Pay down 1.9% loan or invest

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
ssquared87
Posts: 755
Joined: Tue Apr 02, 2013 9:54 am

Pay down 1.9% loan or invest

Post by ssquared87 » Thu Jan 19, 2017 10:23 am

Hey everyone,

Quick overview of my financial situation...I max out 401k (18k/yr) Roth IRA (5k/yr) and HSA (3.4k/yr) every year and have 12 months expenses in an emergency fund. My job is fairly stable. I'm 30, single, no kids.

The only debt I have is $9k on a car loan at 1.9%

I want to bring my emergency fund down to 6 months, I don't think having 12 months as I do right now is needed. Should I pay off the loan at 1.9% or invest the money? The interest rate seems sufficiently low that paying off the loan may not make complete sense.

User avatar
dm200
Posts: 18920
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Pay down 1.9% loan or invest

Post by dm200 » Thu Jan 19, 2017 10:37 am

ssquared87 wrote:Hey everyone,

Quick overview of my financial situation...I max out 401k (18k/yr) Roth IRA (5k/yr) and HSA (3.4k/yr) every year and have 12 months expenses in an emergency fund. My job is fairly stable. I'm 30, single, no kids.

The only debt I have is $9k on a car loan at 1.9%

I want to bring my emergency fund down to 6 months, I don't think having 12 months as I do right now is needed. Should I pay off the loan at 1.9% or invest the money? The interest rate seems sufficiently low that paying off the loan may not make complete sense.
I would invest, since 1.90% is very low and rates are trending upward.

bigred77
Posts: 2006
Joined: Sat Jun 11, 2011 4:53 pm

Re: Pay down 1.9% loan or invest

Post by bigred77 » Thu Jan 19, 2017 10:44 am

I would probably opt to just pay off the loan for non-financial reasons. I would want to simplify my life.

Just be done with it. How much are you really going to move the needle with a 9k dollar rate of return bet? If you invest in stocks and get 10% then great, you've made (10%-2%) * 9k = 720 dollars.

I would just pay it off, keep a 6 month E-fund, and start investing in a taxable brokerage account monthly from this point forward (you can start with an amount equal to your car payment that you just paid off).

User avatar
mattyfu1
Posts: 78
Joined: Fri Dec 23, 2016 7:35 am

Re: Pay down 1.9% loan or invest

Post by mattyfu1 » Thu Jan 19, 2017 10:49 am

Reverse the situation....

Would you borrow cash @ 1.9% to invest and hopefully earn more than that? Personally I would not, as it sets a dangerous precedent of getting into further debt.

Pay off the debt and stay out of debt. Use that money you were using for the loan to invest and earn.

Keep it simple.

-Matt

User avatar
knpstr
Posts: 2168
Joined: Thu Nov 20, 2014 8:57 pm
Location: Michigan

Re: Pay down 1.9% loan or invest

Post by knpstr » Thu Jan 19, 2017 11:00 am

May as well pay it off. Then avoid all debt in the future.

Admittedly, at $9,000 and 1.9% it isn't a huge deal either way.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

Independent George
Posts: 311
Joined: Wed Feb 17, 2016 12:13 pm

Re: Pay down 1.9% loan or invest

Post by Independent George » Thu Jan 19, 2017 11:06 am

The math says to invest it - but given how financially stable you already are, emotionally I'd be more inclined to pay off the loan. Once you have enough 'cushion', I feel there is more psychological benefit to increasing your monthly net than there is in trying to maximize your net gains.

User avatar
jimb_fromATL
Posts: 2278
Joined: Sun Nov 10, 2013 12:00 pm
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Pay down 1.9% loan or invest

Post by jimb_fromATL » Thu Jan 19, 2017 11:12 am

I knew people who where out of work or under-employed for more than a year during the crashes of the economy in 2002/2003 and 2008. Some thought their jobs were safe, and did not have enough saved for such an emergency. So six months is good, but 12 months of savings is a lot better.

On the other hand, you can withdraw your contributions from your Roth IRA without tax or penalty if you do run into a bad bump in the road of life. So it's a secondary source of emergency funds. And it does feel good to have no debt. So in your circumstances, I'd pay it off.

jimb

ssquared87
Posts: 755
Joined: Tue Apr 02, 2013 9:54 am

Re: Pay down 1.9% loan or invest

Post by ssquared87 » Thu Jan 19, 2017 11:57 am

mattyfu1 wrote:Reverse the situation....

