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

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  • #31





    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.
    Click to expand...


    Exactly! This is about knowing how it actually works, instead of what the popular opinion is. At some point in the future there will be an opportunity/choice where knowing these things may have an outsized/asymmetric setup that can be transformative.

     

    Comment


    • #32
      A perspective not brought up yet: simplicity leads to focus.

      I will tinker all day long if there is a big premium to do so like with managing my HSA/i401k/bdRoths but when it comes to knocking out my refinanced loans over setting up a taxable account (which you can't change without tax consequences) why lose focus to maybe save a small amount more?

      You will be doubly leveraging since you will not be using any bonds in this assest allocation. If you want to, go for it. Just recognize it. It's not like you don't already have market exposure in your tax advantaged accounts.

      Why not squash your loans, simplify your cash flow, have an easy goal to focus on, then figure out what you really want to do with your taxable account? This is what I'm doing personally.

      Comment


      • #33




        A perspective not brought up yet: simplicity leads to focus.

        I will tinker all day long if there is a big premium to do so like with managing my HSA/i401k/bdRoths but when it comes to knocking out my refinanced loans over setting up a taxable account (which you can’t change without tax consequences) why lose focus to maybe save a small amount more?

        You will be doubly leveraging since you will not be using any bonds in this assest allocation. If you want to, go for it. Just recognize it. It’s not like you don’t already have market exposure in your tax advantaged accounts.

        Why not squash your loans, simplify your cash flow, have an easy goal to focus on, then figure out what you really want to do with your taxable account? This is what I’m doing personally.
        Click to expand...


        How will lack of bonds make any difference in the amount of leverage an asset allocation or portfolio has? This statement makes no sense financially/tactically and just serves as more scare mongering that is always presented in these cases. This account/balance is tiny, and will be less than one months salary for this person. The actual risk is about as close to zero as possible. If they dislike their choice, they can pay it off with cash flow within two months. Have to have a little perspective on these things.

        Also there are only tax consequences if you're profitable, which is a good thing of course. Also there is TLH opportunities.

        Comment


        • #34







          A perspective not brought up yet: simplicity leads to focus.

          I will tinker all day long if there is a big premium to do so like with managing my HSA/i401k/bdRoths but when it comes to knocking out my refinanced loans over setting up a taxable account (which you can’t change without tax consequences) why lose focus to maybe save a small amount more?

          You will be doubly leveraging since you will not be using any bonds in this assest allocation. If you want to, go for it. Just recognize it. It’s not like you don’t already have market exposure in your tax advantaged accounts.

          Why not squash your loans, simplify your cash flow, have an easy goal to focus on, then figure out what you really want to do with your taxable account? This is what I’m doing personally.
          Click to expand…


          How will lack of bonds make any difference in the amount of leverage an asset allocation or portfolio has? This statement makes no sense financially/tactically and just serves as more scare mongering that is always presented in these cases. This account/balance is tiny, and will be less than one months salary for this person. The actual risk is about as close to zero as possible. If they dislike their choice, they can pay it off with cash flow within two months. Have to have a little perspective on these things.

          Also there are only tax consequences if you’re profitable, which is a good thing of course. Also there is TLH opportunities.
          Click to expand...


          "Scare mongering," really? I said he could do it. I just thought most (not all) people want some bonds. If his tax advantaged accounts was 100% stock this would be consistent. But for me, even at a young age I went with some bonds.

           

          I guess you don't think focus is important. But I think many people even subconsciously would be more willing to spend money going into taxable "extra" savings than going into loan "required" payments.

           

          Again, it doesn't matter much mathematically. Maybe a 2% risk premium after considering taxes so likely under $1000 yearly benefit. So why not simplify the balance sheet? That's what I'm doing but nothing wrong with the other path.

          Comment


          • #35


            I guess you don’t think focus is important. But I think many people even subconsciously would be more willing to spend money going into taxable “extra” savings than going into loan “required” payments.
            Click to expand...


