Poll

What should someone do with extra funds?

Invest
Payoff Debts

Author Topic: Let's settle this with a vote: Invest or payoff debts  (Read 42050 times)

Cheddar Stacker

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Let's settle this with a vote: Invest or payoff debts
« on: July 20, 2014, 09:52:10 PM »
Since this is nearly a daily question on the forum, I'd like to get a barometer as to where the majority lies on this question. Selfishly I'd also like to just provide a link to this poll every single time the question is asked so I can stop answering it. Obviously there are many variables that could effect your decision including:

1) Fixed or variable interest?
2) How high is the interest rate?
3) Is it tax deductible?
4) Do you get a company match on your 401k?
5) Are you maxing out your 401k?
6) What is your tax bracket?
7) How long until you retire?
8) How long until the debt will mature?
9) Is the stock market, AHEM, overvalued (just joking, ignore this one)?

Well I want you to ignore all that crap because there are just too many variables. Just assume it's not a hair on fire credit card type situation, and everything else is within the range where a reasonable person would ask themselves this question.

I'm going to delay my vote a bit so I can see what others think, but if you've been around a while you likely have a good idea where I stand.

So which camp are you in?

NeighborGuy

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #1 on: July 20, 2014, 10:04:21 PM »
I'm not an expert on these things, but it seems like a simple matter of asking whether the interest you'd get from investing would be more than the interest you would have to pay on the debt. Am I missing something?

Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #2 on: July 20, 2014, 10:23:34 PM »
I'm not an expert on these things, but it seems like a simple matter of asking whether the interest you'd get from investing would be more than the interest you would have to pay on the debt. Am I missing something?

The interest on the debt, presuming it's a fixed rate, is a known quantity. The "interest" (read "return on investment" or "ROR") you'd get from the investment is completely unknown. You can use historical averages as a baseline, but you are taking a risk that "past performance is indicative of future results" unless you are talking about buying some bonds or CDs.

Make sense?

Goldielocks

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #3 on: July 20, 2014, 10:38:17 PM »
I am okay with having up to two debts, that meet the threshold decision of lower than investment returns. E.g. much less than 4% interest.

After that it is hard to keep focused on you goals... Tendency is to juggle accounts creatively to justify simply not saving each and every day.   Too much working the 'angles' while pretending MMM when you have more than a couple of debts.

Everyone on this forum excluded I am sure...  This only applies to me and people 'out there'.....LOL

Therefore, I tend to be on the pay off debt side, before investing even when the loan rate is low.

Mazzinator

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #4 on: July 21, 2014, 12:15:47 AM »
Thank you!!!

Seriously, chedder..thank you!!!

I go back and forth between the two choices daily...shit, hourly sometimes...ggrrrrr...hoping this helps me decide once and for all ;)

Maybe..

MikeBear

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #5 on: July 21, 2014, 01:56:27 AM »
Pay off as much higher interest debt as you can, as fast as you can, and then snowball the money on investing.

dsiee

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #6 on: July 21, 2014, 05:05:30 AM »
I have a bit of a debt situation which is unusual and would love to hear your opinions.

I am a uni student in Australia and incur about $5k (usually around $4.6k but $5 k keeps it simple). I save pracicaly the same ever semester by working. My loan is indexed to inflation whilst I'm still at uni and only indexed once a year. Once I finish uni it will be indexed to the government bind rate with a max of 6%, I imagine it will be around the 5% to 6% mark most of the time.
Now for the catch, any lump sum payments I make are given a 5% bonus, so if I were to do a lump sum payment of $1000 I would have $1100 of debt removed. This deal is good for the entire period of the loan.

At the moment I plan to save by investing in index funds and destroy the $40k of debt I will have in the first year and a bit of working (will be a teacher starting on ~65k + superannuation, hopefully a tad more). However I change my mind on my approach often, to the point  ihave 4k waiting in a savings account for me to decide what to do.

So what would you all do?

Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #7 on: July 21, 2014, 06:39:40 AM »
Thank you!!!

Seriously, chedder..thank you!!!

I go back and forth between the two choices daily...shit, hourly sometimes...ggrrrrr...hoping this helps me decide once and for all ;)

Maybe..

You're welcome!!!

Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #8 on: July 21, 2014, 06:42:29 AM »
Now for the catch, any lump sum payments I make are given a 5% bonus, so if I were to do a lump sum payment of $1000 I would have $1100 of debt removed. This deal is good for the entire period of the loan.
...
So what would you all do?

The way you explained it there is around a 15% swing if you don't pay lump sum. Pay off as much as you can at that rate.

Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #9 on: July 21, 2014, 06:46:21 AM »

I'm not an expert on these things, but it seems like a simple matter of asking whether the interest you'd get from investing would be more than the interest you would have to pay on the debt. Am I missing something?

Plus the tax you'd pay on the investment income. Which is why for me and hubby, I choose pay down debt. I could be wrong but it's what I'm comfortable with given our situation.

If it's a tax deductible debt this is misleading. You should compare your after tax income to your after tax expense. So assuming 4% debt (tax deductible), 4% ROR, and a 25% tax bracket, both of them net to 3%.

samburger

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #10 on: July 21, 2014, 08:21:36 AM »
Folks mean two different things when they ask this question: 1) How do I think about the math and opportunity cost? OR 2) I understand the math, but is it okay if my gut prefers prioritizing one over the other?

The answer to #2 is always "Sure, why not?" as long as you really understand the math. If I had debt with a reasonable interest rate and zero assets, I would need to invest before I could really hit the debt hard. I understand the opportunity cost, but I would need to feel like I had upward momentum before I could throw my money into the debt pit. If I incurred debt today, I could go right into pay off mode because I already have investing success under my belt.

JCfire

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #11 on: July 21, 2014, 08:34:40 AM »
I think that there is no valuable answer to this question that doesn't rely on the variables that you're excluding.

Bert The Turtle

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #12 on: July 21, 2014, 08:37:22 AM »
I am okay with having up to two debts, that meet the threshold decision of lower than investment returns. E.g. much less than 4% interest.


This.

My general rule is to maximize the guaranteed return (i.e., debt payoff) before investing in something uncertain like equities (even though I know that the market always goes up).  Since the beta/volatility on personal debt will always be zero, my rule of thumb is to pay that off first before making investments.  Keep in mind though--as Cheddar Stacker mentions in point #4 of the OP--a company match on the 401k is also a guaranteed return.  So unless you're only getting something like a 20% match while carrying CC debt at 25%, you should max the 401k company match first.

That said, as goldielocks mentions I do have an investment threshold where I'll prioritize investing over debt payments.  My mortgage is fixed at 3.25% and is tax deductible to boot.  Plus, I do consider the house to be an investment.  It's not a high yield investment, and considering that I lost money on my house when I moved out of Cleveland in 2008, it's certainly not a risk-free investment either.  So when I weigh the <3.25% return on extra house payments against an average return of 8% from the S&P500 I'm happy to stick to the mortgage's 15 year payment plan.

Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #13 on: July 21, 2014, 08:37:56 AM »
Small sample size so far with 36 votes in, but I'm very surprised to see 2:1 debt to invest.

For those of you who would elect to pay down debt I have some genuine questions for you:
-What is your stock/bond ratio if you are holding investments?
-Do you see a major difference between paying down a fixed interest debt or investing in a bond?
-If you are an aggressive investor with a mix of at least 75% stocks, why would you take a conservative approach with your debts?

The only answer I can come up with is one I was faced with myself a few years ago: When your current cash flow can't service your debt load, it's clearly time to get rid of some of the monthly payments somehow. Does anyone else have another solid, logical reason for paying off debts other than the standard "it's a psychological win"? When I hear that, I think of a car warranty. It makes you feel warm and fuzzy, but it doesn't really do much for you.

Obviously there is no wrong answer here and it's a personal choice, I just thought this forum would be closer to 50/50 based on previous answers I've read.

Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #14 on: July 21, 2014, 08:41:32 AM »
I think that there is no valuable answer to this question that doesn't rely on the variables that you're excluding.

Fair point. It's a case by case basis, but there are too many variables to hone it in any further. I will find value in the poll as written, otherwise I wouldn't have written it the way I did. Hopefully others will as well.

What I'm asking is for you to fill in your own variables that fit within a range where you are considering both sides, then vote. If you choose not to participate I will not be offended.