Would you borrow cash @ 1.9% to invest and hopefully earn more than that?
Keep it simple.

-Matt
Well said, didn't really think of it this way, but essentially that's what it is.
bigred77 wrote: I would probably opt to just pay off the loan for non-financial reasons. I would want to simplify my life.
I was leaning in this direction as well...there are certainly more important things to spend my time on in life than paying bills.

Thank you everyone for the input, I was leaning in the direction of paying the car just to get it done with and based on everyone's feedback I just transferred the money so I can knock this thing out

User avatar
Earl Lemongrab
Posts: 5872
Joined: Tue Jun 10, 2014 1:14 am

Re: Pay down 1.9% loan or invest

Post by Earl Lemongrab » Thu Jan 19, 2017 1:45 pm

mattyfu1 wrote:Would you borrow cash @ 1.9% to invest and hopefully earn more than that? Personally I would not, as it sets a dangerous precedent of getting into further debt.
I would, and have in the past. I took out a 50k home-equity loan at 1.99 to invest.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

User avatar
Earl Lemongrab
Posts: 5872
Joined: Tue Jun 10, 2014 1:14 am

Re: Pay down 1.9% loan or invest

Post by Earl Lemongrab » Thu Jan 19, 2017 1:45 pm

ssquared87 wrote:I was leaning in this direction as well...there are certainly more important things to spend my time on in life than paying bills.
Set up autopay for the monthly amount. Done.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

User avatar
whodidntante
Posts: 4337
Joined: Thu Jan 21, 2016 11:11 pm

Re: Pay down 1.9% loan or invest

Post by whodidntante » Thu Jan 19, 2017 1:46 pm

Earl Lemongrab wrote:
mattyfu1 wrote:Would you borrow cash @ 1.9% to invest and hopefully earn more than that? Personally I would not, as it sets a dangerous precedent of getting into further debt.
I would, and have in the past. I took out a 50k home-equity loan at 1.99 to invest.
And I assume you got a bonus, too! :sharebeer

User avatar
Earl Lemongrab
Posts: 5872
Joined: Tue Jun 10, 2014 1:14 am

Re: Pay down 1.9% loan or invest

Post by Earl Lemongrab » Thu Jan 19, 2017 2:15 pm

whodidntante wrote:
Earl Lemongrab wrote:
mattyfu1 wrote:Would you borrow cash @ 1.9% to invest and hopefully earn more than that? Personally I would not, as it sets a dangerous precedent of getting into further debt.
I would, and have in the past. I took out a 50k home-equity loan at 1.99 to invest.
And I assume you got a bonus, too! :sharebeer
You know it!
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

User avatar
Toons
Posts: 13059
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Pay down 1.9% loan or invest

Post by Toons » Thu Jan 19, 2017 2:48 pm

Pay Off The Loan.
You won't have to waste time looking at it anymore
:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

User avatar
BolderBoy
Posts: 4185
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Pay down 1.9% loan or invest

Post by BolderBoy » Thu Jan 19, 2017 2:52 pm

mattyfu1 wrote:Reverse the situation....

Would you borrow cash @ 1.9% to invest and hopefully earn more than that? Personally I would not, as it sets a dangerous precedent of getting into further debt.
This. Sound advice.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

Gropes & Ray
Posts: 1067
Joined: Wed Jul 16, 2014 7:28 am

Re: Pay down 1.9% loan or invest

Post by Gropes & Ray » Thu Jan 19, 2017 2:58 pm

Logically, your expected return on almost any investment is better than 1.9%, so you should invest.

But I know I have paid off low interest debt before because having the monthly payment annoyed me.

Flip a coin; either answer is fine.

User avatar
mattyfu1
Posts: 78
Joined: Fri Dec 23, 2016 7:35 am

Re: Pay down 1.9% loan or invest

Post by mattyfu1 » Thu Jan 19, 2017 3:22 pm

Earl Lemongrab wrote:
whodidntante wrote:
Earl Lemongrab wrote:
mattyfu1 wrote:Would you borrow cash @ 1.9% to invest and hopefully earn more than that? Personally I would not, as it sets a dangerous precedent of getting into further debt.
I would, and have in the past. I took out a 50k home-equity loan at 1.99 to invest.
And I assume you got a bonus, too! :sharebeer
You know it!
I understand the logic and math. However, I still don't think it is a good idea.
Be debt free and invest with your own cash. Keep it simple.

