Accelerated loan payments of $500 and Retirement as normal Annual Interest Rate 7% Number of Payments 54 Amount of Payment -1085 Present Value -91000 Payment is due at the beginning of the period 1 Future Value of the Investment Stream $193,614.99 Annual Interest Rate 7% Number of Payments 200 Amount of Payment -2330 Present Value -193600 Payment is due at the beginning of the period 1 Future Value of the Investment Stream $1,503,629.41 Number of Months 254 |
Loan Payments as Normal and add $500 extra to retirement Annual Interest Rate 7% Number of Payments 66 Amount of Payment -1585 Present Value -91000 Payment is due at the beginning of the period 1 Future Value of the Investment Stream $261,481.64 Annual Interest Rate 7% Number of Payments 36 Amount of Payment -1856 Present Value -261500 Payment is due at the beginning of the period 1 Future Value of the Investment Stream $396,952.62 Annual Interest Rate 7% Number of Payments 10 Amount of Payment -2011 Present Value -396900 Payment is due at the beginning of the period 1 Future Value of the Investment Stream $441,436.42 Annual Interest Rate 7% Number of Payments 36 Amount of Payment -2161 Present Value -441400 Payment is due at the beginning of the period 1 Future Value of the Investment Stream $631,005.65 Annual Interest Rate 7% Number of Payments 105 Amount of Payment -2330 Present Value -631000 Payment is due at the beginning of the period 1 Future Value of the Investment Stream $1,500,332.62 Number of Months 253 |
Loan 3: $12,924.76, 6.3%, minimum payment of $150.00
Loan 4: $12,914.41, 6.3%, minimum payment of $119.00
And it has been addressed other ways, but if you look at straight numbers and rosy scenarios, paying off debt early doesn't always win. But there are two big (to me) benefits, one is mental in that it just feels better to have no debt, and two is the flexibility of less monthly obligations for unforeseen events or what have you.
Paying off your debt gives you pretty much a risk free return. Investing your money is never risk free and returns can be very uncertain while the interst on your debt is certain. I would just pay off the debt asap and worry about investing later.
Your assumption that you'll make 7% year in and year out with your investments is where I'd urge caution.
Paying off your debt gives you pretty much a risk free return. Investing your money is never risk free and returns can be very uncertain while the interst on your debt is certain. I would just pay off the debt asap and worry about investing later.
I definitely side with arebelspy for my student loans but only because my interest rates are <4%. The important thing is the risk of the investment vs the return. Paying off the student loans is a risk-free and inflation-hedged investment. Investing is neither. So your options are:
Pay off 6.3% loan risk free
or
Earn X% interest in a "high" risk investment
Around these parts, we estimate a 5-6% (inflation adjusted) long term return in the stock market. (the 7% you used is in line with that but you need to subtract inflation). So if X% is 6%, then investing in this situation is the WRONG move because the loans pay a higher rate AND have less risk.
The question becomes what is your X%? Arebelspy invests in real estate and he gets a much higher rate than 6%. His X% is probably closer to 10% if not higher. In which case, he makes the choice that investing will be the better move (even despite the higher risk). And he is entirely right!
If you are only going to invest in index funds though, I wouldn't expect more than about 6% inflation adjusted long term in which case paying off the loans is a better move even if you ignore the fact that paying off the loans is risk free. So I'd say pay off the highest interest loans ASAP and then reevaluate when you get to the 5% ones.
My reasoning is, that once you have eliminated one of those loan payments, you have about $150/mo less in mandatory payments - a little extra buffer if there are unexpected job losses etc. If you have only paid off half of both loans, you don't have that extra security yet.
3. I would say you missed one intangible thing - the feeling of being debt free and knowing that if something shitty happened tomorrow you aren't in hock to Sally Mae.
But there are two big (to me) benefits, one is mental in that it just feels better to have no debt, and two is the flexibility of less monthly obligations for unforeseen events or what have you.
Your OP had nothing to do with wanting to be a real estate investor. You also didn't mention you have additional (real estate) debt.
In addition, we owe a mortgage on our residence and a mortgage on our rental.
I didn't think mentioning that I would like to invest in real estate changed the subject of the post, if it did I am sorry.
...Except that over the long term market timing doesn't work, and you are making guesses about when to buy and when to change your strategy based on your assumptions about market trends. Even "trained professionals" would do just as well (or better?) flipping coins in deciding when is the best time to buy, rather than buying based on your assumptions about what will happen next based on what has happened recently.
Start paying off your debt - the interest rates are too high to do anything else right now (you may find yourself doing this for years - no problem)
With the next market downturn of more than 15 or 20% (you decide) switch to investing in stock index funds (you may find yourself doing this for years - again, no problem)
With the markets recovered to previous highs switch back to accelerated debt service
...
3. I would say you missed one intangible thing - the feeling of being debt free and knowing that if something shitty happened tomorrow you aren't in hock to Sally Mae.
I didn't think mentioning that I would like to invest in real estate changed the subject of the post, if it did I am sorry.
Depends if you want a theoretical discussion or practical discussion.
Theory and practice can differ quite a bit, obviously.
"In theory, there is no difference between theory and practice. But, in practice, there is."
Pete - that's an interesting idea. As Hamster points out though, it is difficult to time the market. I definitely need to learn more about stock/bond investing. I'll add your suggestion to my reading list.
Pete, I like your idea but I'd like to do it in a way I can define exactly what to do when and look at past results. I'm trying to come up with something like Value Averaging (http://www.bogleheads.org/wiki/Value_averaging). How would you go about defining your cutoffs (when to switch to stocks and when to switch back to debt)?
...
When will the next 15-20% downturn be? After that, when will it start to recover? or will it continue to fall first? What if you got in a month sooner? a year sooner? waited a year longer?