            It depends on one's perspective. Focus can be harmful. For instance, we were hyperfocused on just paying off the student loan. We were able to take my loans from $200k to $45k in essentially 2.5 years. Yes that is an excellent thing I am very happy we did it. However, I was neglecting to learn anything else about financing. All I knew was that my parents had likely 6 figures in consumer debt so I just needed to be debt-free. I put blinders on and may have continued that pathway (including paying off our mortgage and neglecting retirement savings) because I was so focused on debt. If not for my wife snapping me out of it, she wouldn't have contributed to her 403b. The only way she "sold" me on the idea at that time was because of the matching from her employer. I only saw it as $18.5k minus taxes that aren't going towards student loan debt. I did not even actually understand what a 403b was until recently. I started learning all this when I began interviewing for attending jobs and HR people were speaking Portuguese to me with the financial stuff.

             

            Again, the point of this is to understand the approach. Ultimately, if my wife would rather pay off the debt and not start a taxable I will do whatever makes her happy (divorce will cost much more than whatever the differential between the loan payment vs. invest route ).

             

            Thanks again. I appreciate you guys walking me through this. Hopefully one day I will be able to give solid logical advice on this forum. For now, I will stalk the board and continue to ask my fairly basic questions.

            Comment


            • #36










              A perspective not brought up yet: simplicity leads to focus.

              I will tinker all day long if there is a big premium to do so like with managing my HSA/i401k/bdRoths but when it comes to knocking out my refinanced loans over setting up a taxable account (which you can’t change without tax consequences) why lose focus to maybe save a small amount more?

              You will be doubly leveraging since you will not be using any bonds in this assest allocation. If you want to, go for it. Just recognize it. It’s not like you don’t already have market exposure in your tax advantaged accounts.

              Why not squash your loans, simplify your cash flow, have an easy goal to focus on, then figure out what you really want to do with your taxable account? This is what I’m doing personally.
              Click to expand…


              How will lack of bonds make any difference in the amount of leverage an asset allocation or portfolio has? This statement makes no sense financially/tactically and just serves as more scare mongering that is always presented in these cases. This account/balance is tiny, and will be less than one months salary for this person. The actual risk is about as close to zero as possible. If they dislike their choice, they can pay it off with cash flow within two months. Have to have a little perspective on these things.

              Also there are only tax consequences if you’re profitable, which is a good thing of course. Also there is TLH opportunities.
              Click to expand…


              “Scare mongering,” really? I said he could do it. I just thought most (not all) people want some bonds. If his tax advantaged accounts was 100% stock this would be consistent. But for me, even at a young age I went with some bonds.

               

              I guess you don’t think focus is important. But I think many people even subconsciously would be more willing to spend money going into taxable “extra” savings than going into loan “required” payments.

               

              Again, it doesn’t matter much mathematically. Maybe a 2% risk premium after considering taxes so likely under $1000 yearly benefit. So why not simplify the balance sheet? That’s what I’m doing but nothing wrong with the other path.
              Click to expand...


              I think you misinterpreted my financial question. I was asking why does that leverage his account?

              Yes, it is a type of scare mongering, not saying its conscious or intentional, but thats what it is whether or not its simply repeated. You implied a lack of bonds in an asset allocation increases the leverage of the portfolio, and doubly so. While it is a more aggressive portfolio allocation it is in no way more or less leveraged. The word leverage around here scares people. Just think of the long term, is it more dangerous to your wealth to have 100% equities with a 5k balance just starting out, or to have 50% at retirement? We should all be thinking across our career timelines as a reference and our expected contributions and savings rate. Time is one of our only legs up on the whole market, we should take advantage of it.

              I love focus. I am super focused on the distilled end point both sides of the argument are supposed to lead to. Net worth, even more so terminal net worth. How does one accomplish that in the most efficient manner possible, etc...are the questions I posed to myself. Turns out the answer is to accumulate assets that will appreciate and hold them for the longest period of time possible, as young as you reasonably can. You can never go back in time to buy the market or focus on building your nest egg if you want to, that opportunity is forever lost.