Regardless - I hope you made tons of cash!

Tamalak
Posts: 564
Joined: Fri May 06, 2016 2:29 pm

Re: Pay down 1.9% loan or invest

Post by Tamalak » Thu Jan 19, 2017 3:34 pm

mattyfu1 wrote: Would you borrow cash @ 1.9% to invest and hopefully earn more than that?
Hell yes I would. Lower than inflation = free money.

Invest, OP!

User avatar
Earl Lemongrab
Posts: 5872
Joined: Tue Jun 10, 2014 1:14 am

Re: Pay down 1.9% loan or invest

Post by Earl Lemongrab » Thu Jan 19, 2017 3:56 pm

Gropes & Ray wrote:But I know I have paid off low interest debt before because having the monthly payment annoyed me.
This sort of reaction puzzles me. This is a constant monthly amount, so you can set it up for autopay of one sort or another. Easier than most payments.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Gropes & Ray
Posts: 1067
Joined: Wed Jul 16, 2014 7:28 am

Re: Pay down 1.9% loan or invest

Post by Gropes & Ray » Thu Jan 19, 2017 7:14 pm

Earl Lemongrab wrote:
Gropes & Ray wrote:But I know I have paid off low interest debt before because having the monthly payment annoyed me.
This sort of reaction puzzles me. This is a constant monthly amount, so you can set it up for autopay of one sort or another. Easier than most payments.
True, it's not a rational reaction. I would get an F in finance.

mortfree
Posts: 1325
Joined: Mon Sep 12, 2016 7:06 pm

Re: Pay down 1.9% loan or invest

Post by mortfree » Thu Jan 19, 2017 7:30 pm

I am in this exact spot. I think he actually stole my situation- haha.

Would "you" cut your EF in half (so it appears) to pay off a car loan at 1.9% only to have a true emergency (10k+) and turnaround to totally deplete you EF or borrow the money at a higher rate via a loan or credit card or at the loss of your Roth contributions?

User avatar
sperry8
Posts: 1667
Joined: Sat Mar 29, 2008 9:25 pm
Location: Miami FL

Re: Pay down 1.9% loan or invest

Post by sperry8 » Thu Jan 19, 2017 7:38 pm

mattyfu1 wrote:Reverse the situation....

Would you borrow cash @ 1.9% to invest and hopefully earn more than that? Personally I would not, as it sets a dangerous precedent of getting into further debt.

-Matt
There is nothing hopeful about it.

You can get a 5 year CD that pays you more than 1.9%. Currently the top rates are 2.3%. So you should not pay off the loan. Take out the CD - and set the auto loan on auto-pay. Admittedly you won't make much more than 1.9% but you will make more.

As such there is no reason to pay down the loan. A bank is offering to lend you money for less than you can earn in a risk-free FDIC insured investment.
Last edited by sperry8 on Thu Jan 19, 2017 7:44 pm, edited 1 time in total.
Humbling BH contest results: 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Re: Pay down 1.9% loan or invest

Post by Rodc » Thu Jan 19, 2017 7:43 pm

jimb_fromATL wrote:I knew people who where out of work or under-employed for more than a year during the crashes of the economy in 2002/2003 and 2008. Some thought their jobs were safe, and did not have enough saved for such an emergency. So six months is good, but 12 months of savings is a lot better.

On the other hand, you can withdraw your contributions from your Roth IRA without tax or penalty if you do run into a bad bump in the road of life. So it's a secondary source of emergency funds. And it does feel good to have no debt. So in your circumstances, I'd pay it off.

jimb
I presume the idea was to keep the 12 months of money, just not all in cash. That is, put half in a taxable stock and/or bond portfolio.

To the OP: Do what makes you happy. You won't go too far wrong (or right) either way.

I might choose either depending on which way the wind was blowing the day I had to decide.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

User avatar
BL
Posts: 8456
Joined: Sun Mar 01, 2009 2:28 pm

Re: Pay down 1.9% loan or invest

Post by BL » Thu Jan 19, 2017 7:49 pm

Roth should be 5.5k/yr.

