Announcement

Collapse
No announcement yet.

MATH HELP re recent blog post: Loan payoff vs. Invest

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • #16





    To clarify, the 7% (with 15% capital gains) was just a simple example. The 5.95% after tax return assumes annual capital gains taxes every year which is highly unlikely.  Any deferral at all, will improve upon the return. 
    Click to expand…


    I follow the example that you illustrated. After tax return (%) = % return x (1- capital gains %).

     

    The part I do not follow is the statement: “The 5.95% after tax return assumes annual capital gains taxes every year which is highly unlikely.” If funds are in a “taxable account” then why wouldn’t taxes be applied yearly? Probably a basic question, but I do not follow (still a rookie ???? ).

     
    Click to expand...


    When there is a capital gain raised within the fund by shares of individual constituent stocks being sold, or a dividend paid on a stock within the fund, it generates tax on it because the fund sold shares of the stocks even if you didn't sell your shares of the fund. These are usually baked into equity funds' annual distributions and bond funds' monthly distributions (though you shouldn't have taxable bonds in taxable, just munis). You don't pay tax on the capital gain on appreciation of shares until you sell the fund shares.

    Comment


    • #17
      I know the whole point of this post was to get into the nitty gritty numbers and all but . . . You only have 45k in loans and will be making 400k and plan to work for 30 years. Roll around in that cash, use it as toilet paper . . . Whatever you want. You're going to be fine no matter what you do ???? I personally would just wipe out the loan but that's me. Congrats on putting yourself in a great position!

      Comment


      • #18




        The subjective criterion which cannot be right or wrong is risk tolerance. What is the expected return of the alternative to reducing your fixed finance charges over how long? Is that worth taking the market risk? Is your income to cover the monthly payments on your simple amortizing loan at risk (going part-time, retiring)?
        Click to expand...


        In theory, my risk tolerance is high. The relatively little we have in retirement accounts (~$95k) are 100% equities. My theory in the retirements is that we are going to ride the waves for the next 30 years anyway so let it "do what it do" in the various index mutual funds we have them in now. But I am new to all this and cannot predict how I would actually behave with a market downturn. I also say that I would be brave if my wife and I were being chased by a bear, but I am faster than her so.... who knows until we are in that situation.

         

        The taxable account would be used as an additional account for retirement with no plans on touching it for 30 years either. Thus, I think a 6-8% return would be reasonable. I think it would be worth the market risk because we will be riding the waves for the long haul. Income not at risk.

         

         

         

         

        Comment


        • #19


          I know the whole point of this post was to get into the nitty gritty numbers and all but . . . You only have 45k in loans and will be making 400k and plan to work for 30 years. Roll around in that cash, use it as toilet paper . . . Whatever you want. You’re going to be fine no matter what you do ???? I personally would just wipe out the loan but that’s me. Congrats on putting yourself in a great position!
          Click to expand...


          Haha well it is my wife who put us in a great position. Now it is my turn to step up with the attending salary.

           

          I agree that in the grand scheme of all this it is negligible. However, I am very new to investing/finance and I want to be able to independently make these decisions when our portfolio is much bigger. It is more so about learning the process and analysis now so that we can make smart decisions in the future. I don't want us to make small mistakes and develop a poor approach that will compound into potentially $1mil+ mistake in our portfolio.

          Comment


          • #20
            If you're going to carry debt as de facto leverage for your investments, then you absolutely need to be prepared for what may happen if you cease to be able to cash-flow your payments. This can be manifested as a "safety buffer" in a taxable account, short-term bonds, or just a lot of equities on which you'd be able to tolerate losing 50% on (whatever the most catastrophic market plunge might be) and still be able to cover them.

            This is where the expression "if you've won the game, stop playing" comes into play. Leverage has very little utility when you don't need to take the risk. Again, if you want to go all-out with equities, real-estate, etc, sure, go for it. But you need to have your liquid (or easily liquefied) assets structured in such a way that they can be ready to cover your payments in the event that your income stops or your properties are vacant or require expenses.

