Should I Invest, or Pay Debt?

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BrianJone
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Should I Invest, or Pay Debt?

Post by BrianJone »

I own two stocks (both with a high yield % and both large, well known companies). I also have a handful of bonds that were bought for me from family at younger ages and have not matured yet. I have done a good bit of research over the past few months as I want to be investing more money (in a conservative way), because I am self employed and need to plan for my future. I am 30 years old and have no credit card debt or anything like that, but I do have student loan debt (at 3.5% for another 25 years) and i have a car loan (2.99% for another 4 years). I have not yet added money to any IRAs though will be using Roth IRA the first chance I get.

my question: Am I better off investing as much or all of the $5,000 that I can in my Roth IRA (for 2012 as long as I do it soon), or should that money be used to pay off my student loan or my car loan? And I would be interested in learning why, if you were able to explain.

If you need any more information from me, please ask.
WHL
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Re: Should I Invest, or Pay Debt?

Post by WHL »

I would think a lot more information is needed before we could give an honest answer.

How much do you make being self-employed?

How stable is your work?

What are your long-term goals?

Typically, I would say contribute at least to your 401k match but since you don't get one, it's a bit different.
ALRebel
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Re: Should I Invest, or Pay Debt?

Post by ALRebel »

This is probably more of a personal decision. You have a few years on me and we are in a similar situation. I personally HATE debt, other than a house but don't currently have one, and am currently chomping away at student loans. I do invest in my company's 401k, only because it has a very nice match...if it did not I would probably be throwing what I did invest on the debt. I don't regret what I am doing for one second and love what the future holds with goals in mind for when this debt is paid off at the end of this year. Then becomes not when I am going to start investing, but how much do I want to invest.
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BrianJone
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

WHL wrote:I would think a lot more information is needed before we could give an honest answer.

How much do you make being self-employed?

How stable is your work?

What are your long-term goals?

Typically, I would say contribute at least to your 401k match but since you don't get one, it's a bit different.

I made $30K in my first year, $40K my second year and though we have hardly started this year, I am on pace for around $70K to this point and yes the work is stable. I owe $60K for my student loan and $18K for the car (the blue book value is slightly higher than what i owe in the loan).

My long term goals are to have a retirement plan set up for me in about 35 years (maybe 40, though I wouldnt mind if it was 30). At this time I have no children though that may be happening in the next couple years (of course the business will grow at that time too). With this saving for retirement as a goal, I want to start putting money away in IRA's, long term investment Bonds, and so forth. Though again, maybe it is best for me to just pay off the debt I have and save that interest rather than collect interest from a bond or something like that. If you still need more information please ask, but hopefully this helps you answer. Thank you.
WHL
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Re: Should I Invest, or Pay Debt?

Post by WHL »

Personally, I would max your Roth IRA and dump the rest of your available money towards paying off the debt. If you can knock it out in a few years, I don't think it will crush your retirement plans. Just make sure you take the money from your debt payments and put it into investments.
rfburns
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Re: Should I Invest, or Pay Debt?

Post by rfburns »

I vote pay debt. The portfolio you mention is too narrow.
Use the money to pay off car debt early, hang around here and learn more about investing the BH way.
I see no rush either way.
humanshield
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Re: Should I Invest, or Pay Debt?

Post by humanshield »

I also vote that you pay off your debt. If you look at it this way, the total amount of money you would pay on the life of the student loan is about $90k (i believe my calculations are correct... I just used an mortgage calculator and plugged in your numbers). So thats $30k you're paying.

If you think you can invest your money to make MORE than $30k + taxes in 25 years than I would suggest doing that. But thats a big if.
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BrianJone
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

humanshield wrote:I also vote that you pay off your debt. If you look at it this way, the total amount of money you would pay on the life of the student loan is about $90k (i believe my calculations are correct... I just used an mortgage calculator and plugged in your numbers). So thats $30k you're paying.

If you think you can invest your money to make MORE than $30k + taxes in 25 years than I would suggest doing that. But thats a big if.

Thank you for the calculations. I am not as good with math, but can you tell me what may happen if I invest rather than pay off the debt? If I take the $60K and put it into a long term bond or somethign else "fixed" over the same time period (25 years), how much would that earn over that time period? and maybe a better example would be (because I dont have the $60K today), what would a $10K investment (likely a bond because it would be easier to calculate) pay over a 25 year period (If i start today and invest for both 2012 and 2013 Roth IRA), in relation to a 24 year investment period of the same type (assuming I pay off debt this year and then wait to start the Roth IRA next year.....because that would be compound type interest over that time period and so it isnt as simple as just $10K less, am I correct in saying that?)


Also, special thanks to everyone who posted an answer, this is very helpful!!
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BrianJone
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

rfburns wrote:I vote pay debt. The portfolio you mention is too narrow.
Use the money to pay off car debt early, hang around here and learn more about investing the BH way.
I see no rush either way.
thank you for your suggestion, I do have a question about your answer and look forward to learning about the bogleheads investing plans!
are you suggesting the car be paid off first because it is a lower amount? or because I have such a longer time period to pay off the student loan?
humanshield
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Re: Should I Invest, or Pay Debt?