User avatar
grabiner
Advisory Board
Posts: 23148
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Pay down 1.9% loan or invest

Post by grabiner » Thu Jan 19, 2017 9:21 pm

sperry8 wrote:
mattyfu1 wrote:Reverse the situation....

Would you borrow cash @ 1.9% to invest and hopefully earn more than that? Personally I would not, as it sets a dangerous precedent of getting into further debt.

-Matt
There is nothing hopeful about it.

You can get a 5 year CD that pays you more than 1.9%. Currently the top rates are 2.3%. So you should not pay off the loan. Take out the CD - and set the auto loan on auto-pay. Admittedly you won't make much more than 1.9% but you will make more.
This isn't the right comparison, because the loan is non-deductible, while the CD interest is taxable (unless you hold the CD in an IRA you wouldn't have contributed to otherwise). In a 25% bracket, you would earn only 1.77% on the CD, which makes paying down the loan better.

Also, the CD term is longer than the loan term. I don't know how much time is left on the loan, but a 5-year loan has an average duration of 2.5 years, so it should be compared to a 30-month CD rather than a 5-year CD. (Actually, it should be compared to a portfolio of 60 CDs maturing in 1-60 months, but a single 30-month CD has the same average duration.)
Wiki David Grabiner

User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: Pay down 1.9% loan or invest

Post by Pajamas » Thu Jan 19, 2017 9:39 pm

As mattyfu1 stated, you can look at it as a question of whether or not you want invest using borrowed money.

I use a small amount of margin to invest, about 7% of my total investable assets. The rate is slightly higher than 1.9% but the margin interest is deductible while the interest on your car loan is probably not, so it is about equal after tax.

Having a car loan can also improve your credit score but paying it off early may not have much effect either way as you have no other debt.

User avatar
mattyfu1
Posts: 78
Joined: Fri Dec 23, 2016 7:35 am

Re: Pay down 1.9% loan or invest

Post by mattyfu1 » Fri Jan 20, 2017 7:41 am

grabiner wrote:
sperry8 wrote:
mattyfu1 wrote:Reverse the situation....

Would you borrow cash @ 1.9% to invest and hopefully earn more than that? Personally I would not, as it sets a dangerous precedent of getting into further debt.

-Matt
There is nothing hopeful about it.

You can get a 5 year CD that pays you more than 1.9%. Currently the top rates are 2.3%. So you should not pay off the loan. Take out the CD - and set the auto loan on auto-pay. Admittedly you won't make much more than 1.9% but you will make more.
This isn't the right comparison, because the loan is non-deductible, while the CD interest is taxable (unless you hold the CD in an IRA you wouldn't have contributed to otherwise). In a 25% bracket, you would earn only 1.77% on the CD, which makes paying down the loan better.

Also, the CD term is longer than the loan term. I don't know how much time is left on the loan, but a 5-year loan has an average duration of 2.5 years, so it should be compared to a 30-month CD rather than a 5-year CD. (Actually, it should be compared to a portfolio of 60 CDs maturing in 1-60 months, but a single 30-month CD has the same average duration.)
Well said.

User avatar
mattyfu1
Posts: 78
Joined: Fri Dec 23, 2016 7:35 am

Re: Pay down 1.9% loan or invest

Post by mattyfu1 » Fri Jan 20, 2017 7:43 am

Food for thought from a previous thread:

the math of paying off debt vs investing: viewtopic.php?t=170906

User avatar
Kosmo
Posts: 1285
Joined: Wed Sep 05, 2012 11:54 am
Location: Philadelphia

Re: Pay down 1.9% loan or invest

Post by Kosmo » Fri Jan 20, 2017 8:58 am

My personal threshold for paying down debt is 3% (after adjusted for tax implications). Debt above 3% gets paid down more aggressively, debt below 3% gets paid off according to schedule. I currently have no debt above 3%.
mattyfu1 wrote:Would you borrow cash @ 1.9% to invest and hopefully earn more than that?
Absolutely.

