Author Topic: 25 year old with debt but identify as an "investor". Have cake and eat it too?  (Read 7595 times)

wealthviahealth

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There are an abundance of threads asking advice on whether to invest or pay off student loans
and though my situation is similar, the primary difference is that investing/reading everything I can get my hands on
regarding investing has become my passion. I find that I am truly enjoying the act of reading all of my favorite financial websites,
investments books, podcasts, etc.. as well as making contributions to my various funds daily.
This in a way has become a part of my identity as I enjoy learning everything I can as well as speaking with others about investing.
I do not think I would be getting this enjoyment if I were reading all of this great info and thinking " this will be so useful when I can apply it 5-10 years from now"

That being said- I have a substantial, but fairly average amount of debt for a college grad my age. Primarily in student loans at 6.8%
and a hefty car loan ( bought just before reading millionaire next door, all of the other classics, and this site) but thats only at 2.5%
making the total cost of the loan 1k if I paid only the minimum.

I find that investing also makes me more frugal as I now avoid un-essential  purchases since I know the money would be better spent in my portfolio.

In my situation would you still recommend holding off on most investments and instead just throwing all of that money at my loans or
is there merit to keeping up with my investments and chipping away at my loans at a 6/10 pace?
« Last Edit: March 23, 2014, 12:50:56 PM by wealthviahealth »

golfer44

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Re: 25 year old with debt but love everything investment related.
« Reply #1 on: March 23, 2014, 07:51:45 AM »
If I gave you the lead on an investment that 100% guaranteed a 6.8% return, would you, as a savvy and educated investor, invest in it? Well, that's your student loan.

wealthviahealth

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Re: 25 year old with debt but love everything investment related.
« Reply #2 on: March 23, 2014, 08:23:04 AM »
If I gave you the lead on an investment that 100% guaranteed a 6.8% return, would you, as a savvy and educated investor, invest in it? Well, that's your student loan.

I absolutely agree with this but also wonder to what extent it should be factored in that there may be a few more years like 2013, in which my portfolio returned 35%. This is of course NOT guaranteed like the 6.8% but even if returns were 15%, when much of this is also my emergency fund ( etfs),  it seems like it would leave me with something in hand by the time I"m done paying loans.

I suppose a supplemental questions would be - for those on the most aggressive student loan payoff ( rock on btw), are you not adding to your emergency fund/ nest egg concurrently, and if not, do you feel any lack of financial security as a result?

This is certainly a matter a matter of different strokes for different folks to some degree but I think I would prefer turning 30 ( 5 years from now) and having a sizable nest egg and a very large dent in my loans, then having finished paying my loans 1-2 years ago and to just now be building my nest egg.  I suppose it could be said that the same discipline to paying off loans could be applied to adding to savings/ investments once loans are gone but there is the chance of missing out on a few fantastic bull markets.

golfer44

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Re: 25 year old with debt but love everything investment related.
« Reply #3 on: March 23, 2014, 08:41:29 AM »
What if the market goes down?

Now you're market timing and speculating, surely your education has steered you otherwise.

lifejoy

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Re: 25 year old with debt but love everything investment related.
« Reply #4 on: March 23, 2014, 09:02:29 AM »
Random question... How badly do you need your car?

wealthviahealth

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Re: 25 year old with debt but love everything investment related.
« Reply #5 on: March 23, 2014, 12:49:39 PM »
What if the market goes down?

Now you're market timing and speculating, surely your education has steered you otherwise.

You are absolutely right, the market very well could go down, in fact I hope it does frequently. My education has certainly exposed the illusion of correctly timing the market. With a buy and hold strategy, I am very acceptant of the fact that I will not always be buying at the "right time" and if ever really needed, I may need to sell in an even worse time. ( I have a cash E.F to dip into before going this route though)

I am motivated by the constancy of the 6.8% on the student loan and will still be aggressively paying this down.
This feeling my change but at the moment, I envision having a greater sense of finical security via paying down debts at 7/10 pace
and keeping up with my investments and emergency cash savings as opposed to paying down debts at a 9/10 pace and not building my nest egg at all. Perhaps I will have a shift in this thinking in a short period of time but am wondering if any others have felt the same way.


Random question... How badly do you need your car?

