay the mortgage principle and interest at this point...

Going forward to 20 years, the ROTH IRA investor has a worst case balance of $131k and $17k in tax savings, and owes $50k on his mortgage. Assuming after paying of the mortgage the pay-of-house case saw the light and started investing, he would have a $100k house plus $64k in the IRA... Bummer, he didn't get any tax savings those last 10 years. He has $164k, vs the worst case early investor with $204k, and a $47k mortgage balance (but still $53k in home equity). The average case has our ROTH IRA investor sitting on $301,000, plus $17,000 in tax savings, and $47k in mortgage debt.

The average case has our ROTH investor $170,00 better off. But that money is better, as all of it is in a tax-free account. He can withdraw $96,000 of that, tax free, whenever he wants. And he can ultimately take all of it out, tax free, plus any additional gains in retirement.

***The worst case here is not realistic, as the S&P500 has never yielded only 2% over 20 years. There are plenty of near-zero-risk fixed income instruments you can buy that will do better than 2%, but the average S&P returns are going to be far far far better over 20 year stretches, every time.
 
mojo6911 said:
What tool did you use to calculate that? I'm sure the negative returns of 2000, 2001, and 2002 were devastating to this theoretical portfolio that is 100% invested in an SP index fund. Obviously, it's pretty stupid to expose yourself to that much risk that close to retirement.
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No, they were not devastating. The index price does not take into account the cumulative gains from dividends over the period. Amateur mistake, trap for the young players. You can look at a worst case period, say 1997-2008, where the market return looks flat going by price. But reinvesting dividends, that theoretical S&P portfolio was actually up 20% or 30%. Cash under the mattress was up 0%.

People who know what they are doing are generally looking for dividend yield, not prices.
 
That is all great, now factor in, income, living expense, kids, and maybe a okay job for the wife. And don't forget, 100k, is a little light on a 3 bedroom in a good school district. Don't forget the flying debt. I would love to put money away like that, but we are pilots and life has far exceeded our pay.
 
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