Post: #1

I have a bit more money right now than I have had in the past. I was wondering what your guys thoughts and rule of thumb were on when it's worth paying off debt vs when it's worth keeping cash on hand?

I like the idea that I have cash incase a good investment opportunity comes up maybe a house comes on the market cheap or silver price is low and I want to buy a monster box. I could also put it in the stock market or a fund.

On the flip side I have a 25 year mortgage at 4.85% and a 4 year carnote at 5%. I was debating whether I want to keep cash on hand for opportunities and comfort of knowing I have cash vs paying some of this down. I guess if I pay the carnote or pay extra on the mortgage I'm essentially making 5% and 4.85%.

I know people say if you can make more off an investment than your paying in interest then do it but I cant be certain what returns something will bring.

Is there a hard and fast rule like under 3% dont pay it off over 3% pay it off? What are your guys thoughts and what would you do personally?

Post: #2

Are your loans fixed? No penalty for over paying or paying early?

If there are NO penalties, then pay off the debt. If there are any penalties, save the cash and look for investment opportunities.

If you have to choose over the car or the mortgage, pay off the car debt first, as the interest is higher and also the car is a depreciating asset, but the house is not.

Post: #3

Unless you can use the cash for an investment that outgrows the money you lose in interest than its better to pay debt off.

Post: #4

That's right around the border I'd say. Average SP500 long term return is like 7% though the market is on an upswing and may even be considered expensive. If it was 3% I would take my chances in the market.

I'd probably pay the car off but pay the mortgage normally, and invest money instead. As long as you dollar cost average it you don't have to worry so much about what point you get in to the market, as long as you don't need cash short term.

If you're life situation is hazy then it is always better to have at least some cash on hand, and never less than 10% liquid.

Post: #5

my opinion is to pay off 1 car and 1 place to live first. Then play around with riskier investments...you have less risk aversion then. If you lose all of your investment money you still have a house and car left which only require maintenance.

Post: #6

You know what I think

You should be able to easily find investments that pay above & beyond your current debt rates. With that said, I would get that cash working for you asap.

Post: #7

Pay off your debts, you can predict the savings on the interest for sure.....

....you cannot predict a guaranteed ROI on investments.

Having cash lay around is like having a car, they're depreciating.

Post: #8

...

Post: #9

I would also pay off the debt, and look at acquiring "good" debt in the form of investments. By this I mean take on a second mortgage as a rental property and have your tenants pay off the mortgage. Using this method you can make a little bit of money each month, and then acquire equity in the home itself or hold it down the road for cash-flow.

Post: #10

I will suggest a bit of the opposite.

Obviously it depends on your situation.

But those rates are pretty low. I wouldn't be eager to pay them off.

To me there has always been some value to paying a little interest if it means that I have cash that allows me some flexibility. You may have a deal that pops up.

Also, do you have your reserves funded? You know the 6 month fund, etc. Make sure you have that before making these other decisions.

While I understand it is a math problem, ultimately it is a comfort issue. Some people derive emotional value for having cash even if there is debt outstanding. Only you can know what is right for you. Nice problem to have.

Post: #11

Fuck having debt. Paying off debt is guaranteed to have positive ROI. Stack up a couple thousands in cash as backup money and pay those bitches off. Then, when your house and car are paid off, they become solid backup equity.

There are a lot of other things at play here: lifestyle, location, and most importantly - goals. What do you want to do with your investments?

Post: #12

I avoid debt myself and can certainly see the appeal of wanting to pay any off as soon as possible. Right now it is very difficult to get any yield, and it's equally hard to find an asset class that isn't hitting all time highs. On one hand this makes paying down debt at any rate of interest a pretty appealing option.

That being said I think that liquidity is way underrated. A fellow wants to have enough cash on hand to ride out a financial storm should it hit. I also believe that there will be very good investment opportunities ahead (as I said, there aren't many now) and you're going to want to have some dry powder sitting ready to capitalize on them.

Post: #13

I'm going to join in the chorus of people saying make sure you have an emergency fund, then use the money to acquire assets, then pay off the debt, though it might be worth getting rid of the car at least.

