Debt repayment vs Investing – thoughts on psychology

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MrBeaver
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Debt repayment vs Investing – thoughts on psychology

Post by MrBeaver » Thu Dec 06, 2018 9:48 am

This podcast episode was fascinating to me, especially in the context of how many debt vs investing topics we have. An interesting take on:
  • Mathematical calculation
  • Which goal is more motivational to increase income and reduce expenses to achieve the goal faster?
  • How will each achievement change how we think leading to lifestyle changes?
http://radicalpersonalfinance.libsyn.co ... -or-invest

It seems to formalize and explain to me a lot of the emotional pleas we see of 'I know it's more mathematically beneficial to invest, but I'd rather not have debt'.

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FiveK
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Re: Debt repayment vs Investing – thoughts on psychology

Post by FiveK » Fri Dec 07, 2018 6:22 am

Yes, people are different.

For the debt averse: money can't buy happiness. Pay the debt and be happy.

For the investing aficionados: a lower net worth doesn't buy happiness. Invest and be happy.

grettman
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Re: Debt repayment vs Investing – thoughts on psychology

Post by grettman » Fri Dec 07, 2018 6:49 am

FiveK wrote:
Fri Dec 07, 2018 6:22 am
Yes, people are different.

For the debt averse: money can't buy happiness. Pay the debt and be happy.

For the investing aficionados: a lower net worth doesn't buy happiness. Invest and be happy.
Agreed. Also, it doesn’t have to be black or white. It rarely is. It is usually a transaction by transaction decision. I hate debt and I’m paying off my mortgage but I also invest.

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willthrill81
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Re: Debt repayment vs Investing – thoughts on psychology

Post by willthrill81 » Fri Dec 07, 2018 9:28 am

Research has shown that when someone's net worth is negative, building assets is preferred to paying off debt. But when net worth is positive, paying off debt is preferred. It's very interesting.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

harvestbook
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Re: Debt repayment vs Investing – thoughts on psychology

Post by harvestbook » Fri Dec 07, 2018 9:38 am

Interesting. I'm still seriously debt-averse but sometimes it has to do with where you are on your learning scale. When I ran amortizations on my mortgage, or looked at the principal/interest ratios on my monthly bills, I was horrified by "how much more" I'd be paying for the house over 30 years, even after I refinanced to 15 years. This was in 2012/2013 when I finally started to get some extra money. And I had a great rate at the time, somewhere in the mid-three percent range.

I also didn't really have a vehicle to invest a lot. I was pretty ignorant and although I maxed out my Roth, I was self-employed and didn't consider a taxable brokerage account or s401k. Now, after a few years reading Bogleheads, I'd probably value the low mortgage rate more than I did then. I'd think more mathematically and less emotionally.

Yet I'm still glad to be debt-free now even if the retrospective math would've had me ahead today. At the time, who knew the market would keep going up like crazy? It seemed around 2011 "everybody knew" that another 2008 was coming. Aside from hindsight bias, being out of debt allows me to have a more aggressive AA, have a higher savings rate, and sleep a little more easily when we get volatility like we have this year. For me, the ultimate purpose of money is freedom of time, and being debt-free helps accomplish that.

At this point, I have no absolute position on the matter, so it's good to hear this gentleman talking about one's own time frame and how we view our own futures. The clear focus of having zero on the mortgage looked solid to me.
I'm not smart enough to know, and I can't afford to guess.

Random Walker
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Re: Debt repayment vs Investing – thoughts on psychology

Post by Random Walker » Fri Dec 07, 2018 9:52 am

I’m a big fan of paying off debt. Firstly, it’s a guaranteed return. Secondly, I’ve found it helps create the psychological muscles to perhaps take on a more aggressive asset allocation.

Dave

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onthecusp
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Re: Debt repayment vs Investing – thoughts on psychology

Post by onthecusp » Fri Dec 07, 2018 10:44 am

I do look at mortgage debt differently, but it is mostly psychological. Even there I have long gone for 15 year terms that offered lower interest rates. I have been paying about 8% extra for the last couple years by rounding up the payment. I believe it is not the "optimum" for me financially to be paying off a 3% loan early but it feels good and is not horrible financially. It is a tiny bit of enforced savings so again, psychologically it is probably a good move as it would probably be spent rather than swept into savings.

Having some debt for an appreciating (hopefully) asset seems less onerous than that for a car or worse credit card debt. The difference in typical rates is also part of it. I once had a 0% car loan that I took as long as I could on. I'm sure I just paid a little more for the car, but it was an upfront offer and the price of the car seemed reasonable for the make/model. We have long since wiped out all other debt obligations and pay cash for new (to us) cars.

MissGina
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Re: Debt repayment vs Investing – thoughts on psychology

Post by MissGina » Fri Dec 07, 2018 8:38 pm

I’m in the no debt camp. I’d invest while paying off debt, but debt freedom was always the main force.

Turbo29
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Re: Debt repayment vs Investing – thoughts on psychology

Post by Turbo29 » Sat Dec 08, 2018 12:23 pm

I consider mortgage debt differently than other debt for two reasons.

First, I have to live somewhere and my current mortgage payment plus property taxes and insurance is less than current rental prices.

Second, I live in a no recourse state. If I wished, I could turn over the keys to the lender and say, "see ya." I have no plans to do so but psychologically that increases my freedom and my personality is all about options. Of course the value of the house is more than the loan balance so that would be inadvisable but my memories are very fresh of being "underwater" not that many years ago.

I understand that paying the mortgage off would be better from a return point of view mathematically, but that is not my only consideration.

kolea
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Re: Debt repayment vs Investing – thoughts on psychology

Post by kolea » Sat Dec 08, 2018 12:33 pm

Random Walker wrote:
Fri Dec 07, 2018 9:52 am
I’m a big fan of paying off debt. Firstly, it’s a guaranteed return. Secondly, I’ve found it helps create the psychological muscles to perhaps take on a more aggressive asset allocation.

Dave
Yes but those 30-year mortgage payments look like peanuts after about 10 years, as inflation erodes away their real value.

We carried a fair amount of debt through the 2008 recovery which allowed us to pile more money into the booming market. In 2014 we finally paid off all our debt. It worked out well but that was somewhat lucky that it did.
Kolea (pron. ko-lay-uh). Golden plover.

KlangFool
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Re: Debt repayment vs Investing – thoughts on psychology

Post by KlangFool » Sat Dec 08, 2018 12:45 pm

Folks,

The problem for many folks is that they only think in term of debt repayment vs investing.

1) For many folks, it does not make sense for them to pay 20% to 30% tax in order to save less than 4% mortgage interest payment. Whether they choose to invest their money in the Trad. 401K account or keep that money in the money market fund is a separate question.

2) How does it make them safer by putting more money into an illiquid house basket? It does not. Especially for folks that are "House Poor"

3) Then, we have folks pay off their mortgages in order to take a more expensive student loan for their children.

KlangFool

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