              I've said it before, net worth is agnostic as to how it changes.

              Net worth=Assets-Liabilities

              On an instantaneous time frame it cant tell the difference between an acquired asset with value of x or a liability paid off with value of x. However, if x is an asset that is likely to appreciate and grow over time after a period than the long term effect of one of those choices will have a disproportionate effect on your ultimate NW. The earlier that process is started, the better.

              Things change over time as well, the further along in your career you are the less time you have to compound so the urgency in this regard naturally diminishes and favors cleaning things up for the longer term. Debt and overall simplifying become more the focus. In the end stages you should be free riding and just deciding how you want to spend it all.

              Naturally, there will be specific circumstances that alter things given exactly what people want in their short, mid, and long term careers, etc..but that was my focus coming right out. I actually modeled out a pay off all debt in 3 years scenario, but I couldnt have put a penny toward retirement or any savings at all had I done that. WCI actually talked me out of it and to run some numbers. Thank goodness for that. Changed everything.

              Now Ive accumulated quite a bit of assets in the first several years instead, and am now looking to keep that up but with strategic wiping out of debt the next couple years as that fits my situation now.

              Comment


              • #37













                A perspective not brought up yet: simplicity leads to focus.

                I will tinker all day long if there is a big premium to do so like with managing my HSA/i401k/bdRoths but when it comes to knocking out my refinanced loans over setting up a taxable account (which you can’t change without tax consequences) why lose focus to maybe save a small amount more?

                You will be doubly leveraging since you will not be using any bonds in this assest allocation. If you want to, go for it. Just recognize it. It’s not like you don’t already have market exposure in your tax advantaged accounts.

                Why not squash your loans, simplify your cash flow, have an easy goal to focus on, then figure out what you really want to do with your taxable account? This is what I’m doing personally.
                Click to expand…


                How will lack of bonds make any difference in the amount of leverage an asset allocation or portfolio has? This statement makes no sense financially/tactically and just serves as more scare mongering that is always presented in these cases. This account/balance is tiny, and will be less than one months salary for this person. The actual risk is about as close to zero as possible. If they dislike their choice, they can pay it off with cash flow within two months. Have to have a little perspective on these things.

                Also there are only tax consequences if you’re profitable, which is a good thing of course. Also there is TLH opportunities.
                Click to expand…


                “Scare mongering,” really? I said he could do it. I just thought most (not all) people want some bonds. If his tax advantaged accounts was 100% stock this would be consistent. But for me, even at a young age I went with some bonds.

                 

                I guess you don’t think focus is important. But I think many people even subconsciously would be more willing to spend money going into taxable “extra” savings than going into loan “required” payments.

                 

                Again, it doesn’t matter much mathematically. Maybe a 2% risk premium after considering taxes so likely under $1000 yearly benefit. So why not simplify the balance sheet? That’s what I’m doing but nothing wrong with the other path.
                Click to expand…


                I think you misinterpreted my financial question. I was asking why does that leverage his account?

                Yes, it is a type of scare mongering, not saying its conscious or intentional, but thats what it is whether or not its simply repeated. You implied a lack of bonds in an asset allocation increases the leverage of the portfolio, and doubly so. While it is a more aggressive portfolio allocation it is in no way more or less leveraged. The word leverage around here scares people. Just think of the long term, is it more dangerous to your wealth to have 100% equities with a 5k balance just starting out, or to have 50% at retirement? We should all be thinking across our career timelines as a reference and our expected contributions and savings rate. Time is one of our only legs up on the whole market, we should take advantage of it.

                I love focus. I am super focused on the distilled end point both sides of the argument are supposed to lead to. Net worth, even more so terminal net worth. How does one accomplish that in the most efficient manner possible, etc…are the questions I posed to myself. Turns out the answer is to accumulate assets that will appreciate and hold them for the longest period of time possible, as young as you reasonably can. You can never go back in time to buy the market or focus on building your nest egg if you want to, that opportunity is forever lost.