ADK_Junkie

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #15 on: July 21, 2014, 09:03:48 AM »
I think investing is more important than debt paydown (given a reasonable level of aggregate debt). Why?

1) Pay yourself first.  Investing is truly paying yourself, while debt paydown is paying for past (and current) indiscretions (I use that term loosely as most need a roof over their head and wheels to get to work).
2) If you pay yourself first (say 20% of take-home), then you are still obligated to make your debt payments which are amortizing your principal outstanding.  So your debt is being reduced, however very slowly.
3) I believe it is good to be "hungry", meaning having as little extra disposable income as possible makes one more efficient and a harder worker.  This ensures you show up for work, make sensible spending decisions, and such.  I appraise businesses for a living and I can tell you that managers/owners that are flush with cash tend to waste it, while those with a manageable amount of debt are lean, efficient operating machines.
4) For those who believe in MMM, if we invest first, we will still have a burning desire to paydown our debt, and will/should strive for it.
5) Generally, the market has significantly outperformed most debt prices in the last decade (generally anything less than 5% interest is a pretty cheap borrowing cost).

While I am against debt, and believe it should be reduced/paid-off, I do believe paying yourself first is more important.

Cpa Cat

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #16 on: July 21, 2014, 09:14:00 AM »
I can't vote on this question without factoring interest rates! I can't!

It matters!

If you have $100,000 of student loans at 2% interest, then screw paying it off. Let that debt ride into the sunset!

My mortgage is at 4%. I'd love to have a paid off house. But I had an average of 30% gains last year in my investments. It would have been foolish to pay off my house. And yet I have a 10 year mortgage - I didn't go out and refi to a 30 year just so I could invest more.

How could I vote on this?! Ahhh! My brain is exploding!

Thegoblinchief

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #17 on: July 21, 2014, 09:16:11 AM »
I voted invest, particularly since someone with appreciable debt likely isn't maxing out registered accounts.

But it does really come down to the details.

Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #18 on: July 21, 2014, 09:28:15 AM »
I can't vote on this question without factoring interest rates! I can't!

It matters!

If you have $100,000 of student loans at 2% interest, then screw paying it off. Let that debt ride into the sunset!

My mortgage is at 4%. I'd love to have a paid off house. But I had an average of 30% gains last year in my investments. It would have been foolish to pay off my house. And yet I have a 10 year mortgage - I didn't go out and refi to a 30 year just so I could invest more.

How could I vote on this?! Ahhh! My brain is exploding!

Hah! Understood. I feel your pain.

I voted invest, particularly since someone with appreciable debt likely isn't maxing out registered accounts.

But it does really come down to the details.

Agreed.


Ok, for those that want details, my general thoughts when writing this in the opening post:
Quote
Just assume it's not a hair on fire credit card type situation, and everything else is within the range where a reasonable person would ask themselves this question.

were this is a reasonable, likely tax deductible debt somewhere in the 3.5-5.0% range. Given today's interest rate environment I think that's a solid range where people might swing one way or the other.

For the record, I would (and do) invest any surplus rather than pay down any additional debts, and I have debts within this range.

kaizen soze

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #19 on: July 21, 2014, 09:41:42 AM »
I would vote both, if I could.  I'm a hedger by nature.  In the absence of an all-of-the-above option, I vote to invest.

Spudd

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #20 on: July 21, 2014, 09:44:50 AM »
I vote max out tax-preferred options for investing, then pay down debt with the leftovers if any. That's what I've done and I'm happy with it.

hybrid

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #21 on: July 21, 2014, 09:49:20 AM »
I can't vote on this question without factoring interest rates! I can't!

It matters!

If you have $100,000 of student loans at 2% interest, then screw paying it off. Let that debt ride into the sunset!

My mortgage is at 4%. I'd love to have a paid off house. But I had an average of 30% gains last year in my investments. It would have been foolish to pay off my house. And yet I have a 10 year mortgage - I didn't go out and refi to a 30 year just so I could invest more.

How could I vote on this?! Ahhh! My brain is exploding!

This isn't an either/or option. We also do both. Rather than have every extra dime going to investments or paying off the mortgages we have about half going to investments and half going to rental and home mortgage. With healthy 401K balances we still reaped the benefits of the market last year. Had this been 2008-9 instead, and had I followed the same logic as above, I could have very likely had all the eggs in the wrong basket.

