The dark side of the pilot shortage.

ComplexHiAv8r said:
Don’t follow me on FB then.... BBQ overload... 8) Sent from my iPhone using Tapatalk
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Or you can just like, invite me over =)
 
Ecl!pse said:
This is a good question, and I think it's one of the travesties of our education system. In my opinion, personal finance should be a mandatory high school class. I get that much should can/should be taught at home, by the parents, but with the large number of people who are uninformed on this topic I think it needs to start with the schools. Replace one elective course with a personal finance course and I think it would do wonders.

@ATN_Pilot is very well versed on all of this, so please jump in if you spot any issues with the below.

Short, simple answer @thegriffinpages : any time your loan's interest rate is lower than what you could reasonably get by investing your money elsewhere (i.e. the S&P 500), you should be investing any excess cash you have into the market rather than into repaying your loan faster. At the end of your loan, you will have more money in your bank account than you otherwise would have had if you simply accelerated the repayments of your loan. There is an element here that we should discuss about risk-adjusted returns, but we can save that maybe for another thread in the Investing forum (see below for a flavor of this, if interested).

Longer answer with a simple example:

Say on 12/31/2016, you took out a $100 loan, with a term of 1-year and an interest rate of 4%. For simplicity, assume you paid both the $100 principal and $4 interest on 12/31/2017, with no other payments in between.

Scenario 1: suppose you woke up on 1/1/2017 and decided you actually didn't want the loan, so you give the money back to the bank, without penalty. You're effective return was 4%, since you avoided the $4 interest payment and saved yourself this expense.

Scenario 2: suppose you woke up on 1/1/2017 and decided to invest your $100 loan into the SPY S&P 500 Spider Index. Well, in 2017 SPY returned ~21%, so your $100 would have grown to $121. On 12/31/2017, you could have repaid your $100 principal back in full, paid the $4 interest charge, and had $17 left over to keep for yourself.

This example obviously works because the stock market did so well last year, but it illustrates the general principle: simply repaying any debt "as fast as possible" can actually be value destructive, and perhaps very value destructive at that. Generally speaking, the S&P's 90-year annual average return is ~10%, so if your interest rates are less than say, 7%, you are mathematically better off making only the minimum payments and investing your excess money into the markets. If you're interest rates are close to this (say, 7% or higher), you are better off repaying the loan faster as this represents the best return you can get on your cash. I use 7% only as an illustrative example to show that there should be a spread/gap between your target minimum prepayment interest rate and your target stock market return. Repaying your loan is considered "risk free", since you are guaranteeing that you save yourself from future 7% interest payments. Investing in the stock market is not "risk free", so the 3% gap between your target interest rate and the market return represents the compensation you require for the extra risk of losing your principal.

Hopefully this helps. We should probably create a separate thread for further discussion and to not continue derailing the thread.
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Thank you! That makes total sense to me!
 
NovemberEcho said:
To be fair though your friend had CC debt, so interest rate probably above 15%, quite a bit higher than 4% used in the example.
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The same principle still applies. Pay off the highest interest rate first. Paying off a card with a 27% interest rate with a $5,000 balance instead of a card with a 10% interest rate with a $4,500 balance will make a big difference in the end. But that POS Ramsey would have you do the opposite.
 
thegriffinpages said:
Thank you! That makes total sense to me!
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My pleasure! Apologies for the numerous typos in the post, going back through and re-reading made me cringe.

NovemberEcho said:
To be fair though your friend had CC debt, not loans, so interest rate probably above 15%, quite a bit higher than 4% used in the example.
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This is of course true, and the example was only meant to be a simple illustration. The point in my very last paragraph is worth repeating: as your interest rates start to approach/exceed typical market returns, you should repay them first/faster, systematically starting with your highest interest rates and working your way down as balances are reduced (I.e high-yield credit card balances). As you start to work down toward your mortgage, which is secured and should have a relatively low interest rate, you should be looking to invest your excess money instead of repaying the loans faster.

TL;DR version: invest your money where it generates the best annual return.
 
ATN_Pilot said:
The same principle still applies. Pay off the highest interest rate first. Paying off a card with a 27% interest rate with a $5,000 balance instead of a card with a 10% interest rate with a $4,500 balance will make a big difference in the end. But that POS Ramsey would have you do the opposite.
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Now I'm confused. I assumed that's what the op's friend did and everyone was saying that was wrong. Must have misread the original post.

Edit: just googled the snowball method.
 
NovemberEcho said:
Now I'm confused. I assumed that's what the op's friend did and everyone was saying that was wrong. Must have misread the original post.
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No, the friend did what Ramsey recommends: paying off the smallest balance first, with no regard to interest rates. He calls it the "debt snowball." It's asinine. It defies math. If there was any justice in the world, Ramsey would be in prison for all the money he's costed people by advocating this garbage.
 
NovemberEcho said:
Now I'm confused. I assumed that's what the op's friend did and everyone was saying that was wrong. Must have misread the original post.