                I’ve said it before, net worth is agnostic as to how it changes.

                Net worth=Assets-Liabilities

                On an instantaneous time frame it cant tell the difference between an acquired asset with value of x or a liability paid off with value of x. However, if x is an asset that is likely to appreciate and grow over time after a period than the long term effect of one of those choices will have a disproportionate effect on your ultimate NW. The earlier that process is started, the better.

                Things change over time as well, the further along in your career you are the less time you have to compound so the urgency in this regard naturally diminishes and favors cleaning things up for the longer term. Debt and overall simplifying become more the focus. In the end stages you should be free riding and just deciding how you want to spend it all.

                Naturally, there will be specific circumstances that alter things given exactly what people want in their short, mid, and long term careers, etc..but that was my focus coming right out. I actually modeled out a pay off all debt in 3 years scenario, but I couldnt have put a penny toward retirement or any savings at all had I done that. WCI actually talked me out of it and to run some numbers. Thank goodness for that. Changed everything.

                Now Ive accumulated quite a bit of assets in the first several years instead, and am now looking to keep that up but with strategic wiping out of debt the next couple years as that fits my situation now.
                Click to expand...


                I agree the focus should be on net worth growth but not to the point of increasing risk and complexity beyond what one is comfortable with. I agree saving in tax advantaged accounts is important before paying down low interest debts. Are you using the 0% offers on credit cards to increase your market exposure now? Surely not. Mathematically it is sound since your stable income with be able to pay it off in time. At some point the complexity is not worth the risk to people. It is a personal call. But I find it funny that both you Zaphod and ChristopherMD20 went from not even saving in tax advantaged accounts to kill the loans to let the loans be to start taxable accounts. Once again, not necessarily a wrong call.

                To get the core of the mathematics:

                IF you save the same amount as if you were agressively paying off loans,

                IF you are creating an asset allocation that you will stay the course with,

                You have a high probability of increasing your net worth more by equity investing over 3% rate loans, on average 2-3% (about $1k/yr on the $44k amount).

                Comment


                • #38
















                  A perspective not brought up yet: simplicity leads to focus.

                  I will tinker all day long if there is a big premium to do so like with managing my HSA/i401k/bdRoths but when it comes to knocking out my refinanced loans over setting up a taxable account (which you can’t change without tax consequences) why lose focus to maybe save a small amount more?

                  You will be doubly leveraging since you will not be using any bonds in this assest allocation. If you want to, go for it. Just recognize it. It’s not like you don’t already have market exposure in your tax advantaged accounts.

                  Why not squash your loans, simplify your cash flow, have an easy goal to focus on, then figure out what you really want to do with your taxable account? This is what I’m doing personally.
                  Click to expand…


                  How will lack of bonds make any difference in the amount of leverage an asset allocation or portfolio has? This statement makes no sense financially/tactically and just serves as more scare mongering that is always presented in these cases. This account/balance is tiny, and will be less than one months salary for this person. The actual risk is about as close to zero as possible. If they dislike their choice, they can pay it off with cash flow within two months. Have to have a little perspective on these things.

                  Also there are only tax consequences if you’re profitable, which is a good thing of course. Also there is TLH opportunities.
                  Click to expand…


                  “Scare mongering,” really? I said he could do it. I just thought most (not all) people want some bonds. If his tax advantaged accounts was 100% stock this would be consistent. But for me, even at a young age I went with some bonds.

                   

                  I guess you don’t think focus is important. But I think many people even subconsciously would be more willing to spend money going into taxable “extra” savings than going into loan “required” payments.

                   

                  Again, it doesn’t matter much mathematically. Maybe a 2% risk premium after considering taxes so likely under $1000 yearly benefit. So why not simplify the balance sheet? That’s what I’m doing but nothing wrong with the other path.
                  Click to expand…


                  I think you misinterpreted my financial question. I was asking why does that leverage his account?