Every wealth manager stresses having a diversified portfolio, and I think the "correct" (for whatever that is worth) answer for a great number of people would be to do both.

tyd450

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #22 on: July 21, 2014, 09:52:56 AM »
I voted invest but I have been going back and forth with this one lately.  We have a $260k 30 yr at 3.5%.  We have been paying about $1k extra principal per month for the last 6 months but I just recently dropped it back down to the minimum payment as I think we would be better off saving/investing that extra $1k. The old plan had us set to pay off our mortgage in about 10 years or so.  It just felt like we were running a little too lean every month.  We are both maxing our 401ks and Roths but I didn't feel like we were doing enough taxable investing.

I figured that I can always make a large lump sum principal payment once per year if I get that burning desire but I didn't want to be locked into that commitment on a monthly basis.  My plan now is to throw whatever bonus I get towards the mortgage and hopefully that gets us there just as quick.

My FIRE plan is about a 10 year plan at the moment....or at least our FI plan.  In 10 years we should have built up a nice little nest egg and have a couple kids.  It would be great to have the house paid off as well.  We are in the pricey Chicago suburbs but all of our family lives in cheaper downstate IL so at that point we may consider moving down there to take advantage of the lower COL and pay cash for a house.


Bert The Turtle

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #23 on: July 21, 2014, 09:55:22 AM »
Small sample size so far with 36 votes in, but I'm very surprised to see 2:1 debt to invest.

For those of you who would elect to pay down debt I have some genuine questions for you:
-What is your stock/bond ratio if you are holding investments?
-Do you see a major difference between paying down a fixed interest debt or investing in a bond?
-If you are an aggressive investor with a mix of at least 75% stocks, why would you take a conservative approach with your debts?

The only answer I can come up with is one I was faced with myself a few years ago: When your current cash flow can't service your debt load, it's clearly time to get rid of some of the monthly payments somehow. Does anyone else have another solid, logical reason for paying off debts other than the standard "it's a psychological win"? When I hear that, I think of a car warranty. It makes you feel warm and fuzzy, but it doesn't really do much for you.

I'll answer the second paragraph first.  For me it's a little bit academic anymore since I don't really have any debt to speak of (mortgage excepted), but I suppose I see it as a risk mitigation strategy.  There's any number of reasons that my cashflow could be interrupted such as a job loss, injury, lawsuit, and so on.  The debt payments aren't optional, so if my cashflow were to be disrupted for some reason, I'd have to either drawdown my investments early (which could mean paying penalties/short term taxes/etc) or default on the debts.

Regarding your first three questions:
1. Without going into excruciating detail, I'm pretty aggressive with about 90/10 equities/bonds
2. The main difference is risk.  Let's say I try to service a $1000 debt at 5% by buying a $1000 bond with a 5% coupon rate (I know that math doesn't exactly work out, bear with me).  There's always a chance the company issuing the bond could go under and but I'd still be stuck with the debt.
3. Taking a conservative approach on my debts is a way to hedge against my aggressive investment strategy.

But ultimately, the most important thing to do is to minimize spending.  There are different risks/rewards to servicing debt vs. increasing investments, but you can't realize the gains from either strategy unless you're generating surplus cash flow.

Garnacerous

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #24 on: July 21, 2014, 10:07:32 AM »
I think the answer has some to do with your debt to income ratio. How much money is coming in vs going out to debt.

Unfortunately, I racked up a few student loans and picked up a mortgage before I discovered MMM, so my D/I is much higher than I'm comfortable with. Therefore, any "extra" cash I have from not paying down interest would get eaten up by commissions/fees if I were to buy a pile of stocks. Therefore, I prefer to free up my cash flow first to be able to make more significant purchases in the future to dilute those costs. Someone with a smaller D/I ratio would probably be comfortable enough to send a big chunk to invest.

All that being said, I still contribute to my tax advantaged accounts as much as possible since the benefits of employee match / tax breaks are too good  to miss out on.

Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #25 on: July 21, 2014, 10:13:19 AM »
Thanks for the response Bert, very good points. I'd like to counter one of them:

There's any number of reasons that my cashflow could be interrupted such as a job loss, injury, lawsuit, and so on.  The debt payments aren't optional, so if my cashflow were to be disrupted for some reason, I'd have to either drawdown my investments early (which could mean paying penalties/short term taxes/etc) or default on the debts.

I see your point about paying penalties, taxes, etc. if you had to cash out to service a loan, but at least you'd have that option. If you are 5 years into aggressively paying down a mortgage, you have about 8 more years until it's gone, and you lose your main source of income, you're screwed. How are you going to make your next $1,000 mortgage payment? And the next? The mortgage company does not care that you "pre-paid", they want the next months payment or they will eventually foreclose. The only way the debt payoff strategy mitigates this risk is if you complete it and are left with a $0 balance due.

Investing gives you much more flexibility, liquidity, and the ability to keep making payments and maybe pay off the entire debt at any point after some years of compounding.

Breaker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #26 on: July 21, 2014, 10:15:01 AM »
The thing is you are comparing a guaranteed ROR with an unknown ROR.

Last year in the Stock Market was great, 2007/08 you would have lost money.

You are also comparing tax deductible interest with taxable returns.

There is also the fact that once your mortgage is paid off that debt is gone forever.  Not having debt is a great thing and no one knows how long they will be able to keep making debt payments.  You can stop investing if you don't have the money but you can't stop paying your mortgage.

Besides, I don't see this as an either or situation.  No reason that extra money can't be split between debt reduction and investments.

I would opt for the security of paying off the mortgage.

rocksinmyhead

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #27 on: July 21, 2014, 10:17:30 AM »
I agree with those who say I just can't vote without taking variable into account!!! And, I also do both. (or did, until I killed my student loans two weeks ago, yes!!!!) That being said, I lean towards the pay down debt side.

-If you are an aggressive investor with a mix of at least 75% stocks, why would you take a conservative approach with your debts?

The only answer I can come up with is one I was faced with myself a few years ago: When your current cash flow can't service your debt load, it's clearly time to get rid of some of the monthly payments somehow. Does anyone else have another solid, logical reason for paying off debts other than the standard "it's a psychological win"? When I hear that, I think of a car warranty. It makes you feel warm and fuzzy, but it doesn't really do much for you.

My reason is that I'm paranoid about a loss of income and having a sufficient emergency fund. Without debt, my required monthly outflow is lower. I don't really have a reason to be worried about losing my job, but I'm just a worrier by nature. Layoffs I think I would see coming, but in two years at my job I have seen two people on my team fired (ostensibly for cause), one saw it coming, one did not. I think some of our management issues are worked out now, but I'm still paranoid. :)

That being said, I do have a 0% car loan outstanding with a pretty low monthly payment. Even I am not conservative enough to pay that one off early :)

(also re. Bert's comment and your response, I guess this doesn't apply to mortgages you can't really "pre-pay," but it did apply to my student loans, and I know my one friend who got fired did appreciate it when her next student loan payment wasn't really "due" for another year and a half due to her prepayments!)

eccdogg

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #28 on: July 21, 2014, 10:58:46 AM »
I guess it is a continuum but I voted invest in today's environment.

We have a 3% interest rate on a 15 year  mortgage.  I don't see any purpose in paying that down quickly.  The market might not beat 3% over the next 10 years,  but that would be a pretty nasty run if it didn't.  Plus the yield on the S&P is nearly 2%  So just dividends which don't vary as much covers 1/2-2/3 of the interest I am paying.

We recently bought a new (used) car and were going to pay with cash (I had never borrowed money for a car before), but they were offering 2% interest.  How can I pass that up?  Just the yield on the S&P almost covers the interest.


frugaliknowit

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #29 on: July 21, 2014, 11:03:47 AM »
In my case I have $1500 of debt at a true 0% (no fee balance transfer with an original balance of $4000).  I am paying $40 per month until it is gone (about 3 years).

Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #30 on: July 21, 2014, 12:24:16 PM »
I just re-read this MMM post on the subject for anyone interested. There are some good points in there, and the basic summary is it's a win-win question. I agree.

Since no one else has mentioned it yet, I'll bring up the obligatory "inflation hedge" argument.