Jack FFR1846
Posts: 8115
Joined: Tue Dec 31, 2013 7:05 am

Re: Pay down 1.9% loan or invest

Post by Jack FFR1846 » Fri Jan 20, 2017 9:08 am

Kosmo wrote:My personal threshold for paying down debt is 3% (after adjusted for tax implications). Debt above 3% gets paid down more aggressively, debt below 3% gets paid off according to schedule. I currently have no debt above 3%.
mattyfu1 wrote:Would you borrow cash @ 1.9% to invest and hopefully earn more than that?
Absolutely.
If you're in a state with a DCU credit union, you should join. Refinance your car(s) for 1.74%. While I'm a "pay off all the loans" guy myself, I know that not everyone is.
Bogle: Smart Beta is stupid

bighatnohorse
Posts: 120
Joined: Thu Oct 13, 2016 4:04 pm

Re: Pay down 1.9% loan or invest

Post by bighatnohorse » Fri Jan 20, 2017 9:29 am

ssquared87 wrote:Hey everyone,

The only debt I have is $9k on a car loan at 1.9%
At about the three year mark, a vehicle is depreciated enough that if it is lost/damaged then insurance would only cover it's "replacement value" not the full "new" value. And you would still owe the 1.9% on $9,000. dollars.

Pay it off.

mmmodem
Posts: 1503
Joined: Thu May 20, 2010 1:22 pm

Re: Pay down 1.9% loan or invest

Post by mmmodem » Fri Jan 20, 2017 9:34 am

Earl Lemongrab wrote:
mattyfu1 wrote:Would you borrow cash @ 1.9% to invest and hopefully earn more than that? Personally I would not, as it sets a dangerous precedent of getting into further debt.
I would, and have in the past. I took out a 50k home-equity loan at 1.99 to invest.
I would and currently holding a car loan for over 4 years now. Autopay causes me no stress.

Another way to look at it is: A 2% car loan plus a 12 month emergency fund half in a high yield savings account and half in a taxable total stock market index versus no car loan, no taxable savings and a 6 month EF. The former is vastly more attractive.

User avatar
mattyfu1
Posts: 78
Joined: Fri Dec 23, 2016 7:35 am

Re: Pay down 1.9% loan or invest

Post by mattyfu1 » Fri Jan 20, 2017 9:35 am

I am enjoying the responses and views of everyone!

I am leaning on the mental aspect of having debt (regardless of rate) and not paying that off before doing anything else.
Though mathematically it makes sense to invest and set up payments for the loan, I feel mentally being comfortable with having debt can lead towards future riskier decisions.

"Keeping it simple" = just pay off debt 1st.

Hustle on the side and pay debt of quicker and use that new found money to invest even more after the debt is paid!

-Matt

JLed
Posts: 11
Joined: Thu Feb 11, 2016 11:19 am

Re: Pay down 1.9% loan or invest

Post by JLed » Fri Jan 20, 2017 10:01 am

I had this exact situation last summer. I had a vehicle loan at 2.99% and too much cash in our savings account (based on total asset allocation). I had been debating whether to take some of our cash and pay off the loan ($8K) or keep making the payments and move part of our cash to taxable investments. Surprisingly, when I sat down with my wife to discuss she had been thinking of the exact situation herself. We independently decided that we wanted to pay the loan off and be done with it.

Was it the absolute best financial decision? Maybe not. But I can tell you that it is awesome to look at our personal balance sheet and only see our mortgage on the liability side. Not too shabby for a couple of 29 year olds! :happy
After paying the loan off, I began to take the previous payment amount and immediately began investing it for our next car purchase...which hopefully will not be for years since we have two paid off, less than 5 year old vehicles.

The most overlooked aspect of personal finance is the psychological side. Within reason, always choose the decision that lets you sleep peacefully at night. While you may not end up with as much money as the "best" decision, you really can't put a price on peace of mind!

User avatar
mattyfu1
Posts: 78
Joined: Fri Dec 23, 2016 7:35 am

Re: Pay down 1.9% loan or invest

Post by mattyfu1 » Fri Jan 20, 2017 10:12 am

JLed wrote:I had this exact situation last summer. I had a vehicle loan at 2.99% and too much cash in our savings account (based on total asset allocation). I had been debating whether to take some of our cash and pay off the loan ($8K) or keep making the payments and move part of our cash to taxable investments. Surprisingly, when I sat down with my wife to discuss she had been thinking of the exact situation herself. We independently decided that we wanted to pay the loan off and be done with it.