                  Yes, it is a type of scare mongering, not saying its conscious or intentional, but thats what it is whether or not its simply repeated. You implied a lack of bonds in an asset allocation increases the leverage of the portfolio, and doubly so. While it is a more aggressive portfolio allocation it is in no way more or less leveraged. The word leverage around here scares people. Just think of the long term, is it more dangerous to your wealth to have 100% equities with a 5k balance just starting out, or to have 50% at retirement? We should all be thinking across our career timelines as a reference and our expected contributions and savings rate. Time is one of our only legs up on the whole market, we should take advantage of it.

                  I love focus. I am super focused on the distilled end point both sides of the argument are supposed to lead to. Net worth, even more so terminal net worth. How does one accomplish that in the most efficient manner possible, etc…are the questions I posed to myself. Turns out the answer is to accumulate assets that will appreciate and hold them for the longest period of time possible, as young as you reasonably can. You can never go back in time to buy the market or focus on building your nest egg if you want to, that opportunity is forever lost.

                  I’ve said it before, net worth is agnostic as to how it changes.

                  Net worth=Assets-Liabilities

                  On an instantaneous time frame it cant tell the difference between an acquired asset with value of x or a liability paid off with value of x. However, if x is an asset that is likely to appreciate and grow over time after a period than the long term effect of one of those choices will have a disproportionate effect on your ultimate NW. The earlier that process is started, the better.

                  Things change over time as well, the further along in your career you are the less time you have to compound so the urgency in this regard naturally diminishes and favors cleaning things up for the longer term. Debt and overall simplifying become more the focus. In the end stages you should be free riding and just deciding how you want to spend it all.

                  Naturally, there will be specific circumstances that alter things given exactly what people want in their short, mid, and long term careers, etc..but that was my focus coming right out. I actually modeled out a pay off all debt in 3 years scenario, but I couldnt have put a penny toward retirement or any savings at all had I done that. WCI actually talked me out of it and to run some numbers. Thank goodness for that. Changed everything.

                  Now Ive accumulated quite a bit of assets in the first several years instead, and am now looking to keep that up but with strategic wiping out of debt the next couple years as that fits my situation now.
                  Click to expand…


                  I agree the focus should be on net worth growth but not to the point of increasing risk and complexity beyond what one is comfortable with. I agree saving in tax advantaged accounts is important before paying down low interest debts. Are you using the 0% offers on credit cards to increase your market exposure now? Surely not. Mathematically it is sound since your stable income with be able to pay it off in time. At some point the complexity is not worth the risk to people. It is a personal call. But I find it funny that both you Zaphod and ChristopherMD20 went from not even saving in tax advantaged accounts to kill the loans to let the loans be to start taxable accounts. Once again, not necessarily a wrong call.

                  To get the core of the mathematics:

                  IF you save the same amount as if you were agressively paying off loans,

                  IF you are creating an asset allocation that you will stay the course with,

                  You have a high probability of increasing your net worth more by equity investing over 3% rate loans, on average 2-3% (about $1k/yr on the $44k amount).
                  Click to expand...


                  You have to look at what each of these risks are, evaluate them, their probabilities of happening, etc...and compare that to the alternative and the costs for each.

                  No, no one should ever use CC to invest. Thats an insane risk. Its not on the same planet as investing while having student loans. You have to appreciate the hyperbolic nature of the subset of physicians on this forum. We are talking about someone not paying down their their student loan that is equivalent to one months pay check over a five year agreed term as a 'risky' thing. Obviously this small amount doesnt matter to much overall.

                  Its not that risky. Its aggressive even for student loans, recommended maybe, but aggressive still. What is the risk of paying on time as scheduled? I can tell you what the cost is, 3k dollars. There is no increase in complexity, thats beside the point. Any change from paying as agreed is an increase in complexity I guess. Its no more difficult to set an auto payment to a taxable account than to send in extra to your loan. I dont get whats complex about that. People forget we are talking about incoming discretionary cash flow that would either over pay vs. something else.