Edit: just googled the snowball method.
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The biggest thing was my friend needed to pay off the balances to develop a history of regular payments which helps raise credit score. It’s very hard to accomplish anything with a crappy credit score.

After his credit improved he could start to worry about interest rates. At the time, he could consolidate his payments and have one interest rate instead of multiple lines of credit with varying rates.
 
ZapBrannigan said:
I don’t know... I’d pony up for Mint if I was going someplace JetBlue flew. Just to try it. Sent from my iPhone using Tapatalk
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It really does look nice, as do some of the premium offerings for transcon from Delta and United. Otherwise, domestic first class is a joke.

Unless you are tall enough to need the little extra leg room required, enjoy having to pick between two meal choices that you don’t care for, or can drink a couple hundred dollars worth of cheap booze, it’s not worth it.
 
thegriffinpages said:
The biggest thing was my friend needed to pay off the balances to develop a history of regular payments which helps raise credit score. It’s very hard to accomplish anything with a crappy credit score.

After his credit improved he could start to worry about interest rates. At the time, he could consolidate his payments and have one interest rate instead of multiple lines of credit with varying rates.
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No, no, no. You have to worry about the interest rates from the beginning. There were two things causing the most damage to your friend’s credit score:

1. The high debt/credit ratio; and
2. The poor payment history

The second problem is easy to fix: start paying your bills on time every month and the score will start to rise. There’s no way to make it happen sooner, it’s just a waiting game for those missed payments to start dropping off the look-back.

The first problem is where the method of paying down the balance matters, though, because you are in direct control of how quickly your score improves on that front. If you follow Ramsey’s advice, it will take you much longer to reduce your debt/credit ratio, which means it will take much longer to improve your score. Paying the highest interest rate first is imperative to reducing that ratio as quickly as possible.

Screaming_Emu said:
It really does look nice, as do some of the premium offerings for transcon from Delta and United. Otherwise, domestic first class is a joke.

Unless you are tall enough to need the little extra leg room required, enjoy having to pick between two meal choices that you don’t care for, or can drink a couple hundred dollars worth of cheap booze, it’s not worth it.
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Disagree completely. Especially as a fatass. :) That wider seat is worth its weight in gold, even on short flights. Now for your skinny ass, doesn’t make much difference, I suppose. Until you’re stuck between two fatasses like me. Then you’ll wish you had that wider seat. :)

Also, I’ll say that the food on Delta, particularly for dinner, is outstanding.
 
ATN_Pilot said:
No, no, no. You have to worry about the interest rates from the beginning. There were two things causing the most damage to your friend’s credit score:

1. The high debt/credit ratio; and
2. The poor payment history

The second problem is easy to fix: start paying your bills on time every month and the score will start to rise. There’s no way to make it happen sooner, it’s just a waiting game for those missed payments to start dropping off the look-back.

The first problem is where the method of paying down the balance matters, though, because you are in direct control of how quickly your score improves on that front. If you follow Ramsey’s advice, it will take you much longer to reduce your debt/credit ratio, which means it will take much longer to improve your score. Paying the highest interest rate first is imperative to reducing that ratio as quickly as possible.



Disagree completely. Especially as a fatass. :) That wider seat is worth its weight in gold, even on short flights. Now for your skinny ass, doesn’t make much difference, I suppose. Until you’re stuck between two fatasses like me. Then you’ll wish you had that wider seat. :)

Also, I’ll say that the food on Delta, particularly for dinner, is outstanding.
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Right and now that you’ve explained it it to me it makes complete sense.

And from one fatass to another, first class is the way to go! ;)
 
thegriffinpages said:
Right and now that you’ve explained it it to me it makes complete sense.
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You see that, Ramsey defenders? This is how it works when someone actually learns about finances instead of being treated like an idiot who can't possibly learn math, which is how Ramsey treats his listeners and readers. People can learn. All it takes is someone teaching them the right way to do things instead of using gimmicks that you can trademark and make money from. Therefore, there is no defense of Ramsey.
 
To be fair to Ramsey, multiple studies have shown that statistically you're more likely to completely eliminate your debt using the snowball method than the higher interest first method. This from the Kellogg School of Management at Northwestern and Harvard Business Review.
 
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Screaming_Emu said:
It really does look nice, as do some of the premium offerings for transcon from Delta and United. Otherwise, domestic first class is a joke.

Unless you are tall enough to need the little extra leg room required, enjoy having to pick between two meal choices that you don’t care for, or can drink a couple hundred dollars worth of cheap booze, it’s not worth it.
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Drinking a couple hundred dollars worth of cheap booze is pretty much my jam.

That and eating at Applebee's on the overnight.
 
NovemberEcho said:
To be fair to Ramsey, multiple studies have shown that statistically you're more likely to completely eliminate your debt using the snowball method than the higher interest first method. This from the Kellogg School of Management at Northwestern and Harvard Business Review.
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This wasn’t an actual expirement. There weren’t two groups of consumers, each taught both ways by good teachers, and then left to do it. Rather, it was only an examination of a single data set provided by a debt consolidation company. The comsumers weren’t taught and coached.
 
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