Paying down debt vs. investing

The issue that you keep skipping over is the large number of people that need help making changes in the way that they approach and handle money. That is where Ramsey gives good advice.

The people that follow Ramsey and learn how to get out of debt, even if it is in an inefficient manner, are even further ahead of those that can't make the psychological adjustments and get to retirement with out of sight credit card debt, leased cars, and homes with multiple mortgages.
 
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It's not about math, it's about psychology.

Doing it based strictly on the math is for the people that have conquered society's lessons about instant gratification and overt consumerism.

Both have their place.
 
What's the consensus from the brain trust regarding leasing cars? I'm sure Dave would go berserk at the thought but I'd take advice from my coffee cup before him.
 
I don't particularly care for Mr. Ramsay, but I will say that while paying down debt isn't necessarily a good long term investment, it might be worth noting that on a medium time frame a low debt level might be more advantageous than investing. Long term, investing your money is almost always better than paying down your debt, that said, aviation is fickle. Sometimes it's better to be able to have low debt so that you don't run into cash-flow problems. It may better to be out of debt (that is to say, no financial obligations) when you get furloughed than to have a good portfolio. Personally, while investing is a "wiser" choice for me and my family long term, it is less risky to pay down debt for us. When you invest that money, it's not exactly like you can spend it again tomorrow, in contrast, by having savings and paying down debt my recurring financial responsibilities decrease - indeed, by paying ahead on bills I could stop paying ahead for an extended period of time if necessary and not default. Yes, I lose out on inflation and interest and a whole host of other things - but if I get sick or injured or laid off we have a cushion while I find an income source.

If you've been investing diligently for the last 10 years and you get furloughed when your airline goes tango-uniform and the combination of student loans, mortgage, and car payment causes you to default on a loan or two or cash out your investments and pay a penalty to stay afloat then you probably didn't make the right choice. Again, like everything else, all of this stuff is a gamble.
 
UAL747400 said:
I don't think you did. I haven't seen the portfolios of @ATN_Pilot or @dasleben or a few others that I feel have offered useful insight, but the book list alone in another thread is bang on and their insights have lead to better "google" searches. No, you can't just Google "how to make money", sorry.

Again, sorry, paying off low interest debt is idiotic. Which is recommended to not do, not only in this thread, but also in every rationally written literature out there. In other words Ramsey thinking is idiotic. Money doesn't care how you feel. You can make hundreds of thousands if not millions if you take emotion out of it
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I'm not disagreeing with this.
I was only making comment on what YOU wrote, not what has been stated here or on any other website.
YOU wrote (and I paraphrase): "I know a couple of guys that know where you can go get information"
 
mikecweb said:
What's the consensus from the brain trust regarding leasing cars? I'm sure Dave would go berserk at the thought but I'd take advice from my coffee cup before him.
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I would do it and write it off as a business expense problem is there are no leases in the world that give you 25k miles a year haha. Buying cheap beaters is what I'll do instead.
 
Cessnaflyer said:
Which is why you would want to be paying your money to a fund or stock instead of a banker. Even if you pay your minimum payment but break it up to two monthly payments can shave off a year or more from the term you are telling me you wouldn't do that to save a year of mortgage payments?
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The bi-weekly mortgage (two payments per month) is another fallacy. While it does reduce the term of the mortgage, it is not because you are making two payments per month. It is because their are 26 bi-weekly periods in the year. You are effectively making a 13th payment against the principle every year. You would achieve the same effect by simply making a 13th payment towards principle at the end of the year, or making an additional principle payment every time you have 3 pay cycles in one month.

But that does not change the underlying math. You are better off investing that surplus cash into a brokerage account buying dividend paying stocks, which are currently taxed at 0% or 15%, or in a Roth IRA, which is taxed at 0%.

The US tax code is set up for suckers in a lot of ways - current taxes on capital gains and dividends are so low, that you are possibly better off in taxable accounts than your are in a traditional retirement account.

Another argument, also false, is the "Why would you want to pay $12,000 in mortgage interest, in order to save $4,000 in taxes?" I've heard that one a lot as well. The fallacy here - avoiding the mortgage interest would require you to already have the $200,000 to pay off the mortgage. But even if you did happen to have the cash sitting around, it would be better off in a dividend paying stock index. The dividend alone would just about equal the difference in mortgage interest. Plus, you can move $5,000 of it per year into an IRA. Plus, you will likely see capital appreciation of the stock index over time. You already benefit from the capital appreciation of the house, whether it is paid off or not.
 
drunkenbeagle said:
The bi-weekly mortgage (two payments per month) is another fallacy. While it does reduce the term of the mortgage, it is not because you are making two payments per month. It is because their are 26 bi-weekly periods in the year. You are effectively making a 13th payment against the principle every year. You would achieve the same effect by simply making a 13th payment towards principle at the end of the year, or making an additional principle payment every time you have 3 pay cycles in one month.
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Not talking about bi-weekly payments. I deal with this everyday I know what I am talking about. You can shave about 1-4 years depending on terms by paying the exact same amount but breaking it up into 2 monthly payments. If you pay even a small amount more it makes an even bigger dent. With today's market rates paying extra is ill advised because you will beat it with investments. But breaking up your one monthly payment into 2 payments is a no brainer.