If you currently make $100K and you have a fixed interest mortgage payment of $1,000/month (1%), in 10 years when you make $140K your fixed mortgage payment will still be $1,000/month (0.71%). It automatically becomes easier to meet your debt load as time goes by and your wages increase.

For those saying "you don't have to choose one or the other, you can do both", I agree completely. IRL this is not either or, but my question is specifically either/or for a reason. I want to know which you prefer, I don't have a use for "both" in the poll.

Middlesbrough

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #31 on: July 21, 2014, 02:54:25 PM »
How do I switch my vote? I fat fingered it on a mobile device.

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #32 on: July 21, 2014, 02:59:13 PM »
i'm quite surprised at the overwhelming side to pay down debt.  it would be nice to have a follow up for those people who chose pay down debt to see if that have debt that needs to be paid down.  B/c in my mind while a mortgage is debt its a very good kind of debt as cheddar indicated above. (as long as your rate is reasonable)  It doesnt really make sense to pay off a mortgage faster esp. if youre sub 5% APR.  but i have learned there are ultra risk averse people on these forums since i joined.  so to each his own

Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #33 on: July 21, 2014, 03:02:31 PM »
How do I switch my vote? I fat fingered it on a mobile device.

I don't think you can. I tried to edit the poll to allow people to change their votes, but I didn't see that option. If someone else has a fix let us know.

Jack

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #34 on: July 21, 2014, 03:18:56 PM »
I'm not an expert on these things, but it seems like a simple matter of asking whether the interest you'd get from investing would be more than the interest you would have to pay on the debt. Am I missing something?

Plus the tax you'd pay on the investment income. Which is why for me and hubby, I choose pay down debt. I could be wrong but it's what I'm comfortable with given our situation.

Minus the tax deferral for failing to contribute fully to 401Ks and IRAs, and minus the Saver's Credit...

I think that there is no valuable answer to this question that doesn't rely on the variables that you're excluding.

Exactly. Once you've "corrected" for risk and return, the choices are exactly equal and the question is moot. If everyone answered rationally, the poll results would be 50/50.

At best, all the poll results reveal is what fraction of the MMM readership is "risk-averse" in some general, nebulous sense (corresponding to the extent the "pay off debt" vote exceeds 50%).

Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #35 on: July 21, 2014, 03:24:40 PM »
At best, all the poll results reveal is what fraction of the MMM readership is "risk-averse" in some general, nebulous sense (corresponding to the extent the "pay off debt" vote exceeds 50%).

Great observation Jack. This was part of the reason for asking the question in the first place (aside from what I said in the original post). I'm curious how many people are taking a safe, risk averse approach to FI and are relying mostly on their savings rate and badassity. There's nothing specifically wrong with that approach, but it's not really what I'm doing.

I know there are others here who take extreme, calculated risks. That's not really what I'm doing either. I think I'm somewhere in the middle with an aggressive stock/bond mix, and a willingness to take some small calculated risks like carrying debt in an attempt to achieve higher returns to accelerate FIRE.

gimp

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #36 on: July 21, 2014, 03:47:59 PM »
I don't think it can be boiled down to one or the other. There are two un-ignorable questions:

- Which one, after all is said and done, has a better return?
- How much does debt weigh on your mind? What is its effect on your mental well-being, feelings of freedom / dependency, etc?

The more iron-willed you are, the more cost of debt you're able to tolerate until you put money there instead of investing. It's a sliding scale. Most people would choose to pay off debt at, say, 90% return of investment. Are you at 90? 70? 30?

The first question puts the numbers in a neat form, the second decides where your sliding scale ends.

boarder42

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #37 on: July 21, 2014, 03:51:23 PM »
yes carrying debt even car debt isnt bad at today's rates in my mind.  why pay off a 3% car loan now if you can invest.  now once retired i will be making more cash only purchases to keep my expenses and therefore tax exposure down.(but i guess this could go both ways spending 5k at once for a car will increase burden that year. may have to go back to the drawing board on this)  but right now while in the growth stages.  you may as well carry low interest debt.  you will in all likelihood come out ahead of those who paid down low interest debt.

solon

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #38 on: July 21, 2014, 04:07:18 PM »
Here's another variable: what is the LTV on your mortgage? Right now mine is ~90%. So it makes sense for me to make extra principle payments until it is down to 80% or lower. Right now, if I had to, I probably couldn't sell me house.

