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 40777 times)

Threshkin

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #100 on: August 21, 2014, 10:28:20 AM »
Having posted here before as a proponent of the pay off the mortgage camp, I felt I should clarify a few points.

  • I am a massive supporter of Pay Yourself First.  I have been doing this for so long I tend to forget that I am doing it.  As a start, I recommend adjusting your pre tax or tax deferred investments (401k or equivalent) to be maxed out near the end of each year.  NOT just maxing out the employer match but the maximum allowed contribution.
  • Pay off all high interest debt, again this is something I rarely even think about because I have been paying off my cards every month for decades.  Credit cards are handy, I use them all the time.  BUT if you cannot pay them off when they are due, don't buy that crap.
  • Keep an "emergency reserve".  I put this is quotes because I treat that money as my operating capital and spend it as necessary but I always replace it right away.
  • Get into a habit of making regular after tax investments.  This comes out of paying yourself first.  If you get a raise, redirect some of the money (25% or more) to your investment accounts.  Direct deposit to multiple accounts is a great way to do this if your employer offers this feature.

Only after these items are running on auto pilot should you consider paying off your mortgage.  For years, I only paid a few dollars more than my minimum mortgage payment.  Once the first four items were completely under control did I even consider paying off my mortgage. 

Once I decided to do it, I liquidated and consolidated assets, saved even more than usual and bumped up my operating capital to the point where I could pay off my mortgage in a single payment.  This is what I meant when I voted for payoff debts.  Not pay down, but PAY OFF debts.

This approach worked for me.  Of course YMMV

tyd450

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #101 on: August 21, 2014, 12:06:20 PM »
This thread has been great-  I have decided to only pay the minimum required on the mortgage from now on.  I love the idea of sending that money to taxable investments and once I have built that balance up to an amount that exceeds my mortgage balance I can choose to stay on that path or pay off the mortgage. 

arebelspy

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #102 on: August 30, 2014, 10:32:09 PM »
I only just found this thread, and it blows my mind that 3/4ths of Mustachians voted to pay off debts.

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.

Right.  I'm assuming if one is in the situation where they're asking this question, invest vs pay off debt, they've run the math and it works out in favor of investing* (or would have, historically), but they're deciding between the mathematical and emotional. 

(*Obviously if paying off the debt works out better mathematically AND emotionally, EVERYONE would pick that option, so we're assuming it doesn't work out better mathematically, thus why you have to ask the question.)

And it appears 3/4ths of the voters voted "Emotions" over "Math."

I disagree.

:)
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Cheddar Stacker

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #103 on: August 31, 2014, 07:59:40 AM »
@Rebs, surprised me as well which I'm sure you picked up on. I knew which way you'd vote. Had you chimed in ealier with your convincing arguments maybe it would've swayed the vote a bit more.

To each their own, but with the sophisticated group of minds here I did not expect 3 times as many debt averse people. Oh well, more capital for us I guess.

LadyStache

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #104 on: August 31, 2014, 08:20:43 AM »
I think there should be an extra option in this poll - it depends on the variables.

I really can't vote one way or another without knowing the expected interest rates on the debts or investments at the very least.

Goldielocks

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #105 on: August 31, 2014, 08:30:56 AM »
Well, I just took another $8.5k that was purposefully saved for the house, and put it into the RRSP instead of mtg.  Yep,and I voted pay debts first.

What gives?  A feeling of security and FU money to ride out any job loss or rate hike.. Together with, a new 2.4% variable MTG rate versus 41% tax back on the RRSP.  Even keeping it in govt bonds inside the RRSP would be better.

And of course reading this blog and really thinking about early retirement strategies, and the fact that I can pull from RRSP at any time without penalties; it's actually to my benefit if I do so in lower income years. (Such as early retirement or sudden job loss).

So maybe we vote conservatively, but invest logically?

