Sounds like a lot of peeps on this thread should look up the term "opportunity cost" before making the decision to pay off loans.
Meh, the peace of mind that I would get from paying off the loans would be pretty nice.
Sounds like a lot of peeps on this thread should look up the term "opportunity cost" before making the decision to pay off loans.
Sounds like a lot of peeps on this thread should look up the term "opportunity cost" before making the decision to pay off loans.
Maybe. I suppose it depends on what your financial goals are. I'm not sure how I'm worse off by saving and investing the $400/month that I had been paying on my auto loan (not to mention money saved/gained by avoiding interest charges over the remaining life of the loan).
I'd be curious to hear the scenario in which NOT paying of the loans is the smart thing to do.
When you can earn a greater rate of return on the money you'd spend paying off the loan than the interest rate you are paying on the loan.
I should have realized this when I posted the comment. I guess the amount of outstanding debt is probably something to consider when making these choices.
For me, the choice was simply - pay off the debt. Of course, I was pretty fortunate in that my loans were relatively small.
When you can earn a greater rate of return on the money you'd spend paying off the loan than the interest rate you are paying on the loan.
Student loans and mortgages are especially interesting when it comes to this because the interest paid on both is tax deductible.
Lets say you have an interest rate of 5% on one of those types of loans and you pay in the 25% tax bracket. That 5% rate essentially becomes 3.75% (5 times .75) because 25% of all interest you paid becomes essentially a credit on your taxes. So instead of paying extra on the loan, what if you took that extra amount and put the money in a Roth IRA? As long as you get a 3.75% return (no taxes because this is a taxed dollar growing tax-free which can be withdrawn later tax-free) you are making the better economic decision.
Who makes 3.75% a year in this market you say? Well as of December 31, 2010 the following indices outpaced that return on a ten-year annualized basis:
US Equities:
Russell Midcap Index
Russell 2000 Index
Russell Midcap Vale Index
Russell 2k Growth and 2k Value Indices
Int Equities:
MSCI EAFE
MSCI World ex-US
Bonds:
Barclays Agg
Barclays US Gov/Credit
Citi World Gov't Bond
That list isnt exhaustive. Basically anyone who put money into the market Jan 1, 2001 and rode the wave of not one but two recessions and didnt invest exclusively in large cap US equities beat a 3.75%. Again the last ten years have been horrible.
It's tax deductible up to a certain income level, correct? If I were making 100k a year, I wouldn't get much benefit from them.
My loans are all around 6%.
My wife and I make well over the amount you stated and 100% of her interest was deductible. At 6% you need a 4.5% return (or say you are in the 15% tax bracket 5.1%), which really isnt that tough.
My wife and I make well over the amount you stated and 100% of her interest was deductible. At 6% you need a 4.5% return (or say you are in the 15% tax bracket 5.1%), which really isnt that tough.
My wife and I make well over the amount you stated and 100% of her interest was deductible. At 6% you need a 4.5% return (or say you are in the 15% tax bracket 5.1%), which really isnt that tough.
It's definitely phased out between $60-75k (single) and $120-150k (married filing jointly).
I can do stocks, but bonds are something I don't have much experience with. What do you look for when picking bonds?
Fixed income is about 10 times more complicated than equity investing and for a guy in his mid 20s, you probably dont need much bond exposure but if your risk tolerances require it then just buy a bond mutual fund. The PIMCO Total Return is a good one. Bill Gross can probably pick bonds better than you can.