Paying off student loans vs. Investing

[Red Squirrel]

Originally Posted by spidey07

Ummm. Remember the net worth thing I mentioned.

Remember how I talked about loan rates vs rate of return?

My secret is simple. Make my money make more money for me.

Wait is this 750k all sitting in investment, as opposed to being stuff you bought? That would be a bit different, at least if shit hits the fan you can pay it all off completely. I've heard of people doing this, it can be risky but if it works out you CAN make money. I still never heard of a bank that will give that much money though. The most my bank will give me is 20k and I have a very high credit rating (825 or something like that).

Originally Posted by fstime

30 year mortgage is basically a death loan, good luck. You also end up paying double in interest compared to a 15 year. Have fun working for the bank. Now if that debt is from investment property which is generating a healthy 10% return fine. On a primary residence, no thanks.

American society has sold so many sheep into thinking debt is normal when that is far from the truth.

Want a car? -Debt

Want a college education? -Debt

Want a house? -Debt

It is what keeps you enslaved and working until your death to pay off.

Don't forget to give any spare cash to a investment broker, he won't lose it, trust me.

Not everyone can afford the payments for a 15 year. (I would imagine it's much higher than what a 30 year would be). But the shortest you can afford is the smartest.

Also you can buy a used car, and go to local college. that's two debts that can fairly easily be avoided.

[spidey07]

Originally Posted by Red Squirrel

Wait is this 750k all sitting in investment, as opposed to being stuff you bought? That would be a bit different, at least if shit hits the fan you can pay it all off completely. I've heard of people doing this, it can be risky but if it works out you CAN make money. I still never heard of a bank that will give that much money though. The most my bank will give me is 20k and I have a very high credit rating (825 or something like that).




Not everyone can afford the payments for a 15 year. (I would imagine it's much higher than what a 30 year would be). But the shortest you can afford is the smartest.

Also you can buy a used car, and go to local college. that's two debts that can fairly easily be avoided.

It's mostly the house and why at today's rates it's foolish to pay down or do 15 year if you are smart with your money.

Debt can be good if used correctly.

[Phoenix86]

Originally Posted by spidey07

The rule is pay off debt if it's greater than what you would get in return.

This +/- taxes and inflation.

[jagec]

Originally Posted by Red Squirrel

Wait is this 750k all sitting in investment, as opposed to being stuff you bought? That would be a bit different, at least if shit hits the fan you can pay it all off completely. I've heard of people doing this, it can be risky but if it works out you CAN make money. I still never heard of a bank that will give that much money though. The most my bank will give me is 20k and I have a very high credit rating (825 or something like that).

That was his implication, yes. And banks hand out $750k loans all the time...they're called mortgages.

Your credit score influences the rates banks will give you much more than the amount. You need assets+income to get big loans.

[ViviTheMage]

skip the school debt, who knows, oblama might have some sort of credit back to those of us still paying

[silverpig]

Originally Posted by manly

I'm pretty sure the long-term average is more like 8% (in the U.S.), and then you have to factor in inflation and taxes to calculate a net rate of return.

Paying off the 8 and 6.8% loans ASAP is pretty much a no-brainer unless the OP is a strong stock-picker. In which case he probably wouldn't be asking us the question.

Finally, buy and hold really takes decades to be successful. Over say the past 14 years, you would've had to absorb two market crashes.

Nope. It's pretty close to 10%, and they factor inflation into that. Actually, I think it even includes the excess return over holding treasury bills.

http://www.istockanalyst.com/article...icleid/2803347

As shown, as of today, the annualized return of the S&P 500 Index (and its predecessor index) is about 9.26%, the 5-year annualized return is about -2.92%, the 10-year annualized return is about -1.75%, and 15-year annualized return is about 6.19%, the 20-year annualized return is about 8.22%, and the 25-year annualized return is about 9.61%.

Your last point is definitely true though. That's why it's risky and why you need to be able to weather the short term fluctuations.

[silverpig]

Originally Posted by spidey07

So given that. Why wouldn't you mortgage 30 year at 3.5%, not even counting tax deductions? It's like free money.

I maxed out a non jumbo loan and a fat heloc.

The name of the game is net worth and making your money make more for you.