Having an emergency fund is absolutely vital. If all of your money is tied up in other things and you lose your job or face a big unexpected expense, you can be completely blindsided. Owning your own house and car does not help if you can't feed yourself. In fact, if anything, in such a scenario, owning (or rather, owning a part of) such things ties you to one place and makes it harder to move to a place with better economic prospects.

There are a few things that no one has mentioned that I think are important.

Firstly, most people have too much house, too much car, and too much stuff in general. The 75/20/5 rule. Basically, 75%+ of your net worth should be in investments, 20% (or less) in your residence, and 5% (or less) in stuff, which could be further broken down into 2.5% for your car and 2.5% for all your other possessions. Obviously, that's hard to achieve when you're young because your house, car and stuff will take up disproportionately more than they should. That said, you should still try to minimise the amount of your net worth you have in them. A house that you live in is a liability (one that you rent to others is an asset) and in terms of a car, I would follow two rules: 1) never buy a new car because the depreciation in the first few years will kill you, 2) never go into debt to acquire anything that depreciates (including a car). Combining 1) and 2) is a recipe for middle class debt servitude for the rest of your life.

The damage has probably already been done in terms of depreciation on your car, but it still might be worth looking into whether you would be better off selling it (and paying off that debt if necessary to completely close that chapter) and buying a car a few years older than your current car. I know people don't want to think like that, but as I wrote above, when your stuff (and the image it portrays) defines you, that's a recipe for debt servitude. Have we learnt nothing from the GFC?

I think this is really important right now more than ever because I have a very bearish outlook on living in the U.S. and much of the West. That's not to say that there won't be investment opportunities, but living/working there is about to get a whole lot worse for the overwhelming majority of people. Ignore this if you're not in an average job. The government is drowning in debt and running a huge deficit. Almost 50% of the populace is dead weight. There are only four ways the government can go on this:

1) increase taxes
2) decrease services
3) borrow more money (and possibly eventually default)
4) inflation

I have deliberately left out 5) grow GDP simply because that's not going to happen anywhere near fast enough, if at all.

Of those four, probably only number 2) won't affect a young, single, productive man too much. Number 3) won't either in the short term, but will in the long term. Numbers 1) and 4) obviously will, and in a big way. I'm assuming you're not a high roller, but rather, someone in the 50th to 98th percentiles. That is going to make you precisely the sort of goose they like to pluck.

As such (and here's where it gets back to the topic at hand), you need to be thinking about acquiring significant assets and either tying them up in legal entities that makes them hard to touch, or outright moving them completely offshore and getting a different citizenship. Unless you eventually become a very high roller, I suggest you also need to think about complete location independence, and part of that is either having a job you can take with you or significant passive income. Ideally, I'd be looking at achieving this within five years if I were you, but certainly nothing longer than a decade. Thus, having debt for liabilities is going to stand in the way of that in a big way.

Maybe that's more than you asked for, but I just can't help thinking that you don't want to be the Thanksgiving turkey, even if you're not aware that that's what you're being fattened up to be. Everyone here at RooshV needs to understand that governments are not our friends. This is not a left-right issue. It is a simple mathematics issue. The poor have nothing and the rich are too smart with their money. That only leaves those in the middle. Don't make yourself an easy target come the day of reckoning, and don't hamstring your ability to outrun that.

Post: #14

Like a few guys said above, have a safety net and then some. 6 months is a good rule, I am going for at least 12 months cash in the bank before I start paying any extra on my house. My interest rate is a little lower than your and in all reality I'm not even concerned about paying off ahead of time, although I currently do not have any car payments and even when I did they were pretty minimal.

Post: #15

Hey guys thanks for all the great responses. I have just short of a years worth of expenses including my current residence and rental property saved up so emergency fund is taken care of.

I have a bit of money lying around, not quite enoug to do with it what I want yet. If silver drops in price a buck or two I may buy a monster box or two of eagles. I also have lmy eye on some properties but could afford to save a bit more to buy them and be comfortable just incase repairs are needed or it takes a while to find a tenant.

I guess if you guys don't mind me spinning off another question. Say I got 15k or 20k sitting around. I don't really have any plans for it right now but would like it to be easily accessable as you never know when a property pops up I wanna buy. Could be a week from now could be a year from now. Should I just let it sit in my account ready and waiting or is there anything I can do with it short term to at least make it work for me a little while it sits. Like I said, I could come across a great property tomorrow that I wanna buy but at the same time I could be sitting on this money for 6 months or a year. Any suggestions?