            Comment


            • #21




              If you’re going to carry debt as de facto leverage for your investments, then you absolutely need to be prepared for what may happen if you cease to be able to cash-flow your payments. This can be manifested as a “safety buffer” in a taxable account, short-term bonds, or just a lot of equities on which you’d be able to tolerate losing 50% on (whatever the most catastrophic market plunge might be) and still be able to cover them. This is where the expression “if you’ve won the game, stop playing” comes into play. Leverage has very little utility when you don’t need to take the risk. Again, if you want to go all-out with equities, real-estate, etc, sure, go for it. But you need to have your liquid (or easily liquefied) assets structured in such a way that they can be ready to cover your payments in the event that your income stops or your properties are vacant or require expenses.
              Click to expand...


              Hey sorry I did not address this in previous post. I meant to.

              We have about $25k in liquid funds right now. Plan is to have a $30k "emergency fund" in Ally Savings, keep checking accounts for bills that get autopaid and start putting money over top that emergency fund into a money market account to save up for the down payment for our next home. Our expenses now (Mortgage + HOA + Bills) are only like $2k ($3k including the student loan payment). We have about $40k equity in our condo that we may hold as a rental. We have enough of a buffer right now in the event of an unexpected unemployment. We will re-adjust when we move up in home.

              Comment


              • #22





                you really can’t beat the feeling of being debt free. 
                Click to expand…


                I can. My balance sheet makes me feel good. You don’t get to tell me what feels good and what doesn’t.

                I don’t buy this “debt slavery” argument. I know Clint didn’t use that specific nomenclature, and I don’t mean to put words in his mouth, but it’s in the same vein.  Someone with a mortgage at <2% after tax over 15-30 years (below historical inflation rate in some cases) who is earning 5% a year compound in their investments over that same period must be in the cushiest bondage imaginable. That’s a massive emotional overstatement. The debt is the debt and the gain is the gain. You get to decide how to feel about it.

                Now, no one should be taking out needless debt or debt on which they can’t reliably cover the payments over time; that’s just not smart. If you don’t need the leverage because you can afford what you need/want without it, don’t take it. Also, you should definitely be structuring your existing necessary debt to the lowest rate and shortest term possible (think 5-year, 3% range for student loans). Just doing that alone is an “aggressive” move to limit your debt to a fixed cost over a short term which should henceforth make long-term equity investing superior.

                But don’t delude yourself into thinking you’re putting yourself into the Chains of Mephistopheles over $3,000 of finance charges over 5 years, or a mortgage loan with a rate approximating historical inflation which is backed by an insured, protected, (likely) appreciating asset, especially if the alternative is open-ended compound (likely) growth and even more so if it’s tax-advantaged.

                The subjective criterion which cannot be right or wrong is risk tolerance. What is the expected return of the alternative to reducing your fixed finance charges over how long? Is that worth taking the market risk? Is your income to cover the monthly payments on your simple amortizing loan at risk (going part-time, retiring)? If you consider that and you *want* to pay your well-structured debt, then pay your debt. That’s never wrong, especially if you have a robust portfolio and have no use for leverage. But don’t emotionally aggrandize a static numerical entity. It’s ontology over semantics.
                Click to expand...


                True.  For a lot of people it does feel like a weight hanging over their head.  The real answer is more personal preference, debt and risk aversion, than it is a math exercise because of the risk and uncertainty involved in investing.  Personally, I prefer to invest than to pay down a smaller interest rate loan.  My wife on the other hand would have us pay down all sources of debt (including mortgage) before investing a dime if she had her way.  We end up meeting somewhere in the middle.

                Comment


                • #23


                  Personally, I prefer to invest than to pay down a smaller interest rate loan.  My wife on the other hand would have us pay down all sources of debt (including mortgage) before investing a dime if she had her way.  We end up meeting somewhere in the middle.
                  Click to expand...