My car is a requirement for my job but I could certainly get by with something significantly less expensive. ( 10k less even)
I have entertained the thought of selling my car and buying something much more affordable, like a 2008 Camry but admittedly, I'm  a bit intimidated by the whole process as I have never done it before.

golfer44

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Re: 25 year old with debt but love everything investment related.
« Reply #6 on: March 23, 2014, 01:03:44 PM »
My car is a requirement for my job but I could certainly get by with something significantly less expensive. ( 10k less even)
I have entertained the thought of selling my car and buying something much more affordable, like a 2008 Camry but admittedly, I'm  a bit intimidated by the whole process as I have never done it before.

It's easy. Trading in is insanely simple, but you obviously won't get the best $ for your car. However, you will only pay sales tax on the difference between the new car and the traded in car (so for you, you might not pay any).

Private party takes a little while longer, tougher logistics (you might own 2 cars for a while), having a loan can be tricky. Just look it up specific to your state.

KingCoin

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Re: 25 year old with debt but love everything investment related.
« Reply #7 on: March 23, 2014, 02:13:48 PM »
This feeling my change but at the moment, I envision having a greater sense of finical security via paying down debts at 7/10 pace
and keeping up with my investments and emergency cash savings as opposed to paying down debts at a 9/10 pace and not building my nest egg at all. Perhaps I will have a shift in this thinking in a short period of time but am wondering if any others have felt the same way.

From an expected return perspective, these two options are basically the same. If investing and building up a liquid nest egg makes you happy, go for it, but a guaranteed 6.8% is mighty enticing. I'd definitely prioritize the loans over corporate bonds, for instance. 

DoubleDown

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What is your timeline for your investing (5, 10, 20, 50 years)? I'd have a hard time justifying investing in the stock market with a 6.8% loan hanging out there. That's a really, really good guaranteed "return" rate. But you're 25, and if you're talking about investing in stocks for the next 25+ years, then you stand a decent chance of doing better in the markets over the long haul. Now, if you're planning on ER'ing in 10 years, that's not nearly as much time and I wouldn't think of investing until those loans are gone.

Safe and good bet is to save like hell, pay off those loans ASAP, then invest. If you must gamble now (and I'd say trying for better than 6.8%, particularly short term, is definitely gambling), maybe try splitting up your repayment/investing, like 80% of your savings to pay off loans, and investing 20% in the markets.

Also, not a mathematical reason for paying off the loans, but I think freeing yourself of those student loans will be liberating and will help your credit-worthiness for getting a mortgage one day, etc.

waltworks

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100% guaranteed 6.8% return is a no brainer. Save the day trading shenanigans for when you have it paid off.

-W

wealthviahealth

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What is your timeline for your investing (5, 10, 20, 50 years)? I'd have a hard time justifying investing in the stock market with a 6.8% loan hanging out there. That's a really, really good guaranteed "return" rate. But you're 25, and if you're talking about investing in stocks for the next 25+ years, then you stand a decent chance of doing better in the markets over the long haul. Now, if you're planning on ER'ing in 10 years, that's not nearly as much time and I wouldn't think of investing until those loans are gone.

Safe and good bet is to save like hell, pay off those loans ASAP, then invest. If you must gamble now (and I'd say trying for better than 6.8%, particularly short term, is definitely gambling), maybe try splitting up your repayment/investing, like 80% of your savings to pay off loans, and investing 20% in the markets.

Great points and made me realize that I forgot to mention my investment time line. Most of my investments are on the time line of 25-50 years and are geared toward dividend classics like KO, MCD, GE, WMT, D, and most everything else is in various 2050 life cycle funds. I am by no means referring to day trading or even short term 1-3 month gains here. I have all of the dividend stocks on DRIP.

" maybe try splitting up your repayment/investing, like 80% of your savings to pay off loans, and investing 20% in the markets"

This is pretty close to my ratio of debt payments to investment savings. Paying off my debts is my priority, investments are really the frosting on the cake.


I am wondering if this scenario changes at all for some folks if instead of investing in the markets, this other portion were being tucked away into a long term savings account. This account of course does not trump the guaranteed 6.8% of the loan but it is helpful to know that I have money saved up to cover several months of expenses ( student loan included) if ever needed.

hodedofome

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I think everyone needs an emergency fund. At least a small emergency fund should be in place before investing or even paying down debt.