Post: #16

Pay off debt. So pay off that car. Also, if you have any other debts, pay them off as well. You can then use that freed up cash to invest. Pay off the mortgage last. You live there and since you bought the house, I would assume you intend on staying there quite some time. It will pay itself off eventually.

As for emergencies, 3 to 6 months (some say 12 in this economy) of income stashed away in an account you can readily access (no CDs or crap like that; also dont put it in the market i.e. mutual fund bc you could potentially lose it). I use an online savings account like Ally. Savings accounts have terrible interest rates but the online banking institutions tend to have the higher interest rates. Yea it sucks the money is not growing greater than inflation but it is a nice insurance policy for yourself in case of an emergency. You'll be able to immediately access the money without a problem.

Once you pay down all of your debts and have a sizable emergency fund, then you can consider paying off the mortgage quicker. I wouldnt worry about the mortgage though until all other debts have been paid off.

Post: #17

I would only pay off a loan if I could pay the "whole" thing off at that moment. Otherwise, it might as well stay in your bank account.

Post: #18

Think of it like this jamaicabound.

Let's say a deal may come up in 6 months.

1) Pay off 20k of debt - how much do 6 months of saved payments equal? 5% at 20k times 1/2 year = 500 - you saved 500 bucks but lost the 20k. Not really lost but you don't have access to it anymore.
2) Invest 20k in stocks or soemthing - how much could you earn realistically in 6 months? Maybe 10% tops if you have some idea of what you are doing? So now you have 22k. But you could lose some principal, right if it goes bad?
3) Put it in the bank. 20k at 1% (I haven't checked lately - some safe short term deal) - 20,100.

4) What does a good real estate deal do for you? What is your return that you would expect or is reasonable? Could it kick out 500 a month in profit, 300? I have no idea what market you are in.

So compare the lifetime (well long term) profits of real estate vs the other scenarios. It seems if you just sit on it - you protect the opportunity of a real estate deal as long as you are confident you can find one) that will pay in the long run.

VS.

Paying down debt that saves you not even 100 bucks a month at 5% on 20k. Or losing some principal with a misplayed stock investment. If you trust your RE skills, I'd put it in something safe and just work hard at finding a RE deal.

My 2 cents. If my numbers are off I still think the theory works.

P.S. I have no idea how old you are or what your risk tolerance is. Also, in an RE deal I am guessing you might have to take on a mortgage? Ask yourself if you want to take on an extra obligation. But if I was young and could pay an occasional mortgage payment due to vacancy, I would go RE. But only if you trust your skills.

Post: #19

Assuming you have 6 mos - 1 year of living expenses, i'd pay off debt.

But if you don't have that, i'd stack until I got there.

WIA

Post: #20

The answer is "it depends". Others have already given good answers regarding factors to consider in a decision.

One element of your question is what each of us would personally do. So I'll just answer that. I'd pay off the car loan, only if I could immediately pay it down to zero and still feel good about my liquidity and emergency fund.

I'd do it because I like reaching milestones (owning my car outright) and I like increasing surplus income in future months. No more car payment means less overhead in monthly payments to meet, therefore more surplus.

(06-09-2014 07:41 PM)Feisbook Control Wrote:  A house that you live in is a liability (one that you rent to others is an asset)

#facepalm. Off topic, but - that is so wrong I don't even know where to start.

Post: #21

(06-09-2014 10:19 PM)Tigre Wrote:  The answer is "it depends". Others have already given good answers regarding factors to consider in a decision.

One element of your question is what each of us would personally do. So I'll just answer that. I'd pay off the car loan, only if I could immediately pay it down to zero and still feel good about my liquidity and emergency fund.

I'd do it because I like reaching milestones (owning my car outright) and I like increasing surplus income in future months. No more car payment means less overhead in monthly payments to meet, therefore more surplus.

(06-09-2014 07:41 PM)Feisbook Control Wrote:  A house that you live in is a liability (one that you rent to others is an asset)

#facepalm. Off topic, but - that is so wrong I don't even know where to start.