                  Youre not avoiding a risk by choosing to pay down the loan more aggressively, you're simply trading risks (mostly to one you've not considered, not you specifically, but people in general) and opportunity costs. Lots of finance sites make debt crushing the a priori correct answer, so it is never critically evaluated from a holistic, long term, life long impact stand point.

                  Debts lose value over time to inflation. Not a big deal in the short term but for things like mortgages it can be large, this is where imputed owner income measurements stem from. That everyone is rushing to pay as much real dollars as possible into these inflation wasting away assets is sometimes a wonder to me. Investing is an appreciating move. Yes, there has to be a balance and one cant go crazy, again, that doesnt apply here and those scenarios are straw men on a site like this where everyone is already very conservative.

                  Since that is the baseline no one ever thinks about the cost of doing that aggressively. So they toss their literally most valuable dollars they will ever have in their in both nominal and opportunity terms to basically lose value to inflation and the lost opportunity cost. Its pretty easy to see why people soften their all or nothing stance on debt once you run a 30 year model with even very conservative assumptions. It just doesnt make a lot of sense to see it as a boogeyman. Once properly framed all that emotional baggage should disappear. Money decisions shouldnt be made emotionally everyone says all the time, unless its debt, than its priceless (unless you do the math ofc). Lots of people who have chosen debt over investing the last 10 years will kick themselves if they ever end up doing the math, lets hope they dont.

                  I pay extra on every single debt I have, but nothing crazy and I dont care to ever really have a ton of equity in my own home nor rental. Thats money at risk for natural disaster, liability, illiquid, etc...and comes with a heavy transaction fee to access. I am also currently focusing a little more on paying debts the next couple of years given I've got a start in, the market cycle point, my specialties very high exposure to economic health of the country, and new goals.

                  What we should be doing is making sure everyone actually understands the pros and cons of these decisions, rather than saying that one is automatically better than the other as is often the case on many financial sites regardless of income/debt or profession. More of an informed consent viewpoint. Most of the disagreements here even just come from physicians at different stages of their lives with different priorities and concerns. No one disagrees that these are all good choices overall.

                  Comment


                  • #39


                    Yes, there has to be a balance and one cant go crazy, again, that doesnt apply here and those scenarios are straw men on a site like this where everyone is already very conservative.
                    Click to expand...


                    Ugh.  Tell me about it.  I get straw-manned almost every time I mention thinking about not trying to obliterate your short-term, low-interest debt yesterday (or your well-structured tax-deductible mortgage loan secured by your appreciating, insurance-backed house) and doing a ridiculous debt-free scream.  "So if you shouldn't pay off your mortgage right away, you're saying you should stay a debt slave, take out credit cards to buy a Richard Mille, and finance a 911?"  C'mon.  Stop aggrandizing the semantic and deal with the ontology.  Debt complacency is real, but so are fixed term-limited costs, inflation, and open-ended compound growth.


                    What we should be doing is making sure everyone actually understands the pros and cons of these decisions, rather than saying that one is automatically better than the other as is often the case on many financial sites regardless of income/debt or profession. More of an informed consent viewpoint. Most of the disagreements here even just come from physicians at different stages of their lives with different priorities and concerns. No one disagrees that these are all good choices overall.
                    Click to expand...


                    Yep, and just like giving informed consent to our patients, all the higher-order data and thought processes can go misunderstood or not understood at all.  Can't tell you how many deer-in-headlights responses I get in both scenarios, and how many follow-up inquiries about something that was supposedly completely understood pre-procedure has become a "you never told me" moment.