We are also talking about different spectrum here with amount of money as well. If there is $10,000 left on a mortgage and you have $15,000 extra after savings and investments you should probably pay it off because the tax benefit will be negligible.
 
Cessnaflyer said:
Not talking about bi-weekly payments. I deal with this everyday I know what I am talking about. You can shave about 1-4 years depending on terms by paying the exact same amount but breaking it up into 2 monthly payments. If you pay even a small amount more it makes an even bigger dent. With today's market rates paying extra is ill advised because you will beat it with investments. But breaking up your one monthly payment into 2 payments is a no brainer.
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That depends upon two things. First, your mortgage needs to allow partial payments to be applied when they are received. It also requires the mortgage to amortize at least biweekly, but ideally daily. Assuming both of these conditions are true, yes, you will save that amount of interest for the amount of principle over two weeks. Mine allows neither.

So, how much is that? Lets say for a $100,000 mortgage, at 3.5%, you are paying about $150/mo in principle, and $300 in interest per month. BUT, if allowed, the early payment would reduce the $100,000 principle to $99,925! So we aren't paying interest on $75. For two weeks. At 3.5%, or 0.0673% per week. So you will save about $0.11. Eleven cents. You are after all still paying $99,925 * .0673% * 4 = about $300 for the interest anyway. I personally don't think it is worth the cost of 12 stamps per year. The effect becomes even smaller over time, as principle becomes most of the payment anyway.

Obviously, this will add up over time, and the savings are bigger with a higher interest rate. But it is mostly a gimmick, and usually products like this have some sort of fee attached to them. Usually a processing fee to set up, and a processing fee for each additional payment (which is more than the savings you would realize).

But anyway, it is worth doing the math with real numbers to see if products like this are appropriate or not. The marketing materials are often deceptive, so you really should do your own math.
 
drunkenbeagle said:
The bi-weekly mortgage (two payments per month) is another fallacy. While it does reduce the term of the mortgage, it is not because you are making two payments per month. It is because their are 26 bi-weekly periods in the year. You are effectively making a 13th payment against the principle every year. You would achieve the same effect by simply making a 13th payment towards principle at the end of the year, or making an additional principle payment every time you have 3 pay cycles in one month.

But that does not change the underlying math. You are better off investing that surplus cash into a brokerage account buying dividend paying stocks, which are currently taxed at 0% or 15%, or in a Roth IRA, which is taxed at 0%.

The US tax code is set up for suckers in a lot of ways - current taxes on capital gains and dividends are so low, that you are possibly better off in taxable accounts than your are in a traditional retirement account.

Another argument, also false, is the "Why would you want to pay $12,000 in mortgage interest, in order to save $4,000 in taxes?" I've heard that one a lot as well. The fallacy here - avoiding the mortgage interest would require you to already have the $200,000 to pay off the mortgage. But even if you did happen to have the cash sitting around, it would be better off in a dividend paying stock index. The dividend alone would just about equal the difference in mortgage interest. Plus, you can move $5,000 of it per year into an IRA. Plus, you will likely see capital appreciation of the stock index over time. You already benefit from the capital appreciation of the house, whether it is paid off or not.
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It's entirely based on individual circumstances. It doesn't make sense for me to put additional money into my house because a simple index will beat what I pay in interest/pmi annually. However, if a person bough high, with bad credit and is carrying around a 7% mortgage, unable to refi due to being underwater and with housing not appreciating at near the rate it used too, they should be working on getting that house paid off.

A house is not the great investment people claim it to be. Yeah it appreciates, but aside from that run on real estate in the early 2000's, it typically is a wash financially. When you figure in taxes, interest paid, PMI if you had/have one, repairs needed, inflation, taxes on the sale of the home as well as realtor fees, it becomes a much less lucrative investment. You could buy in an area that is "up and coming" in a city or buy a heap of trash at an auction or as an estate sale, but if you buy at market value, in an established area, for a decent home the upside is not that great.
 
drunkenbeagle said:
That depends upon two things. First, your mortgage needs to allow partial payments to be applied when they are received. It also requires the mortgage to amortize at least biweekly, but ideally daily. Assuming both of these conditions are true, yes, you will save that amount of interest for the amount of principle over two weeks. Mine allows neither.

So, how much is that? Lets say for a $100,000 mortgage, at 3.5%, you are paying about $150/mo in principle, and $300 in interest per month. BUT, if allowed, the early payment would reduce the $100,000 principle to $99,925! So we aren't paying interest on $75. For two weeks. At 3.5%, or 0.0673% per week. So you will save about $0.11. Eleven cents. You are after all still paying $99,925 * .0673% * 4 = about $300 for the interest anyway. I personally don't think it is worth the cost of 12 stamps per year. The effect becomes even smaller over time, as principle becomes most of the payment anyway.