BooksAreNerdy

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #106 on: August 31, 2014, 09:30:38 AM »
Well, we just got rid of two debts. I suppose we technically got rid of two liabilities and their payments. We had a 0% loan on a tractor and a 0% loan on a classic corvette.

 Obviously, investing makes way more sense. However, keeping those assets no longer fit in with our lifestyle. So, we cut the dead weight and paid off the debts. With what was left, plus what we were paying monthly, we have been investing at a higher rate than before.

Our mortgage is at 4% interest and we are not paying it down faster. Though we are trying to sell and downsize. :)

Now, the tricky question is to pay cash for a smaller house (that would also make the 1% rule in our area for a rental, should we ever move, etc) or get a loan. I'm on the loan side and DH is not convinced yet. He needs to see the real math advantage played out and I don't have the excel skills to prove him otherwise. And, yes, I've read the thread in investor alley, but he hasn't.

So, in the end, I voted pay off debts. But I wonder if that was a misrepresentation of my actual goals and intentions?

RetiredAt63

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #107 on: August 31, 2014, 10:01:07 AM »
It always comes down to the math. So, I'm sorry, but that makes this long.

Canadian situation:  RRSP's are done with before-tax dollars, money (and whatever it made) is taxed as income when withdrawn.
TFSA (Tax Free Savings Account) - done with after-tax dollars, money (and whatever it made) is withdrawn tax free.
Both have maximums, RRSP is income based, TFSA is flat rate but must be "of age", both can have withdrawals repaid (but there are rules about that).
Mortgage interest is not tax-deductible, there is no capital gain (or loss) on sale of primary residence.
There is capital gains tax when investments are sold, there is income tax on dividend and interest income.

So from a tax viewpoint it does not make sense to save for a mortgage in an account that is not a TFSA, since there will be a big tax hit when the account is cashed.

So again re taxes, where is the person relative to brackets?  If at the low end of a bracket, there is lots of room to increase income without penalty - invest.  If close to the top of a tax bracket, more investment income will be taxed at the next bracket (not a big deal if the next bracket is not a lot more, but if there is a big jump - ouch - so watch Provincial as well as Federal brackets) - so pay down debt with that money instead.  Income has not changed but debt payment is less, so more money is available.  Of course this assumes the debt is not overwhelming, in which case it should always be paid down first.

If passive income is high enough (investments, pensions, whatever) then disasters are not disasters.  Disaster to your house?  Your house insurance should be replacement cost (not original cost, labour and materials have gone up), so you don't find yourself paying costs your insurance company should have.  And will your insurance company let you take the money instead?  You might not want to rebuild - there may be very negative emotions involved with the disaster.  This does not mean you can't have high deductible for less than disastrous situations, to keep premiums reasonable.

Just my $.05 worth (no pennies any more).


arebelspy

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #108 on: August 31, 2014, 10:44:40 AM »
It always comes down to the math.

You would think it would, but it doesn't.

For many people when the math falls on the side of invest, they pay debt anyways.

That's okay, but suboptimal.
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RetiredAt63

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #109 on: August 31, 2014, 10:51:15 AM »
I wrote "Of course this assumes the debt is not overwhelming, in which case it should always be paid down first."  For some people anything >0 may be overwhelming, emotionally, in which case the answer is, pay down debt.  I used to be more in that camp (except for the mortgage and car loans), now I am a bit more flexible.  After all, I am retired and still have a mortgage and a tiny car loan.  The car loan is at 0%, why would I pay it down early?  My emotions want me to, logic says otherwise.

Mind you, we make a lot of decisions (and not just financial) for emotional reasons that could be improved by a bit of cold hard logic.  I can think of more than a few that I have made!


It always comes down to the math.

You would think it would, but it doesn't.

For many people when the math falls on the side of invest, they pay debt anyways.

That's okay, but suboptimal.

Dicey

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #110 on: September 03, 2014, 08:22:05 AM »
The "math" we're discussing here makes assumptions about the future. Nobody has a crystal ball.