Post by humanshield »

BrianJone wrote: Thank you for the calculations. I am not as good with math, but can you tell me what may happen if I invest rather than pay off the debt? If I take the $60K and put it into a long term bond or somethign else "fixed" over the same time period (25 years), how much would that earn over that time period? and maybe a better example would be (because I dont have the $60K today), what would a $10K investment (likely a bond because it would be easier to calculate) pay over a 25 year period (If i start today and invest for both 2012 and 2013 Roth IRA), in relation to a 24 year investment period of the same type (assuming I pay off debt this year and then wait to start the Roth IRA next year.....because that would be compound type interest over that time period and so it isnt as simple as just $10K less, am I correct in saying that?)
No problem, this is fun for me ;)

I just used an online web calculator. So to take your example of 10k into a bond fund, i just went to this site http://www.moneychimp.com/calculator/co ... ulator.htm and plugged in 4% as the annual average return (i have no idea actually how much a bond fond will yield you) for 25 years.

Looks like that alone will get you about 26.6k!

So maybe the best thing to do is to aggressively pay off that loan, invest some of your money (that 10k), and invest in your roth IRA like some of the other posters have mentioned.
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BrianJone
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

humanshield wrote:
BrianJone wrote: Thank you for the calculations. I am not as good with math, but can you tell me what may happen if I invest rather than pay off the debt? If I take the $60K and put it into a long term bond or somethign else "fixed" over the same time period (25 years), how much would that earn over that time period? and maybe a better example would be (because I dont have the $60K today), what would a $10K investment (likely a bond because it would be easier to calculate) pay over a 25 year period (If i start today and invest for both 2012 and 2013 Roth IRA), in relation to a 24 year investment period of the same type (assuming I pay off debt this year and then wait to start the Roth IRA next year.....because that would be compound type interest over that time period and so it isnt as simple as just $10K less, am I correct in saying that?)
No problem, this is fun for me ;)

I just used an online web calculator. So to take your example of 10k into a bond fund, i just went to this site http://www.moneychimp.com/calculator/co ... ulator.htm and plugged in 4% as the annual average return (i have no idea actually how much a bond fond will yield you) for 25 years.

Looks like that alone will get you about 26.6k!

So maybe the best thing to do is to aggressively pay off that loan, invest some of your money (that 10k), and invest in your roth IRA like some of the other posters have mentioned.

So if the interest in a 25 year period on my student loan costs me to pay out $30K in interest....and a bond would earn me $26.6K in added pay.......I would be better off paying down the loan with whatever money I would otherwise use to invest......am i reading that correctly?

and thanks again, I am glad you had fun with this, it is very helpful to me!
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nydad
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Re: Should I Invest, or Pay Debt?

Post by nydad »

I vote to sell $10,500 of the stocks and dump it into Roth IRA for 2012/2013, put it in total market index, then use the $5k to pay down some debt - that way you've tax sheltered a lot of money - there is only a small window for tax shelter each year, so if you can stretch, I'd try to fill it. I also have found that once that money is in there, even though there are ways to get it out (esp of Roth), it is psychologically more difficult and seems less touchable.

Also, turn off re-investment of dividends on those stocks, and use that money to pay down debts even more.
humanshield
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Re: Should I Invest, or Pay Debt?

Post by humanshield »

Haha, I'm not a financial adviser by any means but if i were in your situation I would try to pay off as much of the debt as fast as possible.
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BrianJone
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

nydad wrote:I vote to sell $10,500 of the stocks and dump it into Roth IRA for 2012/2013, put it in total market index, then use the $5k to pay down some debt - that way you've tax sheltered a lot of money - there is only a small window for tax shelter each year, so if you can stretch, I'd try to fill it. I also have found that once that money is in there, even though there are ways to get it out (esp of Roth), it is psychologically more difficult and seems less touchable.

Also, turn off re-investment of dividends on those stocks, and use that money to pay down debts even more.
I should have listed that also, my stocks total about $10-$11K, so do you think I should dump it all?

And am I understanding correctly that your thought would be for me to invest as much as I can (hopefully max) in a Roth IRA first and then paying off debt second. Attempting to do both of course, but use my money in that order each year? And the reason for this is because of the cap on the Roth IRA each year?
CedarFence
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Re: Should I Invest, or Pay Debt?

Post by CedarFence »

One thing about investing is that it is not an all or nothing activity. If you don't have a Roth, why not fund one at >$3000 to get into the no fee realm. If I would wait until I was out of debt, I would be more behind retirement goals for ever. You don't have to do 50/50, just enough to see one account grow while the other shrinks.
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nydad
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Re: Should I Invest, or Pay Debt?