                  100%.  That's p much life and marriage in a nutshell, right? :-)

                  Comment


                  • #24
                    We are in a similar situation. Have about 30K of student loans left at 3.7% from >300.  I slowed down paying my loans because we would like to move pretty soon.  We are trying to save up for a downpayment for a house, pay off loans, and invest with the money we have after already contributing to retirement accounts. In the end i'm sure it doesn't really matter as long as you are saving towards your goals.

                    Comment


                    • #25





                      To clarify, the 7% (with 15% capital gains) was just a simple example. The 5.95% after tax return assumes annual capital gains taxes every year which is highly unlikely.  Any deferral at all, will improve upon the return. 
                      Click to expand…


                      I follow the example that you illustrated. After tax return (%) = % return x (1- capital gains %).

                       

                      The part I do not follow is the statement: “The 5.95% after tax return assumes annual capital gains taxes every year which is highly unlikely.” If funds are in a “taxable account” then why wouldn’t taxes be applied yearly? Probably a basic question, but I do not follow (still a rookie ).

                       
                      Click to expand...


                      Typically, if you are accumulating assets and aren't trading the account, there isn't a lot of need to sell from the portfolio. Even if you are rebalancing, you can do it through your buys instead of selling.   Capital Gains taxes are only triggered at the time of sale (or if the fund has a capital gains distribution), so if you can hold for 30 years for example without selling, the 5.95% turns into 6.50% assuming everything else is equal.  This of course is illustrative and doesn't include dividends and capital gains distributions.

                      Comment


                      • #26
                        You really should have zero issues with distributions and capital gains by using ETFs and choosing the right funds instead of those that are not favorable to a taxable.

                        Again, the hurdle rage for a compound investment to beat your loan is 0.35% over 20 years. It would be less for 30 years. If you made it anything higher you start to beat it considerably. That was a break even.

                        I also dont get the "debt slave" issue, or that its such a hassle. These things should be on autopilot. I havent messed with a mortgage/loan payment in years except to adjust payments, its all auto-deducted and brainless.

                        There is certainly a cost to making these decisions, and the OP is right to at least figure them out before hand, no matter the choice. The overall sum may be small, but over 30 years it wont be. The real sum that is small is the 3k of interest. The point is to accurately and for the right reasons make the choices, not that one is inherently better than the other. That depends on a host of things.

                        Not everyone is a two doctor income family with the ability to fully max out deferred accounts and crush loans, and for those people this kind of an all or nothing view point can be detrimental without really understanding the options.

                        If you're just starting and in a decent job, I'd focus on wealth building. Once you have a nest egg for compounding of some amount, then start the finer points and making the overall portfolio of your dreams. You can never get compounding time back, time is your biggest friend. Also why this is entirely different for a doctor thats near retirement, they dont have the compounding time that will allow fluctuations to not matter.

                        Comment


                        • #27


                          You really should have zero issues with distributions and capital gains by using ETFs and choosing the right funds instead of those that are not favorable to a taxable.
                          Click to expand...


                          That is the next step in my education: figuring out how to build a tax efficient portfolio. At this point, I would probably just put everything in the taxable account into a large cap index since it is tax efficient and should easily beat the break-even 0.35%. I am not interested in bonds at this point in life either.


                          These things should be on autopilot.
                          Click to expand...


                          Yes I agree. My credit cards are all autopay too, so I have to actively remember to check my statements to make sure there are no errors.


                          Not everyone is a two doctor income family with the ability to fully max out deferred accounts and crush loans, and for those people this kind of an all or nothing view point can be detrimental without really understanding the options.
                          Click to expand...


                          Agreed. My wife is not a doctor but earns 6-figures.


                          If you’re just starting and in a decent job, I’d focus on wealth building.
                          Click to expand...


                          Let's hope my wife continues to be ok living in our "little condo." I am salivating at the opportunity of earning $400k as a family with such low expenses. It doesn't feel real yet. I earned more as a resident/fellow than my parents did most of their lives.