Paying off debt relegates it to the past instead of pushing it into an uncertain future.

Assumptions based on history are not crystal ball territory. Having a mortgage at a low rate is an excellent hedge against inflation. You also have leverage with a mortgage because you put a small amount into it initially, but get the value of a larger amount of money i.e. a place to live that you would otherwise pay rent for.
The more money you have saved and under your control, assuming no CC or SL debt, the less uncertain the future feels.

Gockie

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #111 on: March 02, 2015, 05:29:22 AM »
Interesting thread. I'm been reading another forum for a few years catering to property investors and I'm sure their responses would be completely the other way! I think that way too, I consider myself an investor but then again, I don't have consumer debt except for a home loan and that debt isn't very big, and the house value basically has almost doubled the 7 years we have lived here. So not a bad investment at all. I say invest!! Damn partner is very cautious. Not an investor. He's cost me big bucks... :(

You have to invest to make the big bucks. Use other people's money (OPM). Invest, leverage, take the equity increases when property prices go up. And even if they don't, you still have regular money coming in from rents.
Agree though, anybody with revolving credit card debt at typical credit card interest rates is stupid. I currently work for Australia's biggest bank, (It's the highest value company on the Australian Stock Exchange btw, extremely profitable) and previously worked at Amex for 6 years. Don't borrow money for consumer goods. Don't finance them.

If you don't understand the power of investing, play Robert Kyosaki 's cashflow 101 a couple of times. The take home message i get from the game is, it's ok to borrow money, have debt, but do it to make you money in the long run.

boarder42

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #112 on: March 02, 2015, 05:58:34 AM »
Holy old thread

libertarian4321

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #113 on: March 08, 2015, 01:28:23 AM »
I had to vote for "invest" since I don't understand this "debt" thing you speak of.  Never did debt, never will.  So invest instead.

gaja

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #114 on: March 08, 2015, 05:06:13 AM »
Old thread, but relevant topic.

I get stressed out by debt. When I'm stressed, I do stupid stuff, like eating a lot of chocolate or crashing cars. Therefore it makes economical sense for me to pay down debt rather than investing.

ender

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #115 on: March 08, 2015, 09:06:13 AM »
I suppose this becomes more interesting if you switch your way of thinking about work.

Considering the requirement to work as a debt of sorts, making investing itself paying off a debt.


joat

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #116 on: March 08, 2015, 09:39:50 AM »
Since this thread has been resurrected I'll add my 2 cents.

...For many people when the math falls on the side of invest, they pay debt anyways.

That's okay, but suboptimal.

That depends entirely on what someone is trying to optimize. I think everyone seems to agree that it is suboptimal if someone's goal is to maximize net worth. However, depending on what an individual values, it may or may not be suboptimal if they are trying to optimize happiness. I think it's safe to say that generally everyone's goal is to optimize happiness; for some this is achieved by investing and maximizing net worth, while for others it is achieved by paying off a mortgage early. When viewed from the perspective of optimizing happiness, it's like arguing about whether chocolate or vanilla tastes better - the answer is based completely on the individual.

caliq

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #117 on: March 08, 2015, 09:44:33 AM »
Since this thread has been resurrected I'll add my 2 cents.

...For many people when the math falls on the side of invest, they pay debt anyways.

That's okay, but suboptimal.

That depends entirely on what someone is trying to optimize. I think everyone seems to agree that it is suboptimal if someone's goal is to maximize net worth. However, depending on what an individual values, it may or may not be suboptimal if they are trying to optimize happiness. I think it's safe to say that generally everyone's goal is to optimize happiness; for some this is achieved by investing and maximizing net worth, while for others it is achieved by paying off a mortgage early. When viewed from the perspective of optimizing happiness, it's like arguing about whether chocolate or vanilla tastes better - the answer is based completely on the individual.

I agree with this, but I also think it matters just how strongly the math favors investing.