Post by nydad »

In general it is suggested that you max out tax advantaged vehicles before investing in taxable. in this case, I don't know your basis in those stocks, nor your tax bracket so I don't know how much capital gains tax you would have to pay on a sale. You need to understand this before selling - it depends on your income in 2013.

In any case, you say you want to invest conservatively, which to me suggests, dump the stocks and buy total stock market index in Roth - that retains the same equity exposure, but it's now tax sheltered and much more diversified (you'll likely want to sell them at some point, so why not do so now, and take advantage to fund the Roth)

Also since you're self employed, look at other savings options (SEP-IRA, etc).

As for paying off income, my supposition is, stocks will make 6-7% over the long term, which beats the interest. So, perhaps split the difference - throw half of your available savings at the debt, throw the other half at investments?
Default User BR
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Re: Should I Invest, or Pay Debt?

Post by Default User BR »

I would refinance the auto loan at PenFed, changing it to 1.74%. The student loan, if fixed, is a pretty good rate and I would not accelerate at this time. I would definitely work on the investments. Owning a few individual stocks is not the way to go. Get invested in broad index funds. Tax shelter as much as possible.


Brian
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BrianJone
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

Default User BR wrote: The student loan, if fixed, is a pretty good rate and I would not accelerate at this time.

It is fixed.

Can you tell me your thoughts as to why you would not accelerate those payments? I am not asking this to question your opinion, I am asking so that I can learn from you. My guess (and please tell me if I am correct or wrong), is because over the 25 year period, having this low fixed rate will (hopefully) in years to come, be much lower than I could get from an investment. Meaning CDs, Bonds, Etc may pay a higher return at a point in the future and make that number higher than the interest I would be paying on this student loan (similar to how bonds were higher than 4% just a handful of years ago).

Or are you giving this advice for a different reason?
Thank you for your help.
huntertheory
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Re: Should I Invest, or Pay Debt?

Post by huntertheory »

I think whatever you do -- invest, pay debt, etc -- in your situation is a step in the right direction.

Given your self employment, I think the first priority is an emergency fund. I generally am anti-debt, but in your situation the first concern is a cash flow crunch. It does you no good to pay down all of your fixed rate, long term debt (student loans, car payment) if you then get strapped for cash and have to incur credit card debts. That is the absolutely worst case scenario, and can result in taking awhile to crawl out.

The rule of thumb is that if your income is not entirely steady, you want 3-6 months of living expenses as easily tapped "emergency" funds. If you don't have that, that would be my first priority.

After that, without an employer match, I honestly think a mixed approach would be fine for you. Figure out what you can "save" on top of your income (keeping in mind your taxes since you're self-employed), and then work on putting that in your IRA and paying down your debt. All of it will increase your net wealth figure, and it also diversifies your potential returns. (Paying down debt with a 3% interest rate is a guaranteed 3% return, but stocks may -- or may not -- return more over the same time horizon. By doing both you get the "fixed rate return" of paying down debt as well as the upside of equities.) Ultimately I don't think there is a right answer for you on "where" it must go, at least while looking into the future. (If stocks go down 30%, then paying down the debt would've been better; if they go up 30%, then you should have put them into equities. Wish I knew the answer to that question right now.) A mixed approach -- whatever you are comfortable with -- will get you over the finish line. The most important thing is to have a process you are comfortable with and works for you. This race is definitely a marathon, not a sprint.

I also agree that you should be in broad index funds, particularly as you get started. There is no such thing as a "conservative, high yielding stock" -- all stocks have idiosyncratic individual stock risk, and even stable companies can have volatile stocks simply depending on the market price. Plus, in your situation, I'm guessing you don't have a lot of time to invest in value investing resources and stock research; put it in low cost broad market (and tax efficient) index funds and forget about it.
trudy
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Re: Should I Invest, or Pay Debt?

Post by trudy »

BrianJone wrote:I am not as good with math, but can you tell me what may happen if I invest rather than pay off the debt? If I take the $60K and put it into a long term bond or something else "fixed" over the same time period (25 years), how much would that earn over that time period?
Be sure you have an emergency fund.

You will find it very helpful to do arithmetic for various financial things. You can to some extent get away with a calculator, but using a little program will let you vary things easily and see the effect and do more complex stuff.

Here's how old I am: I used to do development work on BASIC. You can find free BASICs on the web. I use http://www.justbasic.com

Here's a sample program to calculate what happens as 5% yearly compound interest is applied to an initial $10,000 over 20 years. You can see it is very easy to modify for different principals and interest rates and time frames and almost self-explanatory to write.

10 P = 10000
20 I = 0.05
30
40 FOR Y = 1 TO 20
50 P = P*(1+I)
60 PRINT Y,P
70 NEXT Y
80
90 END

RUN does this (You can neaten up the output format.):

1 10500
2 11025
3 11576.25
4 12155.0625
5 12762.8156
6 13400.9564
7 14071.0042
8 14774.5544
9 15513.2822
10 16288.9463
11 17103.3936
12 17958.5633
13 18856.4914
14 19799.316
15 20789.2818
16 21828.7459
17 22920.1832
18 24066.1923
19 25269.502
20 26532.9771
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Toons
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Re: Should I Invest, or Pay Debt?