                          Comment


                          • #28





                            You really should have zero issues with distributions and capital gains by using ETFs and choosing the right funds instead of those that are not favorable to a taxable. 
                            Click to expand…


                            That is the next step in my education: figuring out how to build a tax efficient portfolio. At this point, I would probably just put everything in the taxable account into a large cap index since it is tax efficient and should easily beat the break-even 0.35%. I am not interested in bonds at this point in life either.


                            These things should be on autopilot. 
                            Click to expand…


                            Yes I agree. My credit cards are all autopay too, so I have to actively remember to check my statements to make sure there are no errors.


                            Not everyone is a two doctor income family with the ability to fully max out deferred accounts and crush loans, and for those people this kind of an all or nothing view point can be detrimental without really understanding the options. 
                            Click to expand…


                            Agreed. My wife is not a doctor but earns 6-figures.


                            If you’re just starting and in a decent job, I’d focus on wealth building. 
                            Click to expand…


                            Let’s hope my wife continues to be ok living in our “little condo.” I am salivating at the opportunity of earning $400k as a family with such low expenses. It doesn’t feel real yet. I earned more as a resident/fellow than my parents did most of their lives.
                            Click to expand...


                            Yes, try to ride that out as long as possible. There is a reason that the tax code favors home ownership, its the number one predictor of increased consumption overall. More home, bigger and importantly fixed bills increase as well as stuff to fill it, the issues, etc...

                            Keep trying, dont be like me and have a nice place the wife loves and then float an idea like I did last night about selling and moving into one unit of a four plex. Did not go over well at all. There have been zero good four plexes for sale in the last 5 years, this was a great opportunity! Happy wife....etc..

                            Comment


                            • #29




                              I also say that I would be brave if my wife and I were being chased by a bear, but I am faster than her so…. who knows until we are in that situation.
                              Click to expand...


                              I am really going to have to try this line on my wife.  I'm sure it will go over well after she explains the 'happy wife, happy life' for the 10 millionth time.




                              I havent messed with a mortgage/loan payment in years except to adjust payments, its all auto-deducted and brainless.
                              Click to expand...


                              Interesting perspective.  I may be a bit 'old school' (picturing Bernard doing the Iron Cross while smoking) or just 'old' (according to my wife).  The only payment we make via autodraft is the CC bill.  I guess its seems like a bit more of a 'connection' when typing in a number into the bill pay of our bank.  Or it could be the $2K ComEd 'autodrafted' from my wife's business account when the normal monthly payment was like $25 and it took almost two years to get refunded.

                              Comment


                              • #30







                                I also say that I would be brave if my wife and I were being chased by a bear, but I am faster than her so…. who knows until we are in that situation.
                                Click to expand…


                                I am really going to have to try this line on my wife.  I’m sure it will go over well after she explains the ‘happy wife, happy life’ for the 10 millionth time.




                                I havent messed with a mortgage/loan payment in years except to adjust payments, its all auto-deducted and brainless.
                                Click to expand…


                                Interesting perspective.  I may be a bit ‘old school’ (picturing Frank the Tank doing the Iron Cross while smoking) or just ‘old’ (according to my wife).  The only payment we make via autodraft is the CC bill.  I guess its seems like a bit more of a ‘connection’ when typing in a number into the bill pay of our bank.  Or it could be the $2K ComEd ‘autodrafted’ from my wife’s business account when the normal monthly payment was like $25 and it took almost two years to get refunded.
                                Click to expand...


                                Its more of a credit management idea really, and of course convenience. Doctors are busy, number one reason you may fail to pay a bill on time is just not paying attention due to being busy. This hits your credit, etc....painful.

                                You do want to watch for any changes like that of course, and every now and then I catch something. Nothing big though and I try to put any big/important purchases on credit card as your ability to withdraw, cancel and otherwise control the transaction is much higher.

                                At&t still wont give me my 350$ back that they autodeducted after a line was supposed to be removed. Spent hours on the phone fighting them, actually found the notes where I asked for it to be cancelled, etc...but they just told me to get lost. Painful. First world problem not to notice a few hundred dollars in charges however.

                                Comment

                                Working...
                                X