We use a 5% or 6% growth rate for long term investing of stocks, right? Even though it's really closer to 7%?

So technically, if you have a 4.5% or even 5% debt, the math still works out in favor of investing.  However, investing over paying down a 5% debt is a lot riskier than investing over paying down a 0%-3% debt.  I'd probably pay down anything over 3.5% and invest if I only had 0-3% debts. 

Another variable is what the market's doing -- if it's really low and you could stand to make a ton in the next upswing, maybe it'd be smarter to divert some debt-paying money into investing. 

I didn't even answer the poll because I feel like there are way too many variables for this to be boiled down into a yes/no type answer.

arebelspy

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #118 on: March 08, 2015, 03:24:06 PM »
Since this thread has been resurrected I'll add my 2 cents.

...For many people when the math falls on the side of invest, they pay debt anyways.

That's okay, but suboptimal.

That depends entirely on what someone is trying to optimize. I think everyone seems to agree that it is suboptimal if someone's goal is to maximize net worth. However, depending on what an individual values, it may or may not be suboptimal if they are trying to optimize happiness. I think it's safe to say that generally everyone's goal is to optimize happiness; for some this is achieved by investing and maximizing net worth, while for others it is achieved by paying off a mortgage early. When viewed from the perspective of optimizing happiness, it's like arguing about whether chocolate or vanilla tastes better - the answer is based completely on the individual.

I would suggest that if your happiness is dependent on yournet worth, or debts, or investments, you're approaching happiness suboptimally.
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xenon5

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #119 on: March 08, 2015, 09:04:37 PM »
It depends on the interest rate of the debt.  I paid off my student loans rapidly because I had a crappy interest rate.  Also, because I travel a lot for work, I charge a lot of hotel and taxi fares to my CCs that get reimbursed.  The work reimbursements helped me keep $5-$12k on 0% CCs instead of in 6.25% student loans.  The reimbursement cash infusions make it easy to shift capital between cards based on when the 0% period will end.  I make sure the amount I have loaned at 0% is low enough relative to the end of the 0% period that I can still pay it off in time even if I was out of work for a while for some reason.

Obviously, not everyone will be comfortable with this approach.  Ultimately it depends on what you're comfortable with.  At the same, if the interest rate is 4% or less,be aware that you could be paying with opportunity cost to pay the loan off earlier.
« Last Edit: March 08, 2015, 09:07:21 PM by xenon5 »

joat

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #120 on: March 08, 2015, 09:52:51 PM »
I would suggest that if your happiness is dependent on yournet worth, or debts, or investments, you're approaching happiness suboptimally.

While I wholeheartedly agree with you (and arguably so would MMM - see http://www.mrmoneymustache.com/2014/11/23/not-extreme-frugality/) I can not think of a way to argue that what makes one person happy is any more or less valid than what makes another happy. I'm not suggesting that one's entire sense of happiness is dependent on a single thing, though I am suggesting that when given a choice there is generally an option that contributes more to their overall happiness than the other available options. My argument is that happiness is very personal and therefore entirely up to the individual. If someone truly derives some sort of happiness from things such as net worth, debts or investments then I think that's entirely their prerogative whether or not I agree with it. Happiness is entirely subjective and I do not know of a way to logically prove that what makes one person happy is any more valid than what makes another person happy.

Sibley

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Re: Let's settle this with a vote: Invest or payoff debts
« Reply #121 on: March 09, 2015, 10:26:13 AM »
I'm lucky right now - the math and my feelings currently agree. Pay off debt first. In about a year, I won't have that alignment.

Emotionally - I really want to be able to say that I'm debt free.

Math - It will be advantageous of me to invest.

What will probably happen - I'll max out 401k and possibly IRA of some sort, then use remainder to kill all debt, then direct all funds to savings/investments for 1) house and 2) FI. So do both, which should appease many here, and will appease my logical and emotional brains.