Post by Toons »

Pay Off Debt -Keep It Simple :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Grt2bOutdoors
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Re: Should I Invest, or Pay Debt?

Post by Grt2bOutdoors »

Have I got a great deal for you - 4 year bond paying 2.99%, interested?

But first, make sure you have at least 6 months living expenses tucked away in an FDIC insured savings account.
After that, fund the retirement account. If you have extra $$ - funnel it to the car loan.

You're on your way - congratulations, and keep up the "hard work". :beer
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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ruralavalon
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Re: Should I Invest, or Pay Debt?

Post by ruralavalon »

Welcome to the forum :) .

Its great that you have no credit card debt.

I think that nydad has it about right.

The interest rates on your debt are not high, and the debt is not excessive ($60k at 3.5%, and $18k at 2.99%). You are 30 years old, self-employed, own two stocks (~ $10-11k) and a handful of bonds, have no money in IRAs, and need to build up some tax advantaged space for retirement investing. It sounds like your self-employment is going well, on pace for ~ $70k this year.

Figure out how much gain you have in those stocks to see what tax liability will be if you sell, then if that is not too horrible sell the stocks. Also sell the bonds. Max out the IRA and use any extra to pay down the loans. Continue to live frugally. Each year make maxing out the IRA first priority, then make aggressively paying off the loans second priority.

In the future look at plans that will allow you to have more than $5.5k/yr in tax protected saving, like:
Wiki article link: SEP
Wiki article link: SIMPLE IRA
Wiki article link: Solo 401k plan
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Default User BR
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Re: Should I Invest, or Pay Debt?

Post by Default User BR »

BrianJone wrote:
Default User BR wrote: The student loan, if fixed, is a pretty good rate and I would not accelerate at this time.
It is fixed.
Can you tell me your thoughts as to why you would not accelerate those payments?
It's a relatively inexpensive hedge against inflation and future interest rate increases. It's also reasonably cheap leverage for your investments. The expected (but by no means guaranteed) return from investments would be higher than that. It's not as good as a mortgage at that rate, as I assume that you are not able to deduct much if any of the interest on this loan.

When you accelerate payments on a student loan, the money is forever inaccessible, unlike a mortgage where you might be able to tap the equity at a later point. Here, you permanently affect your liquidity.

So in terms of liquidity, hedging, and leverage, I like the loan and would pay on schedule.


Brian
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Meg77
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Re: Should I Invest, or Pay Debt?

Post by Meg77 »

You don't say how much you already have saved or invested, but here are the usual steps in order from most important to least:

1. Have 6 months of expenses in cash. In your case you may need up to 12 months since you are self employed, but it's your call how much in reserves you are comfortable with to run your business and survive a downturn.

2. Contribute 10% - 15% of your gross income toward retirement investments. If you already have a good cushion and have been saving for years you can veer more towards 10, but 15% is prudent especially since you don't benefit from employer matches or anything. Max out all tax-free and tax-deferred options first (Roth IRA, 401k, etc).

3. Use excess cash flow to pay off debt. In your case your interest rates are very low, so I wouldn't be in a hurry to get to this step at the expense of the first two.
"An investment in knowledge pays the best interest." - Benjamin Franklin
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BrianJone
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

ruralavalon wrote:Welcome to the forum :) .

Its great that you have no credit card debt.

I think that nydad has it about right.

The interest rates on your debt are not high, and the debt is not excessive ($60k at 3.5%, and $18k at 2.99%). You are 30 years old, self-employed, own two stocks (~ $10-11k) and a handful of bonds, have no money in IRAs, and need to build up some tax advantaged space for retirement investing. It sounds like your self-employment is going well, on pace for ~ $70k this year.

Figure out how much gain you have in those stocks to see what tax liability will be if you sell, then if that is not too horrible sell the stocks. Also sell the bonds. Max out the IRA and use any extra to pay down the loans. Continue to live frugally. Each year make maxing out the IRA first priority, then make aggressively paying off the loans second priority.

In the future look at plans that will allow you to have more than $5.5k/yr in tax protected saving, like:
Wiki article link: SEP
Wiki article link: SIMPLE IRA
Wiki article link: Solo 401k plan

The bonds are savings bonds and too many mature dates and interest rates to list, but at the moment their value (including interest earned) is in the neighborhood of $7-$8K.
And I have much more than 6 months of an emergency fund, but need to keep a little extra in the savings bank account until after I pay taxes in April. After that, I will be able to use all the extra money in excess of my emergency fund.
The stocks are both over 5 years old, one has slightly gained and the other has lost quite a bit, but over the years I have made enough on the dividends over the years that i will not have lost money on the stock itself.....and the net loss by selling both would help my taxes, not hurt me (that is my understanding of selling stock for a loss, am i correct?).
The bonds are savings bonds, is that something i can sell before they mature? will I have a penalty for doing that?
When you say to max out my IRA, are you talking about Roth IRA? or other kinds?

thank you for your help and thank you for the links to view!
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nydad
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Re: Should I Invest, or Pay Debt?