Simply taking out loans to buy assets doesn't increase your net worth at all. Just making that clear for others as I'm sure you know that. It makes your personal balance sheet bigger, but companies go bankrupt with balance sheets that total billions of dollars all the time.

Making money by investing your assets increases your net worth as you grow your assets faster than your debt.

[manly]

Originally Posted by silverpig

Nope. It's pretty close to 10%, and they factor inflation into that. Actually, I think it even includes the excess return over holding treasury bills.

http://www.istockanalyst.com/article...icleid/2803347



Your last point is definitely true though. That's why it's risky and why you need to be able to weather the short term fluctuations.

Actually, we're both a bit wrong. You're right the long-term average annualized return of U.S. stocks is about 10%. However, the link you referenced does not mention inflation, which is commonly cited at about 3%.

So ignoring capital gains taxes, the long-term average real rate of return is 7%. Source: Active Value Investing

All spidey07 is saying is that if you can borrow at 3.5% and yield 7%; that's not bad. What he doesn't say is that this isn't a risk-free return, as you and others have stated.

[silverpig]

Originally Posted by manly

Actually, we're both a bit wrong. You're right the long-term average annualized return of U.S. stocks is about 10%. However, the link you referenced does not mention inflation, which is commonly cited at about 3%.

So ignoring capital gains taxes, the long-term average real rate of return is 7%. Source: Active Value Investing

All spidey07 is saying is that if you can borrow at 3.5% and yield 7%; that's not bad. What he doesn't say is that this isn't a risk-free return, as you and others have stated.

Ah right. It's the excess return over the risk free rate they include, but not inflation. The net effect is they almost balance out though.

The stock market return over time is actually something like 11%, minus the risk free (tbill) rate to get 10%. If you add that back in, and then subtract inflation you are back around 10%.

Of course this goes to crap when inflation spikes up, when interest rates change etc.

[Hugo Drax]

Originally Posted by spidey07

Ummm. Remember the net worth thing I mentioned.

Remember how I talked about loan rates vs rate of return?

My secret is simple. Make my money make more money for me.

so is 750K your margin debit on a margin account?

Ahh its your house mortgage.

So then your net worth is -750K?

how the heck are you investing it?

[Corporate Thug]

Originally Posted by Chaotic42

10% per year? The S&P 500 is at 1485.98 right now. For it to return 10% per year over the next 30 years, it would have to end up at 25929.46 in 2043. I just can't believe that will happen barring some massive inflation. I can't see the US economy growing that much.

why is that hard to believe? The S&P has gone up over 9 fold in the last 30 years (~165 in 1983 to 1500 now).

[spidey07]

Originally Posted by Hugo Drax

so is 750K your margin debit on a margin account?

Ahh its your house mortgage.

So then your net worth is -750K?

how the heck are you investing it?

Typically your house is worth more than the mortgage so that's included in net worth on the positive side (value of home minus any loans/lines of credit). Not only that, but with the interest deduction you're effectively getting money at less than 3% these days with rates so low.

How investing? Typically buy and hold blue chips. One of them just paid a fat one time 4 dollar dividend.

What sounds better to you? 3% or 10%?

[sunzt]

Originally Posted by Hugo Drax

so is 750K your margin debit on a margin account?

Ahh its your house mortgage.

So then your net worth is -750K?

how the heck are you investing it?

Net worth is not -750k. Assuming his house was paid for and worth 750k, getting a 750k loan gives you 0 net worth.

[sunzt]

Originally Posted by spidey07

Typically your house is worth more than the mortgage so that's included in net worth on the positive side (value of home minus any loans/lines of credit). Not only that, but with the interest deduction you're effectively getting money at less than 3% these days with rates so low.

How investing? Typically buy and hold blue chips. One of them just paid a fat one time 4 dollar dividend.

What sounds better to you? 3% or 10%?

You sure have more faith in the market than I do. I invest in riskier things than you do, but would never put my house into it. Never know when another '08 will happen again.

[fstime]

Never know when another '08 will happen again.

Another 08 is going to happen very soon.

If you can't tell that the entire system in the United States is rotten from the inside out, you are blind. We just put makeup on the outside to make it look pretty for now.

The federal government has no intentions on fixing the massive debt and deficit problem, state and city budgets are facing similar problems.