Obviously, this will add up over time, and the savings are bigger with a higher interest rate. But it is mostly a gimmick, and usually products like this have some sort of fee attached to them. Usually a processing fee to set up, and a processing fee for each additional payment (which is more than the savings you would realize).

But anyway, it is worth doing the math with real numbers to see if products like this are appropriate or not. The marketing materials are often deceptive, so you really should do your own math.
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I agree with the numbers you have provided. 99% of the mortgages I've seen clients get the interest is amortized daily so it does help more to pay an amount more often. Most of the lenders we work with we make sure they are flexible on how payments are accepted this helps with fighting interest as well. One thing I have not seen though is an interest rate in the 3% range unless it is a 20 year or shorter and this is where the math works in the favor of doing the two payments.
 
Cessnaflyer said:
One thing I have not seen though is an interest rate in the 3% range unless it is a 20 year or shorter and this is where the math works in the favor of doing the two payments.
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The average 30 year loan is around 3.89%, so I would expect many borrowers doing better than that. Mortgage brokers are obviously higher (as they are paid by padding the rates).

The math will be most in favor of this at the end of the loan's term, with a high interest rate. Keep in mind, very, very few mortgages last 30 years. Around 25% per year are paid off, they have an average life of 5 years or so. (people move and refinance), so the savings on the end of a loan are largely academic.
 
drunkenbeagle said:
The average 30 year loan is around 3.89%, so I would expect many borrowers doing better than that. Mortgage brokers are obviously higher (as they are paid by padding the rates).

The math will be most in favor of this at the end of the loan's term, with a high interest rate. Keep in mind, very, very few mortgages last 30 years. Around 25% per year are paid off, they have an average life of 5 years or so. (people move and refinance), so the savings on the end of a loan are largely academic.
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Who is giving out rates like that? That would be a 20 year rate or paying some points to get that. Most 30 years are at 4.1% and if they have average credit tack on another half percent.
 
Time to chime in. I left aviation for finance and I talk to 50-80 people a day that decided to invest instead of paying off debt. They are calling me for 401k loans, in-service withdrawals, and hardship withdrawals. I've had three last week that didn't know what a savings account even was. Now, no one here is in the same boat as the people I deal with on a daily basis, but working where I do, I've decided to pay down debt first. It IS a personal decision that each person or household MUST make for themselves but for mine it makes more sense to have a larger cash reserve.

What most people don't do is read their Summary Plan Description in their 401k. What it will tell you is that to get access to those retirement funds it takes time and will cost, what I consider a lot, in early withdrawal penalties and taxes when the unexpected happens and they need money out of their account. Most people don't understand that even when explained but because they don't have a cash reserve they have no other choice but getting into those funds.

Obviously there are other investment account options but I'm reminded daily of why a high debt load doesn't pay.
 
brian434 said:
What most people don't do is read their Summary Plan Description in their 401k. What it will tell you is that to get access to those retirement funds it takes time and will cost, what I consider a lot, in early withdrawal penalties and taxes when the unexpected happens and they need money out of their account. Most people don't understand that even when explained but because they don't have a cash reserve they have no other choice but getting into those funds.
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I've witnessed this happen to some very close family members of mine, and it has had an incredibly negative impact on my life as they have depleted their entire 401Ks and accrued life damning debt :mad:. My wife and I have our priorities set on eliminating debt, saving money, and investing in assets such as a house. Once in a safe spot, I may begin to invest money in other ways. What is also foolish I've seen is people mismanage their 401Ks and not get the growth out of their 401K that they could or should have... My goal is to not touch my retirement until I can take out my money without penalty. I've already started investing in my retirement, and I've got 40+ years ahead of me to continue to invest in retirement.

My 2 cents. If your employer offers 401K matching, DO IT. I have 5% taken from my paycheck, and my employer matches 7%. Not to mention interest accruing on investments is in the neighborhood of 10-20 percent annual gains. It's FREE money.
 
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Cessnaflyer said:
Where are you getting 10-20% in interest?
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It's in my 403(b) retirement fund. Been getting a steady return lately of about 10% some investments are doing better than others. I've diversified it a little bit, but the one that's done the best for me is the Vanguard 500 Index fund. Right now it's about 12% up from the money I've put into it so far. Been investing for a little over a year.

I need to make a correction there. I misspoke, not a percent gain off interest. Just a percent gain on the investment.
 
JustinS said:
It's in my 403(b) retirement fund. Been getting a steady return lately of about 10% some investments are doing better than others. I've diversified it a little bit, but the one that's done the best for me is the Vanguard 500 Index fund. Right now it's about 12% up from the money I've put into it so far. Been investing for a little over a year.

I need to make a correction there. I misspoke, not a percent gain off interest. Just a percent gain on the investment.
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I would have been amazed if that was interest.
 
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