I am in a similar situation as you as I have a real passion for the markets and feel I can handily outperform my 5% interest rate on my mortgage. In a few years I'll be in a position to pay off my house and what will I do at that point? Pay it off or keep it in my trading account knowing that I could double or triple my money in a good bull year? Paying it off is so freeing however. To know that I don't owe anybody for anything for the rest of my life.

My best friend's father in law was in a similar situation and instead of doing one or the other, he used his market gains to pay off his house. As he'd make big gains in the market, he's take out chunks of $5k, $10k or $25k and pay down his house. Eventually he had his house paid off but still a sizable portfolio to work with afterwards. I'll probably end up doing close to the same.

cbgg

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Personally, I'd knock out the 6.8% loan as a first priority.  It might be a bit less satisfying, but it's likely the best option financially.  The only alternative to this that I would consider is contributing to my 401k and IRA first, then knocking out the loan, since in the USA those vehicles are "use it or lose it."

But as others have said, a 6+% GAURANTEED return is a might attractive number.

innerscorecard

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Not to introduce too much complication into this thread, but other things to consider include:

- the student loan interest deduction
- capital gains taxes
- IBR/Pay As You Earn (potentially)

hiddenace

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Here's a crazy idea where you can have your cake and eat it too (as long as you have at least $10k):

 - Open up a brokerage account with Interactive Brokers.
 - Invest in a low-volatility ETF like XLP (consumer staple)
 - Request a margin account.
 - Borrow against the account to pay off your student debt.

Margin rates at Interactive Brokers are about 1.6% (lower if you have more than 100k).

You borrow at 1.6% to pay off a debt that costs you 6.8%.

Risk:  DON'T USE ALL YOUR MARGIN.  You should have a 50% cushion at least.  Even a bad scenario like 2008-2009 the value of XLP dropped 33% (and fully recovered in two years).  So assume a market crash - even if your collateral drops 33% in 6 months - you should have a 50% buffer to protect against a margin call.

Example:

Invest $10k
Margin is $10k
Borrow $5k to pay off debt

Even if the market crashed and your ETF dropped 33% to $6.7k - you'd still have enough to cover your margin.

You get to invest and pay off debt. 

hodedofome

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Here's a crazy idea where you can have your cake and eat it too (as long as you have at least $10k):

 - Open up a brokerage account with Interactive Brokers.
 - Invest in a low-volatility ETF like XLP (consumer staple)
 - Request a margin account.
 - Borrow against the account to pay off your student debt.

Margin rates at Interactive Brokers are about 1.6% (lower if you have more than 100k).

You borrow at 1.6% to pay off a debt that costs you 6.8%.

Risk:  DON'T USE ALL YOUR MARGIN.  You should have a 50% cushion at least.  Even a bad scenario like 2008-2009 the value of XLP dropped 33% (and fully recovered in two years).  So assume a market crash - even if your collateral drops 33% in 6 months - you should have a 50% buffer to protect against a margin call.

Example:

Invest $10k
Margin is $10k
Borrow $5k to pay off debt

Even if the market crashed and your ETF dropped 33% to $6.7k - you'd still have enough to cover your margin.

You get to invest and pay off debt. 

My numbers don't add up to this. IB is going to require 50% in maintenance margin on stocks and ETFs. So a $10k account +$5k margin is gonna be a $15k position. IB will require at least $7,500 in maintenance margin. Therefore the position only has to go down by $2500 for you to get margin called. That means XLP goes down by 16.67% and you're out.

Not to mention, but figuring out how much leverage you can use based on recent past history is how LTCM blew up their hedge fund and almost took down the financial world with it. Buying and holding stocks/equity ETFs on margin, especially 50% more than your account value, is asking for lots of trouble IMO. Charlie Munger has even said if you can't stomach a 50% drawdown at least twice in your lifetime, then you shouldn't be investing in stocks.

Joel

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Paying Debt provides the opportunity it get a guaranteed return...

GoldenStache

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I would hit the car payment first(even though it is a lower rate) and then invest once that is gone.  If the bad does happen and you can't make a payment, they will come take your car, and if you are not working you can get your loans deferred.  Have some emergency fund on the side but invest the rest.  VTSAX 10 year average is 7.87%, compared to 6.8% with a tax write off I would pick the stock.

wealthviahealth

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Thank you all for your great input!

Reading all of these suggestions makes it clear that it truly doesn't need to be an all or none situation.
My current thoughts are to keep paying both loans aggressively, as well as to keep investing semi aggressively,
all while tucking away bills here and there into my emergency cash fund.