Post by nydad »

On the savings bonds, you may want to hold on to those - those will continue to earn interest for 30 years I think - and if you got them a while ago they're likely earning more interest than any bonds you could buy today. Find out what you have, but consider keeping them until they hit 30 years maturity, and consider them as part of your bond allocation.

On the stocks, if you reinvested the dividends, those will add to your basis. Your capital gain is thus calculated more or less as follows:
sale value - original purchase cost - sum of all dividend reinvestments = capital gain / loss

More on capital gains here: http://money.howstuffworks.com/personal ... s-tax2.htm

In any case, it doesn't sound like the tax hit will be big. Just consider if you do this soon (e.g. before April 15), you can fund the both 2012 IRA and the 2013 one - call Vanguard to confirm but I think you can. If you have a long-term net capital loss, you can carry that forward or use it to offset, but I'm not an expert in taxes, others could help more on that.

re: IRA - traditional vs Roth, please see wiki here http://www.bogleheads.org/wiki/Roth_versus_Traditional. Worth understanding the difference, and deciding which one is best for you in your current situation.
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BrianJone
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

Grt2bOutdoors wrote:Have I got a great deal for you - 4 year bond paying 2.99%, interested?

But first, make sure you have at least 6 months living expenses tucked away in an FDIC insured savings account.
After that, fund the retirement account. If you have extra $$ - funnel it to the car loan.

You're on your way - congratulations, and keep up the "hard work". :beer

I'm sure this is some type of joke but sadly I don't exactly get it (about the 4 year bond)....it is related to my car loan, but don't get it. please explain, thank you
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BrianJone
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

Default User BR wrote:
BrianJone wrote:
Default User BR wrote: The student loan, if fixed, is a pretty good rate and I would not accelerate at this time.
It is fixed.
Can you tell me your thoughts as to why you would not accelerate those payments?
It's a relatively inexpensive hedge against inflation and future interest rate increases. It's also reasonably cheap leverage for your investments. The expected (but by no means guaranteed) return from investments would be higher than that. It's not as good as a mortgage at that rate, as I assume that you are not able to deduct much if any of the interest on this loan.

When you accelerate payments on a student loan, the money is forever inaccessible, unlike a mortgage where you might be able to tap the equity at a later point. Here, you permanently affect your liquidity.
So in terms of liquidity, hedging, and leverage, I like the loan and would pay on schedule.
Brian
I am following along, it is a good hedge, I can understand that. And to answer your question I am able to deduct some of the interest, key word being some. I don't remember the exact number but there is a cap of how much interest can be tax deducted, I think something around $2K per year. And since this is still early in the loan, most of my monthly payments are interest so in 2011 I know I paid more interest than they let me deduct, not sure what 2012 will look like, but I expect to deduct the max again (meaning I paid more than they let me deduct)

At the moment I am renting, I do not own.....but that is something I will start in another topic as to what I should be doing there. So no mortgage for me now. Thank you for all your answers and for explaining.
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BrianJone
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

nydad wrote:On the savings bonds, you may want to hold on to those - those will continue to earn interest for 30 years I think - and if you got them a while ago they're likely earning more interest than any bonds you could buy today. Find out what you have, but consider keeping them until they hit 30 years maturity, and consider them as part of your bond allocation.

On the stocks, if you reinvested the dividends, those will add to your basis. Your capital gain is thus calculated more or less as follows:
sale value - original purchase cost - sum of all dividend reinvestments = capital gain / loss

More on capital gains here: http://money.howstuffworks.com/personal ... s-tax2.htm

In any case, it doesn't sound like the tax hit will be big. Just consider if you do this soon (e.g. before April 15), you can fund the both 2012 IRA and the 2013 one - call Vanguard to confirm but I think you can. If you have a long-term net capital loss, you can carry that forward or use it to offset, but I'm not an expert in taxes, others could help more on that.

re: IRA - traditional vs Roth, please see wiki here http://www.bogleheads.org/wiki/Roth_versus_Traditional. Worth understanding the difference, and deciding which one is best for you in your current situation.

I did not re-invest the dividends, and don't have all the math worked out, but you are right that my net gain or net loss will be very minor and not be a hit to my tax bracket at all.
the savings bonds are 30 years (though bought at all different dates and years). The majority (about 2/3) is at 4% interest rate (a couple higher but those that are lower are mostly 2.74% with one very low one at 2.58%). The stocks mature anywhere from 2 - 16 years from today. Does that help give you enough information?