                    Maybe not everyone's equipped to make those kinds of inquiries and information-based decisions and needs a simple all-or-nothing mantra.  That's why Dave Ramsey is popular.  He's a radio personality first, so clearly taking an extreme perspective is going to be more titillating and get people a) to listen and b) to become "followers."  Taking an extreme leverage approach to investing can very likely ruin you.  Taking an extreme debt-elimination approach will definitely keep you safe, hence that's the simple message to give for financial help.  Obv if you're going to break it down, you're going to find it's a more complicated decision than that, without a clear right answer but with greater probability of greater net worth from some decisions, and greater probability for "safety" in others.  WCI does a similar approach, but more cerebral, which befits the audience very well; medicine is a cerebral profession (even ER docs, a little bit...lol).  Sure, you should definitely minimize and work hard to eliminate debt, no question...but using a 5-year recommendation for loan repayment as opposed to immediately and generally prioritizing the tax-advantaged retirement accounts before those well-structured debts is rooted in accurate concepts.  But because his existence as a paragon of financial prudence has that gravitas, I find it very unlikely that he'd ever explicitly support anyone letting a well-structured debt linger - "OMG, WCI said debt was OK?  What about [insert straw man argument here]?" - so of course most of his articles are going to be about paying off one's mortgage and similar things.  I was considering asking him or PoF to do a guest post called "STOP!  DON'T PAY THAT DEBT! ...or do, but think about it first," maybe a pro-con, but again, then I end up getting pigeon-holed as a debt-lover and being asked how much I still owe on my Ferrari.  I hate Ferrari...AMG all the way.

                    Comment


                    • #40
                      Yes, you're immediately the debt lover, when really you're just trying to have a little balance in the force with our very debt averse kind. Its not necessarily an accurate reflection of your ideology on the whole. I just bought a car for cash for instance, could have easily financed at a below inflation rate, but knew I'd buy more car than I wanted (i didnt want one period but needed it).

                      Its also asset/family protection as well, if I die, besides the life insurance my student loans are gone, but the family gets to keep the SEP, HSA, and taxable, etc...If I spent the last 4 years paying off my loans thered be nothing but a shiny framed promissary note.

                      Comment


                      • #41
                        Mantra:  Work smarter, not harder.   Sometimes we focus on the debt tree too intensely and forget the goal of Net Worth building and getting there the most efficient manner.

                        Eg:  we are going to splurge on our selective indulgence of the year:  Tesla 3.    We have the means to pay cash outright without impacting our retirement fund flow.    Some would tap their 'EF';  others would tap their HELOC; others would liquidate some, and (none here--would tap equities funds).     We will probably elect to take the 1.9% financing offer and incur debt.  Why?  'cause we can probably earn better with our money elsewhere.   We have cash flow and earnings to do it, and have backup.  The MATH works better; but there is risk -- as anything when talking %

                        Comment


                        • #42
                          I agree that many on here are debt averse, but I think you guys may be going too far. I have seen some specious math on the forum lately. For example, the IRR on paying down your loan is equal to the interest rate. It’s not half or something way less because of compounding. The IRR on debt pay down assumes you can reinvest cash flows freed up by not having to service debt at the equivalent debt return, which shouldn’t be difficult given the low interest rate on debt.

                          It’s apples and oranges to say you only need a [25]bps return over 30 years to make it worth it to keep your 5 year loan outstanding rather than pay it down. You need to keep the investment horizons the same to make a comparison.

                          Comment


                          • #43
                            True, one has to take into account savings of 5 years is different from 30.

                            It's an extension of the argument of compounded interest savings.

                            Does one delay saving today over anything, including debt repayment? In pure math, the answer is invest and pay the minimum as long as the math works, which usually does in lowest interest student loans compared to average market returns.

                            The harder part is the psychological factor and market forces. One can debate the market forces of retirement and debt voids each other out in priority sibce it's income flow based, and then really boils down the psychological factor and more common debate on sleepless nights -- pay off mortgage or invest?