Record number of people on food stamps, section 8 housing, and other forms of government aid will slip deep into poverty/lower class if government cuts are made.

Interest rates held at 0% until 2015+ creating another housing bubble (also thanks to banks creating an artificial shortage by extending closing times to ridiculously long periods of times on short sales and foreclosures).

A crash is necessary to fix this problem, we have dug ourselves way to deep to keep being able to put a band-aid on the problem and hope it will go away. We need a nice solid reset.

Good luck in keeping faith in your investments.

[Red Squirrel]

Houses can be a decent investment, but if I were him instead of living in a 750k mansion I'd live in a normal ~200k house, and buy several 150k fixeruppers, fix them up, and flip them. Not exactly an investment in it's own, but quick way to make like 30-50k per house then take that money and put it into GICs or something. Keep a buffer, rinse and repeat.

[MeowKat]

Ill invest it for you.

[Dirigible]

The point of "run the numbers and see whether you think you'd be ahead by paying off debt quicker or investing money instead" is very true. Be sure to take risk into account, and your own personal emotions around risk.

If I were the OP, I'd make sure I had an emergency fund, do the basics like make sure you're getting any available 401k match, then pay off the 8% and 6.8% loans quickly.

If the others were small loans (small in my case is like $20k or less, ymmv), I'd pay them quickly off too, even if the interest were low. It might cost me some investment income, but not a lot because we're not talking a lot of money. Plus, I just don't like being in debt.

Despite this, I owe on loans bigger than Spidey's. I overcome my personal distaste of debt when my calculations make it very clear I'd likely be better off with debt.

Originally Posted by Red Squirrel

Houses can be a decent investment, but if I were him instead of living in a 750k mansion I'd live in a normal ~200k house, and buy several 150k fixeruppers, fix them up, and flip them. Not exactly an investment in it's own, but quick way to make like 30-50k per house then take that money and put it into GICs or something. Keep a buffer, rinse and repeat.

Depending on location, $750k may be a mansion, a "normal house," or a decrepit shack.

[Hugo Drax]

Originally Posted by spidey07

Typically your house is worth more than the mortgage so that's included in net worth on the positive side (value of home minus any loans/lines of credit). Not only that, but with the interest deduction you're effectively getting money at less than 3% these days with rates so low.

How investing? Typically buy and hold blue chips. One of them just paid a fat one time 4 dollar dividend.

What sounds better to you? 3% or 10%?

It depends it is not a simple as that.

Also what is your net liquidation value.

If you are forced to liquidate all assets right now, what is your net positive cash value?

[spidey07]

Originally Posted by Hugo Drax

It depends it is not a simple as that.

Also what is your net liquidation value.

If you are forced to liquidate all assets right now, what is your net positive cash value?

I won't say, but I will be retiring by age 50. About 8 more years.

[Hugo Drax]

Originally Posted by spidey07

I won't say, but I will be retiring by age 50. About 8 more years.

Well then I will give you a pat on the back.

[spidey07]

Originally Posted by Hugo Drax

Well then I will give you a pat on the back.

My big wake up call was in my mid 20s when looking at my mortgage application I saw that I actually had a negative net worth (like -15k or something). Ever since then I've been doing everything I can to increase it.

What's weird is when I did the mortgage for the new place, they never asked about assets. I even asked "you don't factor in overall net worth or assets?"

No she said, only debt, liabilities and income.

[Jeff7]

Originally Posted by fstime

Another 08 is going to happen very soon.

If you can't tell that the entire system in the United States is rotten from the inside out, you are blind. We just put makeup on the outside to make it look pretty for now.

The federal government has no intentions on fixing the massive debt and deficit problem, state and city budgets are facing similar problems.

Record number of people on food stamps, section 8 housing, and other forms of government aid will slip deep into poverty/lower class if government cuts are made.

Interest rates held at 0% until 2015+ creating another housing bubble (also thanks to banks creating an artificial shortage by extending closing times to ridiculously long periods of times on short sales and foreclosures).

A crash is necessary to fix this problem, we have dug ourselves way to deep to keep being able to put a band-aid on the problem and hope it will go away. We need a nice solid reset.

Good luck in keeping faith in your investments.

If you think that'll happen (and I also wouldn't be too surprised to see it myself), I would then recommend that you short-sell Vanguard's total stock market ETF.