And I have heard great things about Vanguard, just on other information I have been reading around the web. Do you know how much of a fee they charge though? That is one part I dont like about the stocks I hold, the broker charges a lot of money. I will be using scott trade or something else like that in the future if I ever go in that direction again. So I was wondering if you had information on how much or little Vanguard may charge for the investments you are suggesting I start.....do you have a general idea?
thank you for the help.
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Re: Should I Invest, or Pay Debt?

Post by stemikger »

This sounds like a call that is on the Dave Ramsey show about 10 times or more per week.

First he would find your salary and have you commit to his plan of all out debt reduction which would be anywhere from 2 to 5 years (some a little shorter and some a little longer, but not by much). Of course this depends on how big your shovel (salary) is. If that is the case and you do his plan Debt reduction is what he calls Baby Step 2. In this part of the plan, you stop investing, and during that time you are basically living like a monk or college student. One of the biggest debts he screams about is student loans and he puts the fear of God in people who have big ones.

Now if you can’t commit to his plan which is extreme but effective and it will take you longer, then you should do David Bach’s plan which is the book The Automatic Millionaire where he has you do a little bit of both.

If you can, I’ll check out Dave Ramsey’s book The Total Money Makeover and make the next few years a war against that student loan.

Good Luck.
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

stemikger wrote:This sounds like a call that is on the Dave Ramsey show about 10 times or more per week.

First he would find your salary and have you commit to his plan of all out debt reduction which would be anywhere from 2 to 5 years (some a little shorter and some a little longer, but not by much).
So he would suggest (or you) that I sell both stocks and bonds and use all that money to pay debt.....and then pay off debt each year with my extra money before investing any of it? Do I have that correct?
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stemikger
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Re: Should I Invest, or Pay Debt?

Post by stemikger »

BrianJone wrote:
stemikger wrote:This sounds like a call that is on the Dave Ramsey show about 10 times or more per week.

First he would find your salary and have you commit to his plan of all out debt reduction which would be anywhere from 2 to 5 years (some a little shorter and some a little longer, but not by much).
So he would suggest (or you) that I sell both stocks and bonds and use all that money to pay debt.....and then pay off debt each year with my extra money before investing any of it? Do I have that correct?
Brian,

Here are Dave Ramsey's Baby Steps:

Step 1: $1,000 in an emergency fund.
Step 2: Pay off all debt except the house utilizing the debt snowball.
Step 3: Three to six months of savings in a fully funded emergency fund.
Step 4: Invest 15% of your household income into Roth IRAs and pre-tax retirement plans.
Step 5: College Funding (if applicable)
Step 6: Pay off your home early.
Step 7: Build wealth and give.

The Power of Focus
Dave’s premise with the Baby Steps is that people can accomplish great things IF they can just be focused. When you read over these seven steps, you think, “Yes. I need to be saving. But I also need to be investing for retirement. I should get my house paid off early. But I also need to be getting out of debt and saving for my kid’s college. You would readily agree that all of these goals are important for successful financial planning. The problem is that your stress level kicks into overdrive with the prospect of doing them all. You clench your jaw and do what you are capable of doing while feeling anxious about the goals you place on the back burner.

The Baby Steps plan works because when you stay focused on one step at a time, you can knowingly put some important goals on hold without the nagging feeling that you are leaving something undone. Why? Because accomplishing each step puts you in a great position to accomplish the next one. You begin to feel an empowerment and a sense of control as you get one step behind you and start the next one. You are making progress instead of treading water.

Brain,

Dave has you sell everything in taxable accounts down to $1,000 which is step one (a baby emergency fund) and throw it all at your debt (of course, not what you already have in an IRA or 401Ks).

Having said that, he tells his listeners all the time. Do not sell your assets if you are not going to do his plan. The reason is if you are going to take too long to pay off the debt it is not worth selling assets because you will be in Baby Step 2 too long with nothing but $1,000 in your emergency fund. More than 2 to 3 years in step 2 is not his plan. Maybe a little longer or shorter in some cases but not by much.

I don't agree with Dave's investing advice (you buy The Bogleheads Guide to Investing) but as far as getting motivated and getting out of debt IMHO there is no one better for that task.

I don't want to misrepresent him and God knows he does not need my help selling his book, but you have to buy his book if you decide to go this route, but I personally just paid off my mortgage and am completely debt free because of this focus intensity that he preaches.

I think Dave can be arrogant and obnoxious at times, but the truth is he is the drill sergeant of getting people out of debt.

It can be done and is so worth it

Good Luck!!!

Steve
Last edited by stemikger on Sat Mar 09, 2013 2:44 pm, edited 1 time in total.
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BL
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Re: Should I Invest, or Pay Debt?

Post by BL »

Everyone has slightly different ideas on this and that is fine. You need to find something that makes sense to you as well. I strongly suggest you buy/borrow Bogleheads Guide to Investing if you are seriously interested in investing. Meanwhile I would consider the following:

Sell stocks and use to fund IRAs, probably Roth. This could be a backup emergency fund as you can remove contributions, but not gains, from it without tax or penalty. Suggested fund(s) would be: Target Retirement Fund, Life Strategy Fund 80/20, or Total Stock market at Vanguard. (No cost if you accept online rather than paper reporting). Some firms not only charge you a load up front (so that money never reaches your account), and/or a 12B-1 fee which increases your annual expense, an annual management fee, an exit fee, and/or other hidden costs.