                            Comment


                            • #44




                              I agree that many on here are debt averse, but I think you guys may be going too far. I have seen some specious math on the forum lately. For example, the IRR on paying down your loan is equal to the interest rate. It’s not half or something way less because of compounding. The IRR on debt pay down assumes you can reinvest cash flows freed up by not having to service debt at the equivalent debt return, which shouldn’t be difficult given the low interest rate on debt.

                              It’s apples and oranges to say you only need a [25]bps return over 30 years to make it worth it to keep your 5 year loan outstanding rather than pay it down. You need to keep the investment horizons the same to make a comparison.
                              Click to expand...


                              Yes, those were shown to illustrate how ridiculous the you need x% to beat a loan of y%, and show how powerful compound interest is compared to simple, which many people on this forum still do not fully appreciate.

                              That doesnt make sense in reality unless you're liquidating the account at the time period and ignores the whole upside/opportunity cost side of things, these arent competing capital projects on a similar timescale with a similar rate. The effect is applicable and true, the loan is gone and you havent the savings from that time period could otherwise compound until draw down and they do get to continue to grow no matter what valuation method one applies.

                              It makes more sense from a practical standpoint to simply compare the cost of capital vs. expected return/total  at some nominal rate over your investing horizon with the same cash flows/total. Thats how it will effect your long term bottom line. The student loan hero calculator is actually pretty great for seeing this clearly.

                              I also agree that as a financial blogger, you have a voice that people listen to and have to be much more careful with what you say and prescribe so to speak. Nuance is tough and hard to know what people will do with the information. Given that we're mostly physicians we're probably overly concerned with that aspect but I'd likely have similar canned answers to these kinds of questions publicly on a blog, etc....Here, we're a subset of a subset and its different, I get the blogger reasons.

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                              • #45







                                I agree that many on here are debt averse, but I think you guys may be going too far. I have seen some specious math on the forum lately. For example, the IRR on paying down your loan is equal to the interest rate. It’s not half or something way less because of compounding. The IRR on debt pay down assumes you can reinvest cash flows freed up by not having to service debt at the equivalent debt return, which shouldn’t be difficult given the low interest rate on debt.

                                It’s apples and oranges to say you only need a [25]bps return over 30 years to make it worth it to keep your 5 year loan outstanding rather than pay it down. You need to keep the investment horizons the same to make a comparison.
                                Click to expand…


                                Yes, those were shown to illustrate how ridiculous the you need x% to beat a loan of y%, and show how powerful compound interest is compared to simple, which many people on this forum still do not fully appreciate.

                                That doesnt make sense in reality unless you’re liquidating the account at the time period and ignores the whole upside/opportunity cost side of things, these arent competing capital projects on a similar timescale with a similar rate. The effect is applicable and true, the loan is gone and you havent the savings from that time period could otherwise compound until draw down and they do get to continue to grow no matter what valuation method one applies.

                                It makes more sense from a practical standpoint to simply compare the cost of capital vs. expected return/total  at some nominal rate over your investing horizon with the same cash flows/total. Thats how it will effect your long term bottom line. The student loan hero calculator is actually pretty great for seeing this clearly.

                                I also agree that as a financial blogger, you have a voice that people listen to and have to be much more careful with what you say and prescribe so to speak. Nuance is tough and hard to know what people will do with the information. Given that we’re mostly physicians we’re probably overly concerned with that aspect but I’d likely have similar canned answers to these kinds of questions publicly on a blog, etc….Here, we’re a subset of a subset and its different, I get the blogger reasons.
                                Click to expand...


                                I think this post and others are more confusing than helpful.  Here are charts with the actual math showing net worth sensitivity to market returns after 5 years if you have $44,511 of debt and $44,511 in a taxable account.  As folks can see below, the variability in net worth and the upside after 5 years are both greater if you keep the debt, hence the notion that leverage increases risk and return.  If the returns are lower than the interest rate, you would be better off paying down the debt.  Returns compounding on while interest on the loan doesn't does not mean you should always be borrowing.  The b/e point is the interest rate.  That's all there is to the analysis.  It's not complex.

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