Author Topic: Working some numbers about paying debt vs. investing, need help.  (Read 3878 times)

ChrisM

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Working some numbers about paying debt vs. investing, need help.
« on: February 13, 2014, 02:19:31 PM »
My Excel skills are pretty poor so I'm reaching out for help.  Maybe you have an Excel spreadsheet that you can share to help?

Scenario: We have a car loan that has a 0% interest rate.  My wife just wants to pay off the loan until it's gone with all the extra money we have (so extra payments each month and/or cash bonuses).  I on the other hand, think it's worth it to just pay the payment every month until it's gone and invest the rest of the extra money monthly.  I'd like to lay out a couple of scenarios to show her how much money we leave on the table by not investing over that car loan period and even beyond.

Here are the numbers:

Car Loan $25,000 @ 0% (pre mustachian purchase, she won't budge on getting something cheaper)

The payment is $483/month
Our "extra" would be around $1900/month
So we could potentially pay around $2383/month toward the car's principle.
There is very likely to be a bonus (cash and stocks awards) of around $13,000 in September to apply to the loan as well.

The short of it is this.  We've been in debt our whole adult lives.  This is our last debt.  We can pay it off this year.  This is an incredible feat for us. 

My concern is that by paying the loan off and not investing that money means we're leaving money on the table.  I want to know how much that might be.  The emotional feeling of paying the loan is huge for my wife.  I might agree with her because it does give us true freedom.  I need to quantify it before I make a decision though.  Help?

warfreak2

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Re: Working some numbers about paying debt vs. investing, need help.
« Reply #1 on: February 13, 2014, 02:28:10 PM »
Is it 0% forever, or is that just an introductory rate? If it stays 0% forever, then you are in no hurry, but if it will shoot up to 10%+ then get it paid down ideally just before the interest is applied, or at least minimise the amount of it you will pay interest on.

ChrisM

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Re: Working some numbers about paying debt vs. investing, need help.
« Reply #2 on: February 13, 2014, 02:36:16 PM »
Is it 0% forever, or is that just an introductory rate? If it stays 0% forever, then you are in no hurry, but if it will shoot up to 10%+ then get it paid down ideally just before the interest is applied, or at least minimise the amount of it you will pay interest on.

0% for the life of the loan.

warfreak2

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Re: Working some numbers about paying debt vs. investing, need help.
« Reply #3 on: February 13, 2014, 02:42:02 PM »
Then you are fine! If it gives you/your wife comfort to pay it faster, then go ahead and do that; but maybe both of you could get more comfort from knowing that you are getting some return on your money.

zachd

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Re: Working some numbers about paying debt vs. investing, need help.
« Reply #4 on: February 13, 2014, 02:50:33 PM »

Well, you already know mathmatically and logically you would leave some money on the table by paying off a 0% loan ahead of time and not using the money elsewhere.
Of course, whos to say you don't put your money in some investment and lose it all? Or if you lost your job(s) then you would have to figure a way to pay for the car?
Both are not likely scenarios but I can see her side of things too.

Maybe you should compromise and pay extra on the car and start putting some money in some investments?


ultros1234

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Re: Working some numbers about paying debt vs. investing, need help.
« Reply #5 on: February 13, 2014, 03:04:08 PM »
One simple way you might think about it: If you loan me $25k at 0% interest, I will take it and invest it in my portfolio for an estimated 7% return. I will make $1750/year off that money. And I would prefer to keep that loan for as long as possible, to keep raking in that return. Yes, you'd certainly be leaving money on the table by paying the loan off.

Procrastinating at work, I threw some numbers into an Excel sheet. For simplicity's sake, let's say you actually had $25k in cash today and could pay off the loan immediately. That would earn you a $0 investment return. If instead you paid the minimum, at a 7% annual return (0.57% monthly return), you'd be expected to earn $3729 over the course of the 53 months it would take you to pay off the loan. Or if you're including the compounding from the original returns, it's more like $4555.

Your scenario will be less than that, since you're not making an immediate investment of $25k. But if you start socking away $1900 each month, and you invest a big lump sum of $13k in September, you'll still be making several thousand dollars of return over the next few years.

The other thing that people don't account for in these calculations is taxes.

A few caveats:
- We don't know what the market will do, blah blah blah. One advantage of paying off debt is that there's zero risk.
- There is a certain psychological value in getting rid of debt (especially if it's important to your wife), even if it's not the smartest move, strictly by the numbers.

Eric

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Re: Working some numbers about paying debt vs. investing, need help.
« Reply #6 on: February 13, 2014, 03:10:03 PM »
Here's an ugly spreadsheet. (attached)

Extra money after 4.75 years w/ investing is about $2500 at 3% return.  $5000 at 7% return.  Hey, $5K!  That'll almost buy your next reasonable car!

GregO

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Re: Working some numbers about paying debt vs. investing, need help.
« Reply #7 on: February 13, 2014, 03:19:28 PM »
I see someone beat me to it, but after spending 15-20 minutes making it, I'm gonna post it anyway.  It's not perfect, but you should be able to alter all the green cells.  At 8% return, I'm calculating $3,945 difference.  But like others have said, this really isn't about the numbers.  Clearly, you should be able to get more if it's a 0% loan.  But, this is much more of an emotional question.  You should be able to change the amount you pay on the car and see the changes it makes, if you guys decide to compromise somewhere in the middle.  Let me know if you have any questions on it.
« Last Edit: February 13, 2014, 03:22:20 PM by GregO »

Eric

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Re: Working some numbers about paying debt vs. investing, need help.
« Reply #8 on: February 13, 2014, 03:23:36 PM »
Ooooh, yours is prettier than mine Greg.  Although I think you sold Chris a little short on his principal investment/car payment amounts.  :)

The payment is $483/month
Our "extra" would be around $1900/month
So we could potentially pay around $2383/month toward the car's principle.

GregO

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Re: Working some numbers about paying debt vs. investing, need help.
« Reply #9 on: February 13, 2014, 03:29:17 PM »
The payment is $483/month
Our "extra" would be around $1900/month
So we could potentially pay around $2383/month toward the car's principle.

Oops, you're right.  I moved the monthly amount invested into it's own cell so he can make it whatever he wants.  That's much more useful anyway.  Thanks for the catch.

Thegoblinchief

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Re: Working some numbers about paying debt vs. investing, need help.
« Reply #10 on: February 13, 2014, 03:36:49 PM »
I'd invest the extra money instead unless you're worried about a cashflow crisis (e.g. job loss). If that's a concern, invest the extra money in a semi-liquid, safer vehicle like bonds. Or an asset allocation that's part bond, part stock.

Time and compounding is your friend. But congrats on that being the last debt!

ChrisM

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Re: Working some numbers about paying debt vs. investing, need help.
« Reply #11 on: February 13, 2014, 06:03:45 PM »
Thanks so much for the answers and help!

Everyone's advice is spot on.

Eric - thanks for your spreadsheet!
GregO - that spreadsheet is perfect.  Thanks for taking the time to work on it. 

$5k at the end of the loan term isn't "a lot" of money by any means, but I don't find it insignificant (a little less than 4% of what our stache would be at the time). 

There's always the possibility of jobloss, but we're still fairly young (I'm 33) so I'm not too worried.  I think being debt free is pretty significant.  I'm thankful for this community over the last 4 months I've been here.  We've been paying debt the Dave Ramsey way (loosely anyways) for around 6 years.  I can't even imagine where we would be if MMM and these forums were here back then.  My whole thinking has changed and our outlook is looking so much better. 

Thanks again to those who answered.  I'm happy to read any other comments.  Cheers!