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I have been debating with a friend who thinks my idea of paying debt off early even if the debt is low interest is a mistake. He thinks it’s better to pay regular payments and invest extra money in markets such as mutual funds. I typically double my house and car loan payments instead even though my car loan is 1.7% and home is 3.75%. I just want to be debt free What’s the consensus of th group here?
My gut reaction when I started reading was to pay off the debt. Two reasons for that, I was thinking credit card interest rates and the market is at a high. But since you do have low interest rates I would start investing. You should be able to earn at least 6%. Maybe invest in dividend paying investments and use the dividends to reduce debt.
Do you have an emergency fund? If not get one. Then invest something in the market. Also be sure you are funding retirement accounts.
My gut reaction when I started reading was to pay off the debt. Two reasons for that, I was thinking credit card interest rates and the market is at a high. But since you do have low interest rates I would start investing. You should be able to earn at least 6%. Maybe invest in dividend paying investments and use the dividends to reduce debt.
Do you have an emergency fund? If not get one. Then invest something in the market. Also be sure you are funding retirement accounts.
I have 401k and Roth 401k my regular is maxed 15% Roth is 10% I’m 48 so can’t afford not to. I have stocks as well. I just remember the crash of 2008 many of my friends lost their homes and cars. At that time I had older cars that were long paid off I was lucky I didn’t get laid off. My car loan since I paid double for 3 years I have more then a year before I would have to make a minimum payment in a way that is a savings. I don’t have enough cash savings to feel comfortable I really want to have 100k in my cash savings. I don’t trust markets being used for savings.
I regret paying my student loan off as soon as I did. If I would have kept it, it would have cost me $1k beyond the principle about over the course of 7 years on about a $10k balance. I generally invest everything I have in excess of my lifestyle, so if I had invested that $10k, it likely could have been $15k-$20k based on the performance in my Roth IRA even after the fiasco of the markets this year.
I regret paying my student loan off as soon as I did. If I would have kept it, it would have cost me $1k beyond the principle about over the course of 7 years on about a $10k balance. I generally invest everything I have in excess of my lifestyle, so if I had invested that $10k, it likely could have been $15k-$20k based on the performance in my Roth IRA even after the fiasco of the markets this year.
Hind sight is 20-20.
Scale also matters; size of loan, interest rate, and time. If you were faced with paying off larger loans at higher interest rates you might not be able to satisfy the obligation for a much longer time. The effects of that debt might be more significant compared to potential earnings. $10k isn't a huge loan.
Outside of what the investment returns... if you aren't maxing out the 401k/ira/hsa/etc...
the tax savings might be worth more than the debt interest alone
you could always keep the "loan" amount in short term bonds, in the off chance you have to take money out to pay it off. At least even short term bonds gain more than bank interest rates for a slight increase in risk
My opinion as financial professional is to pay off debt.
Nothing is certain, so while I appreciate your friend's position that it is better to invest and earn a return that exceeds your cost of debt... there is no guaranty that the value of those investments will exceed the price you originally paid for them. Thus, your "risk adjusted" return on those investments probably does NOT exceed your cost of debt and its more economical to pay off the debt and enjoy the peace of mind.
All too often, we get stuck in "all or nothing thinking".
If it suits you better, double the house payment ( A long large higher interest loan), but invest the double amount of the car loan (a shorter low interest loan).
I like not having payments, too. But:
That way you get the best of both worlds.
If, however, to get the low interest car loan, you had to take it out for 8 or more years, id double it too.
Please, PLEASE PLEASE be sure you notify the lenders the "double " ( extra) you pay is APPLIED TO PRINCIPAL ONLY, and NOT to interest, cause of you don't specify PRINCIPAL ONLY for the extra, they will likely apply it to both, costing you more in interest. By applying the extra to principal only, you'll reduce your interest o utgo.
Good luck with your decision(s).
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