Not necessarily. Buying a house I may disagree with (it really depends on a number of factors), but those that use a windfall to pay off debts are simply following sound financial advice: if those debts are running at 4% (student loans) to 15% (credit cards), it makes more sense to pay them off first, then invest the rest in interest-bearing accounts.
Rob
Amused
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Actually, it makes more sense to invest all of it, and use the interest to pay off the debts. Since, in this case, the interest will be $36,000 anually at 2%. Most people don't have more than that in debt (not including car and home).
Also, if you have a lot of debt, chances are you aren't a very good financial planner to begin with. Most people would simply put themselves right back into debt.
JulesMaximus
No Lifer
- Jul 3, 2003
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I agree to some extent with #2 (though for many, myself included, debt has come as a response to rising higher education costs), but for #1, I take a simple mathematical approach to it.
For the sake of discussion, I'll use $1mil as the interest-bearing figure, $18,900 as the figure of debt (national average of undergraduate student loans), 2.1% as the interest-bearing figure (ING direct), and 3.37% as the interest on debt (again, based on student loans).
Taking that $1mil and immediately paying of my loans results in $981,100 to invest. After 5 years of investment, assuming no increases in returns, I am left with $1,089,618.18.
If I were to use the interest to pay off the loan, there are other variables to take into consideration, but effectively I'm earning $21,000 per year. At the end of the first year, I would have approximately $1,021,000 - $19,546.86 = 1,001,453.14, which would appreciate to 1,089,129.41 after 4 years.
The net difference isn't huge, but financially speaking (psychological issues aside), you're ahead, net, at the end of the payment term, assuming the interest growing on your loans is LARGER than the interest you can gain by investment. That's my view, at least.
What reasons do you have for doing it in the opposite way? I know you're a successful businessman, so I don't doubt your methods, I'm just curious. I'm basically following my grandfather's WASP-Y advice when it comes to financial planning, so I'm reasonably conservative when it comes to the numbers.
Rob
Amused
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My reasoning is a very basic financial rule... NEVER spend your principle. It's based on the reason why so many people burn through any kind of windfall and never gain from it.
I agree that your way is sound, but it takes far more will power than simply locking the money away and never touching it. My way is more simple and easier to follow.
I agree that your way is sound, but it takes far more will power than simply locking the money away and never touching it. My way is more simple and easier to follow.
Originally posted by: Amused
My reasoning is a very basic financial rule... NEVER spend your principle. It's based on the reason why so many people burn through any kind of windfall and never gain from it.
I agree that your way is sound, but it takes far more will power than simply locking the money away and never touching it. My way is more simple and easier to follow.
Ok, so your rule is psychological. Nothing wrong with that.
Have I mentioned recently that I hate student loans?
Rob
Amused
Elite Member
- Apr 14, 2001
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Originally posted by: Entity
Originally posted by: Amused
My reasoning is a very basic financial rule... NEVER spend your principle. It's based on the reason why so many people burn through any kind of windfall and never gain from it.
I agree that your way is sound, but it takes far more will power than simply locking the money away and never touching it. My way is more simple and easier to follow.
Ok, so your rule is psychological. Nothing wrong with that.
Have I mentioned recently that I hate student loans?
Rob
Yep, student loans suck. But they DO pay for themselves if you combine ambition with the knowledge you gain.
Yeah, my rule is based on human nature. It's just a whole lot easier to tell people "DON'T TOUCH IT!"
Because if you break that rule to pay off debts, they usually just keep putting themsleves into debt, and keep dipping into the principle to pay off that debt.
The first Austin Powers got it exactly right -- one meeellion dollars is nothing like it used to be 30-40 years ago.
Having $1.8 million US after taxes right now would be sweet, even though I'd do boring things with most of it like savings (INGdirect pays 2.1%), CDs (4% on 4-year), and index-based mutual funds like Vanguard's VFINX (S&P 500). On $1.5m that should earn $60K - 120K a year, while still giving me $300K to throw away the first year.
My body would collpase on itself from the massive weight and I would die. There is no answer to such a question.
Why the fsck do you call them pounds?
It doesen't even make any sense.
"Yeah, I just won 100lbs."
100lbs of what? Rocks? feathers? adult toys?
It doesen't even make any sense.
"Yeah, I just won 100lbs."
100lbs of what? Rocks? feathers? adult toys?
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