They way I see it, I am still making great progress on my loans and if at any point I want to go all out "debt demolition mode"
I can easily liquidate some of my funds in the market periodically to make extra payments on top of my already hefty monthly payments.
A few months from now I may have a complete paradigm shift and decide being debt free is my top priority and sell all positions
but at least I would have still benefited from a few great rides in this overall bull market.

If stocks do take a wicked turn for the worst for a while, I also wouldn't mind buying up quite a few shares in preparation for the inevitable
bull markets to come. All of the reading on investing I have done this far has lead me to the position that the market is going to have some turbulent ups and downs and those who consistently bought through each cycle usually came out on top in the long run.

DCW

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Here's my $0.02:

I had a similar experience. I'll give you my numbers just for some perspective. I graduated college about 4 years ago with roughly 40K (6.55-6.8%) in student loan debt, and next month it will be paid off. Average income over those four years was approximately 34K (net). I've also built around 20k in a Roth IRA. I went with a "max IRA/spend the rest on debt" mentality (I had no other tax-advantaged investment options at the time). Hopefully my situations is similar (or at least relate-able) to yours.

I battled the same questions about extra income repeatedly: Should I put it all towards debt? Should I put it all towards investments? Should I have a balanced mix? I ended up with the balanced approach, but one that leaned heavily towards debt repayment. My main focus/tracking points (to keep my sanity) through the entire process were 1) the dollar value of my net worth, 2) savings rate, and 3) cash flow.

Here is why:
1 - By focusing on my net worth, it really didn't matter if I was investing or paying debt; I saw a significant increase in net worth every month. That helped me cope with the "paying debt isn't actually building anything tangible" argument; furthermore, I treated my ROTH as my emergency fund, so that got rid of any need to put money away with a lousy 1% return for an emergency that never came to fruition (I rented and had neither a wife nor kids; what huge financial emergency could I really have anyway? YMMV).

2 - The higher my savings rate was (50%+), the less investment/debt "returns" even mattered, because the time frame was therefore much shorter. There's really no reason nitpicking over a guaranteed 6.8% return vs a potential higher return when you're not concerned with 30+ years of having to make that choice. The differences in returns were negligible over a time frame of just a few short years. Because of my particular numbers, my savings rate made a HUGE difference in my time frame to pay off the debt completely and then put all of that cash flow towards investments, so I focused on my savings rate rather than my return rate. Again, YMMV.

3 - Cash flow was the biggest motivator for me to pay off the debt. I knew that once my loans were gone, that was $450.00/month (~25% of my monthly expenses) in obligations that would go away forever. Knowing that my no-choice-but-to work-to-live slave obligation would be decreased by 25% per month forever was a huge motivating factor to pay off the loans. Keeping that burden for 10 years just to put more money towards investments that may or may not have been more financially advantageous was not in the cards for me.

I was able to pay off my debt quickly, take advantage of 3 years of tax-free growth by maxing out the Roth, completely change careers, and have a little fun as well. At times it felt like I would never get my head above water, but looking back now I wonder why the hell I spent so much time obsessing about it.

Was my plan more psychologically motivated than others? Perhaps. But isn't our "psychology" the number one reason for wanting to FIRE in the first place? We're all trying to get to that point in life where we can enjoy it to the fullest anyway, and to me that seems awfully "psychological" ;) I'd rather enjoy my working years AND my FIRE years, and still make it to the party on time.

As long as you're not spending your discretionary income on cocaine and strippers and your particular "brand of investing vodka" isn't completely ignorant (EX - 100% AA in Pokemon Cards), your advantage in your youth will overshadow any "purely mathematical strategy vs psychological strategy" debate you can come up with.

I hope this helps. Every situation is different, so therefore there is no "correct" answer. However, I feel that my situation my be similar to yours. If not and I've wasted your time, maybe this will help: https://www.youtube.com/watch?v=c9GU4P-1AWI

I'll see you at the crossover point; we'll get there sooner than either one of us realizes.

gk123

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Thank you all for your great input!

Reading all of these suggestions makes it clear that it truly doesn't need to be an all or none situation.


No offense, but I think you might have been reading this thread with a bit of confirmation bias. There seems to be a broad consensus that the best investment would be to pay off your loans before putting any more money into trading (which would be different from what you plan to do). So you should decide whether your passion is for investing, or for trading.