A liability is something that costs you money, an asset makes you money. A house costs you money on transaction costs, interest, maintenance, insurance, cleaning (time or money), etc. Now obviously, you don't have to pay rent. Sometimes, it's better to rent, sometimes, it's better to buy. I've actually been involved in that debate at least once here.

The point I am making though is that everyone says that real estate is an asset. It's like a mantra. Repeat after me: Real estate is an asset; it never goes down in value; paying rent is throwing money away. One more time: Real estate is an asset; it never goes down in value; paying rent is throwing money away. Yet having said that, they completely ignore what the words liability and asset actually mean.

I actually (partly) own one house, but live in another and pay rent on that one. But why? Renting is just throwing money away! Remember the mantra?! Because the house I (partly) own I bought very cheaply and it's in a holiday destination. I can make the entire yearly mortgage (and more) just in summer. Or, to put it another way, I can rent the house I live in for a month for what I can make from renting about 1/3 of the house I (partly) own. I used to have a better deal at the previous place I rented (where one room at my house could pay the monthly rent on the place I rented), but I moved to another location so that I could open a business out of the ground floor of the place I currently live in (so that business will pay my rent instead). Everyone keeps telling me that I'm crazy for not living in my own house (usually because it's so big and nice, which is an even more absurd reason to live in it), whilst totally missing the point of the arbitrage. This is about arbitrage. I should add that these people who keep commenting on this are people who buy new cars on finance every four years and generally status whore on Farcebook about whatever they've blown their latest pay cheque on. In other words, pinch of salt.

Anyway, all that aside, even ignoring the point that since 1980, in the OECD, there have been something like one housing bust per year (i.e. more than 30), and that this time it's going to be different, there's another point. People say you can sell it and make a profit, but completely ignore the fact that that only makes sense if either 1) there are tax incentives for owning/selling a house (there often are, so it might indeed be better to own/sell), 2) you downsize. Because if you buy a house for $100,000 and it doubles in value to $200,000, the chances are that the house you move to will also have gone from $100,000 to $200,000, so it's a false economy, real estate investing skills not withstanding.

Post: #22

"Everyone here at RooshV needs to understand that governments are not our friends. This is not a left-right issue. It is a simple mathematics issue. The poor have nothing and the rich are too smart with their money. That only leaves those in the middle. Don't make yourself an easy target come the day of reckoning, and don't hamstring your ability to outrun that."

Bingo! We have a winner!

Post: #23

(06-09-2014 07:59 PM)jamaicabound Wrote:  I guess if you guys don't mind me spinning off another question. Say I got 15k or 20k sitting around. I don't really have any plans for it right now but would like it to be easily accessable as you never know when a property pops up I wanna buy. Could be a week from now could be a year from now. Should I just let it sit in my account ready and waiting or is there anything I can do with it short term to at least make it work for me a little while it sits. Like I said, I could come across a great property tomorrow that I wanna buy but at the same time I could be sitting on this money for 6 months or a year. Any suggestions?

If you may need to access the cash within a week, then just sitting in your account is the best option. Have a read of Buffett's unique way of thinking about cash -

“Ms. Schroeder argues that to Buffett, cash is not just an asset class that is returning next to nothing. It is a call option that can be priced. When he thinks that option is cheap, relative to the ability of cash to buy assets, he is willing to put up with super-low interest rates, said Ms. Schroeder, who followed Mr. Buffett for years before she became his biographer.

”He thinks of cash differently than conventional investors,” Ms. Schroeder says. “This is one of the most important things I learned from him: the optionality of cash. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”

It is a pretty fundamental insight. Because once an investor looks at cash as an option – in essence, the price of being able to scoop up a bargain when it becomes available – it is less tempting to be bothered by the fact that in the short term, it earns almost nothing.

Post: #24

^^ Had no idea I had Buffet's genius residing in me.

Post: #25

If we delve into the depths of economics, a dollar today is never worth a dollar tomorrow. Inflation creates a perpetual devaluation of a piece of paper, and the only way to remedy this is make the money grow on its own. So, if you keep cash on hand, sure it feels good because you hold it, but at the same time, I would hope it would light a fire under you to get rid of it on assets that will generate cash-flow on their own.

Also, paying of a mortgage is never a bad choice, due to the fact if you pay it off in seven years, you forgo the vast majority of the interest hit in the long run, plus you get the equity of the house working for you.