G-dog

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #39 on: July 21, 2014, 05:13:52 PM »
I voted "invest," but I realize me vote was influenced by the phrasing of the question in that it says "extra money" ( I won't start the argument that there is no such thing!  ;). )

Coupled with the fact pattern of no hair in fire debt issue (I.e., debt is getting paid) - my thoughts were to start having my money work for me (like someone up thread noted "pay yourself first).

That said, like others have noted, I did both, and recently became 100% debt free, so I do tend to prioritize payoff vs? invest - but I am trying to learn more....

Neustache

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #40 on: July 21, 2014, 05:59:27 PM »
I'm a SAHM with a very limited earning potential if I went back to work FT - say....30K.  So I like to pay off debt so that if for some reason my hubby were laid off or unable to work, (or heck, left me, but he's a great guy, not worried about that!) I could go back to work and not have to worry about bringing in a ton of money because my monthly obligations would be low.  We just paid off a car that had low interest rate, but the payment was $400 a month and if I had to be the breadwinner, I didn't want to have to limit myself by being forced to find a job that would pay $4800 more per year.  There's no guarantee that the money invested would be there in case Murphy really struck and my husband wasn't working for whatever reason and the market tanked. 

Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #41 on: July 21, 2014, 06:47:38 PM »
I voted "invest," but I realize me vote was influenced by the phrasing of the question in that it says "extra money" ( I won't start the argument that there is no such thing!  ;). )

Sorry for the poor choice of words G-dog. I just meant the money left after all obligations are met. You know that stuff everyone else calls "disposable income" that we all like to call "savings". : )

Middlesbrough

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #42 on: July 21, 2014, 09:37:03 PM »
At best, all the poll results reveal is what fraction of the MMM readership is "risk-averse" in some general, nebulous sense (corresponding to the extent the "pay off debt" vote exceeds 50%).

Great observation Jack. This was part of the reason for asking the question in the first place (aside from what I said in the original post). I'm curious how many people are taking a safe, risk averse approach to FI and are relying mostly on their savings rate and badassity. There's nothing specifically wrong with that approach, but it's not really what I'm doing.

I know there are others here who take extreme, calculated risks. That's not really what I'm doing either. I think I'm somewhere in the middle with an aggressive stock/bond mix, and a willingness to take some small calculated risks like carrying debt in an attempt to achieve higher returns to accelerate FIRE.
I guess I have debt now that I could be putting more money to (college loans), but it isn't important to me. It is fixed interest rate and I am only aggressively paying down the above 4.5% parts. The rest I will only continue to make the minimum payments until the 10 year window closes it. To me, the important things to get done are maxing out my Roth IRA, which I control and say what is put in it, and throw as much as possible in a Roth 401k and traditional 401 to minimize marginal tax rates, company has good investments but still have record keeping fees, ugh.

I plan on taking my end of the year bonuses and throw them into the market. The market will then decide how quickly I have a down payment to a house. Or if interest rates go through the roof, pay for a house in straight cash homie!

defenestrate

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #43 on: July 21, 2014, 09:56:06 PM »
This is really a corporate finance question. Everyone wants to maximize their returns--in this case, holding debt and investing it in equities or other assets can be a win win situation, we all know that. However, there is risk and uncertainty that go along with this.
--Will holding debt change your behavior--increase your propensity to spend vs invest for instance?
--Are you really heading for ER? In this case, debt makes no sense, unless it is part of a collateralized income producing asset. Why? Reducing risk through your investments (debt being one of them) will be a key to long-term success. Leverage provides very little long term benefit to those IN ER. Prior to ER debt very well may have a place.
--Why did you get into debt? If it was to take advantage of mispricing in the market, this may be ok. If it was to consume, then you probably want to pay it off, as it is not contributing to your goal.

Bumfluff

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #44 on: July 21, 2014, 10:59:57 PM »
I would pay off debt first because until you are debt free, any extra money is not yours to spend.