Probably keep bonds (also a backup emergency source) as they pay better rates than current bonds/CDs.

I would throw any available money toward the car loan until paid off and then tackle student loan. Since it is tax deductible it is probably equivalent in rate to the lower car loan which you can also get rid of more quickly.
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Re: Should I Invest, or Pay Debt?

Post by ruralavalon »

BrianJone wrote:The stocks are both over 5 years old, one has slightly gained and the other has lost quite a bit, but over the years I have made enough on the dividends over the years that i will not have lost money on the stock itself.....and the net loss by selling both would help my taxes, not hurt me (that is my understanding of selling stock for a loss, am i correct?).
The bonds are savings bonds, is that something i can sell before they mature? will I have a penalty for doing that?
When you say to max out my IRA, are you talking about Roth IRA? or other kinds?
If you have a negative capital gain overall on the two stocks, that should not hurt you on taxes when you sell. So I would say go ahead and sell the stocks, putting the $5k for 2012 and $5.5K for 2013 into an IRA. The 2012 contribution must be before April 15.

Since I am not sure about the bonds, I won't comment on whether you should keep them now.

You ask whether you should use a Roth IRA or traditional IRA. You don't indicate your tax bracket, or even marital or tax filing status. In general :
If you are in the 15% tax bracket, prefer a Roth.
If you expect to be in a higher tax bracket than your current bracket for most of your career, prefer a Roth.
Wiki article link: Traditional versus Roth .

Otherwise prefer a traditional IRA. "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." http://thefinancebuff.com/case-against-roth-401k.html

As for the fund to use in the IRA, I would initially suggest either :
Vanguard LifeStrategy Growth Fund (VASGX) (80/20 atock/bond allocation) ; or
Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (60/40 stock/bond allocation).
Both are combinations of very broadly diversified index funds.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

ruralavalon wrote:
You ask whether you should use a Roth IRA or traditional IRA. You don't indicate your tax bracket, or even marital or tax filing status. In general :
If you are in the 15% tax bracket, prefer a Roth.
If you expect to be in a higher tax bracket than your current bracket for most of your career, prefer a Roth.
Wiki article link: Traditional versus Roth .

Otherwise prefer a traditional IRA. "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." http://thefinancebuff.com/case-against-roth-401k.html

my federal bracket in 2011 was 15% bracket....2012 i have not filed taxes yet but very very likley to be 15% bracket.....I cannot be sure in 2013 but it could move up one bracket, and of course I hope it does. with that, do you think Roth is the best way to do this for 2012 and 2013? I did not read your link yet, but will do that now.


ruralavalon wrote:
As for the fund to use in the IRA, I would initially suggest either :
Vanguard LifeStrategy Growth Fund (VASGX) (80/20 atock/bond allocation) ; or
Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (60/40 stock/bond allocation).
Both are combinations of very broadly diversified index funds.
How much does Vanguard charge for these IRA's, does anyone know? and can these be used for either Roth or Traditional? and could you make the case for Growth vs Moderate Growth.....what is the difference and what would the situation need to be for you to suggest one over the other for different people?
thank you so much!
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SkierMom
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Re: Should I Invest, or Pay Debt?

Post by SkierMom »

Are your student loans Federal or Private?

If Private student loans, I would pay these off before anything else. They are too much of a burden, and potentially can weigh you down in more ways than you know....
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Re: Should I Invest, or Pay Debt?

Post by Default User BR »

BrianJone wrote:How much does Vanguard charge for these IRA's, does anyone know? and can these be used for either Roth or Traditional?
They are mutual funds. An IRA is a container. The mutual funds listed can go into Roth, Traditional, taxable brokerage, whatever.

Vanguard doesn't charge a fee to purchase their products. Like all mutual funds, there is an ongoing expense ratio.


Brian
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

SkierMom wrote:Are your student loans Federal or Private?

If Private student loans, I would pay these off before anything else. They are too much of a burden, and potentially can weigh you down in more ways than you know....
federal, does that matter?
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

Default User BR wrote:
BrianJone wrote:How much does Vanguard charge for these IRA's, does anyone know? and can these be used for either Roth or Traditional?
They are mutual funds. An IRA is a container. The mutual funds listed can go into Roth, Traditional, taxable brokerage, whatever.

Vanguard doesn't charge a fee to purchase their products. Like all mutual funds, there is an ongoing expense ratio.


Brian

ongoing expense? for the next 30-40 years? would i be better off paying a flat fee now rather than all of that ongoing expense every year i invest in my IRA for all that money (which hopefully turns out to be a lot!)
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Re: Should I Invest, or Pay Debt?