For what it's worth, my situation is similar to yours: I enjoy trading but still have a large amount of student loans. When I started making money recently, I decided to take the best investment and pay off all of my loans first.

But before coming to this decision, here was my argument IN FAVOR of trading: Even though the best financial decision is to take the guaranteed 6.8%, there is more to life than trying to get rich. Trading is fun, just like a lot of other hobbies that cost money. So it might make some financial sense to trade before paying off loans if that means you don't need to spend a lot of money on other hobbies in order to enjoy life. In other words, trading is a better investment than buying expensive stuff like cars or traveling.

But I still decided to pay off all of my loans first. I have about 7k in a rIRA (which came from a 401k that a previous employer matched). Just having this money in the market allows me to invest in some index funds, and get all the enjoyment that comes from reading about them and putting in a few trades per year. In other words: I don't need to put any more money into the markets to get some enjoyment from trading.

You obviously love trading. But ask yourself: would putting more money into trading allow you to get more enjoyment out of it? Perhaps it's best to just sell your car and use that 10k (but nothing else) for trading while you pay off your loan ASAP.





beltim

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Thank you all for your great input!

Reading all of these suggestions makes it clear that it truly doesn't need to be an all or none situation.


No offense, but I think you might have been reading this thread with a bit of confirmation bias. There seems to be a broad consensus that the best investment would be to pay off your loans before putting any more money into trading (which would be different from what you plan to do). So you should decide whether your passion is for investing, or for trading.


No offense, but most people don't calling holding an individual stock for "25-50 years" as trading.  They call it investing.

CorpRaider

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Are you able to deduct the full amount of the SL interest or do you phase out? Is your investing done via tax advantaged accounts?  If you're getting a 30-ish% (combined state and federal marginal tax rate) discount on the after tax interest rate and a 30-ish% benefit on the investments, it might be material to your analysis.

rocksinmyhead

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Are you able to deduct the full amount of the SL interest or do you phase out? Is your investing done via tax advantaged accounts?  If you're getting a 30-ish% (combined state and federal marginal tax rate) discount on the after tax interest rate and a 30-ish% benefit on the investments, it might be material to your analysis.

I was going to ask this too. my answer to your question would be totally different depending on what your investment vehicle is (a 401k with a match? a taxable account?) and what your income is (how great is the tax benefit of a traditional 401k to your right now? can you deduct any of your SL interest?)

I am also 25 with a lot of SL debt (started with $70k, now down to <$15k). I was hitting the student loans pretty hard when I started my job in 2012 (contributed to my 401k enough to get 8% company match, the rest went to loans) but some folks here gave me the excellent advice to reassess that. I'm in the 28% tax bracket and when I ran the numbers on tax savings if I maxed out my 401k vs. the extra student loan interest I would pay, it did make sense to max out the 401k. you might want to check the numbers for your situation.

I find that investing also makes me more frugal as I now avoid un-essential  purchases since I know the money would be better spent in my portfolio.

interestingly, I feel the same way re. paying down student loans! to me watching a loan balance go down or a 401k balance go up are equally satisfying. but, to each their own :)

3 - Cash flow was the biggest motivator for me to pay off the debt. I knew that once my loans were gone, that was $450.00/month (~25% of my monthly expenses) in obligations that would go away forever. Knowing that my no-choice-but-to work-to-live slave obligation would be decreased by 25% per month forever was a huge motivating factor to pay off the loans. Keeping that burden for 10 years just to put more money towards investments that may or may not have been more financially advantageous was not in the cards for me.

love your whole post DCW, but especially this, I feel the same way!!

I am motivated by the constancy of the 6.8% on the student loan and will still be aggressively paying this down.
This feeling my change but at the moment, I envision having a greater sense of finical security via paying down debts at 7/10 pace
and keeping up with my investments and emergency cash savings as opposed to paying down debts at a 9/10 pace and not building my nest egg at all. Perhaps I will have a shift in this thinking in a short period of time but am wondering if any others have felt the same way.

I definitely agree with this, up to a certain point. I directed money to an emergency fund until I had $10k. that was enough for me, obviously others may feel differently. after that point, what makes me feel the most financially secure is getting rid of student loans! mine were chopped up into several different loans (I never consolidated), so when I started I had a total minimum payment of ~$1000. now it's about $300. that would be a lot easier to manage if my income decreased significantly.