G-dog

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #45 on: July 21, 2014, 11:13:42 PM »
I voted "invest," but I realize me vote was influenced by the phrasing of the question in that it says "extra money" ( I won't start the argument that there is no such thing!  ;). )

Sorry for the poor choice of words G-dog. I just meant the money left after all obligations are met. You know that stuff everyone else calls "disposable income" that we all like to call "savings". : )

Obligations are being met - I stick with invest. I am also biased by my own stash - I can meet the obligation of an unexpected expense. Now back when I graduated college, I focused on getting rid of debt ( but did also start saving/ investing - and wish I had understood my 403(b) options better then!). My risk tolerance has increased over time as my risks decreased.

Cwadda

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #46 on: July 22, 2014, 05:43:35 AM »
I would say pay off emergency debt immediately (i.e. credit card debt).

If the returns are higher than debt interest, then I would invest before debt in tax-sheltered accounts (for the most part 401(k) and Roth IRA).

PloddingInsight

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #47 on: July 22, 2014, 06:01:04 AM »
I do both, but I lean heavily towards paying down debt.  Why?  Here's two great reasons.

1) If you have to temporarily stop contributing to your retirement accounts, they don't start charging you extra fees and ruin your credit.

2)  My investment plan does not say I should be using leverage to enhance my returns.

Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #48 on: July 22, 2014, 06:37:53 AM »
The market will then decide how quickly I have a down payment to a house. Or if interest rates go through the roof, pay for a house in straight cash homie!

I LOVE this! Let the tail wag the dog every now and then. Most people set a deadline then align their cash/investments/debt according to the deadline. You're doing it backwards, which is brilliant. I applaud you.

Goldielocks

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #49 on: July 22, 2014, 08:39:05 AM »
Small sample size so far with 36 votes in, but I'm very surprised to see 2:1 debt to invest.

For those of you who would elect to pay down debt I have some genuine questions for you:
-What is your stock/bond ratio if you are holding investments?
-Do you see a major difference between paying down a fixed interest debt or investing in a bond?
-If you are an aggressive investor with a mix of at least 75% stocks, why would you take a conservative approach with your debts?

The only answer I can come up with is one I was faced with myself a few years ago: When your current cash flow can't service your debt load, it's clearly time to get rid of some of the monthly payments somehow. Does anyone else have another solid, logical reason for paying off debts other than the standard "it's a psychological win"? When I hear that, I think of a car warranty. It makes you feel warm and fuzzy, but it doesn't really do much for you.

Obviously there is no wrong answer here and it's a personal choice, I just thought this forum would be closer to 50/50 based on previous answers I've read.

Wow, stunningly insightful questions.  Really made me think through my choices and the why...

I have three types of 'money' locations, like many of you...

Tax sheltered RRSP,
Non sheltered investments ,
Big mortgage debt.

1 - 10% bonds.  I don't like bonds, prefer dividend returns when not in growth stocks but forced myself to start to buy bonds when I realized I was in a heavy cash position...and bonds are better than cash.  In the RRSP only do I have bonds. 

2 - I do not remove $ from the RRSP.  Once money is there it is no longer available as FU money.  It would not be used  if we lost our jobs until about 1yr of no income and even then, I would work as a retail cashier, really flex MMM muscle to reduce costs, before touching it, and in Canada you don't have that 10% withdrawal penalty so it is easy to use RRSP as an income hedge (money in in high income yrs, money out in low income yrs).

3 - conservative, yes to less debt.  Two yrs ago I had $500 k mortgage and no FU money.  I was stressed at the thought of losing my job or just needing to refinance in 3yrs at slightly higher rates..  I was fully aware that my current 3.7% rate was low and could adjust by 1% and completely wipe out my ability to break even month to month.   

What I did was set up a MTG saving investment outside of the RRSP, for future MTG pay off or temp MTG payments until I find employment, or even in case interest rates went up.  Although invested, we did not max out RRSP in order to pay down the MTG fund.   See my aversion to touching RRSP.  Yes,  I chose to not receive  the large RRSP tax deduction, so it really is a pay debt before investment decision.  Just at a MUCH higher rate.

Now, I have refinanced at 2.4%, but was able to choose a variable rate without stress, because that MTG fund is at $50k.

And yes, salary raise went to added RRSP payments, so I am nearing maxing out RRSP too, with a year or so.