Post by norookie »

Many a FA will encourage you to use your CC credit limit. JME Hey, your paying 5% or whatever IN THE OLD days, he can assure you of +9% ! :annoyed Yea, R I G H T, as Richard Pryor used to say. In other words......do your own math, debt free is "well", nice.
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Re: Should I Invest, or Pay Debt?

Post by bayview »

BrianJone wrote:
Grt2bOutdoors wrote:Have I got a great deal for you - 4 year bond paying 2.99%, interested?

But first, make sure you have at least 6 months living expenses tucked away in an FDIC insured savings account.
After that, fund the retirement account. If you have extra $$ - funnel it to the car loan.

You're on your way - congratulations, and keep up the "hard work". :beer
I'm sure this is some type of joke but sadly I don't exactly get it (about the 4 year bond)....it is related to my car loan, but don't get it. please explain, thank you
(I don't think this was answered...)

He means that not having to pay 2.99% interest over the next four years on your car loan is the equivalent of earning 2.99% interest on a four-year bond.

This is a useful way of putting interest rates (even fairly low rates) into perspective. Not having to pay interest on a loan is an awful lot like earning interest on an investment or savings. :sharebeer
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

ruralavalon wrote:Otherwise prefer a traditional IRA. "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." http://thefinancebuff.com/case-against-roth-401k.html

this link isnt working for me.
does it work for anyone else?
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Re: Should I Invest, or Pay Debt?

Post by bayview »

BrianJone wrote:
ruralavalon wrote:Otherwise prefer a traditional IRA. "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." http://thefinancebuff.com/case-against-roth-401k.html

this link isnt working for me.
does it work for anyone else?
Worked for me. I'm on a Mac using Firefox, in case that's relevant.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
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Re: Should I Invest, or Pay Debt?

Post by Default User BR »

BrianJone wrote:
Default User BR wrote:Vanguard doesn't charge a fee to purchase their products. Like all mutual funds, there is an ongoing expense ratio.
ongoing expense? for the next 30-40 years?
Yes, every year that you hold them. The amount depends on the particular fund. For example, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) has an expense ratio of 0.06%. So a $10,000 (the minimum) holding in that fund would cost you $6 per year currently. This money pays for expenses generated to manage the fund.
would i be better off paying a flat fee now rather than all of that ongoing expense every year i invest in my IRA for all that money (which hopefully turns out to be a lot!)
What do you mean? What mutual fund can you buy with a single flat fee?


Brian
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Re: Should I Invest, or Pay Debt?

Post by ruralavalon »

BrianJone wrote:my federal bracket in 2011 was 15% bracket....2012 i have not filed taxes yet but very very likley to be 15% bracket.....I cannot be sure in 2013 but it could move up one bracket, and of course I hope it does. with that, do you think Roth is the best way to do this for 2012 and 2013? I did not read your link yet, but will do that now.

Sounds like a Roth IRA is likely better for both the 2012 and 2013 contributions.

You won't find any mutual funds less expensive to use than Vanguard's. Default User BR has explained it correctly, $10k in VTSAX will cost only $6/yr for fees.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: Should I Invest, or Pay Debt?

Post by Meg77 »

INVEST ALL YOU CAN INTO TAX ADVANTAGED RETIREMENT ACCOUNTS BEFORE PAYING OFF YOUR DEBT.

Your debt is at incredibly low rates, and as you admit you need to start saving for your future and diversifying your investment portfolio. If you had high interest rate credit I might say pay that first, but I can't understand why anybody would be telling you to pay off fixed rate debt at 3.25% over 25 years when you are almost certain to earn more than that over the same length of time even with conservative investments. Hell money market accounts will be paying more than that again in just a few years most likely (and at some point in the next 25 years almost certainly).

Pay off your debt, sure, especially if it's crunching your cash flow. But you are self employed and don't have access to too many retirement accounts. If putting $5,500 in an IRA each year is all you can do toward retirement then you absolutely must do that first and foremost before worrying about such cheap fixed rate debt. Additional/extra debt repayment is what you do with excess cash flow. Excess means AFTER doing all the basics like funding an emergency account and retirement accounts. The only exception is for very bad debt such as credit cards or personal loans or other high rate debt.
"An investment in knowledge pays the best interest." - Benjamin Franklin
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

bayview wrote: Worked for me. I'm on a Mac using Firefox, in case that's relevant.
It worked for me after a computer restart. thanks.
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Re: Should I Invest, or Pay Debt?

Post by BrianJone »

Default User BR wrote:What do you mean? What mutual fund can you buy with a single flat fee?

Brian

I have never invested in a mutual fund, but that does sound like a very low fee, thank you.
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Re: Should I Invest, or Pay Debt?

Post by BL »

The fees (ER, expense rate) are in all mutual funds and Vanguard has the lowest cost funds around. At Vanguard they mostly range from 0.06 to the 0.30s or 0.40s as a percent, while many other companies are way over 1%.
Last edited by BL on Mon Mar 18, 2013 9:04 pm, edited 1 time in total.
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