Was it the absolute best financial decision? Maybe not. But I can tell you that it is awesome to look at our personal balance sheet and only see our mortgage on the liability side. Not too shabby for a couple of 29 year olds! :happy
After paying the loan off, I began to take the previous payment amount and immediately began investing it for our next car purchase...which hopefully will not be for years since we have two paid off, less than 5 year old vehicles.

The most overlooked aspect of personal finance is the psychological side. Within reason, always choose the decision that lets you sleep peacefully at night. While you may not end up with as much money as the "best" decision, you really can't put a price on peace of mind!

well said

core5
Posts: 124
Joined: Thu Apr 18, 2013 9:07 am
Location: Georgia

Re: Pay down 1.9% loan or invest

Post by core5 » Fri Jan 20, 2017 10:28 am

I'd hang onto my cash, and put it in a ~1% savings account. Maybe increase payments on the car each month, but I wouldn't dump 9K all at once on a 1.9% loan.

mortfree
Posts: 1325
Joined: Mon Sep 12, 2016 7:06 pm

Re: Pay down 1.9% loan or invest

Post by mortfree » Fri Jan 20, 2017 12:50 pm

mattyfu1 wrote:I am enjoying the responses and views of everyone!

I am leaning on the mental aspect of having debt (regardless of rate) and not paying that off before doing anything else.
Though mathematically it makes sense to invest and set up payments for the loan, I feel mentally being comfortable with having debt can lead towards future riskier decisions.

"Keeping it simple" = just pay off debt 1st.

Hustle on the side and pay debt of quicker and use that new found money to invest even more after the debt is paid!

-Matt
How about this: when you reach the point where your loan balance is equal to 12 monthly payments, then pay it off. you have a year to re-coup the cash you just put out. For me, that would be $6k since I pay $500/month.

emoore
Posts: 479
Joined: Mon Mar 04, 2013 8:16 pm

Re: Pay down 1.9% loan or invest

Post by emoore » Fri Jan 20, 2017 2:05 pm

There is no correct answer here. You'll see the same responses as other threads like this. Which way you choose won't have a huge impact on your finances.

User avatar
SurfCityBill
Posts: 437
Joined: Tue May 01, 2012 10:15 pm
Location: Western United States

Re: Pay down 1.9% loan or invest

Post by SurfCityBill » Fri Jan 20, 2017 9:47 pm

I keep telling myself that I'll never borrow money again, but my last two car purchases were 3 year loans at 0.99%. It's simply a no brainer. Even the dealer was shocked. He was offering 5.05%.

User avatar
Earl Lemongrab
Posts: 5872
Joined: Tue Jun 10, 2014 1:14 am

Re: Pay down 1.9% loan or invest

Post by Earl Lemongrab » Sat Jan 21, 2017 11:36 am

SurfCityBill wrote:I keep telling myself that I'll never borrow money again, but my last two car purchases were 3 year loans at 0.99%. It's simply a no brainer. Even the dealer was shocked. He was offering 5.05%.
I'm always ready to borrow money when the terms favor me! I neither fear nor hate debt, although I am duly cautious with it. Like my power saw at home.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Incendiary
Posts: 479
Joined: Sun Jun 19, 2016 9:42 am

Re: Pay down 1.9% loan or invest

Post by Incendiary » Sat Jan 21, 2017 11:52 am

I'd keep it.

User avatar
FiveK
Posts: 5852
Joined: Sun Mar 16, 2014 2:43 pm

Re: Pay down 1.9% loan or invest

Post by FiveK » Sat Jan 21, 2017 1:06 pm

There are different psychological perspectives.

One is "you'll feel better with no debt." For some that is true, but not for others. If debt scares you, perhaps you should pay off the loan. Or, perhaps you should not pay off the loan and learn that low interest debt really isn't something to worry about.

Another is "people get inordinately upset about temporary losses." For some that is true, but not for others. If a temporary loss scares you, perhaps you should pay off the loan because that's a guaranteed savings. Or, perhaps you should not pay off the loan and learn that, over time, volatility isn't so bad and long term gains make it worthwhile to ignore the short term dips.

Good luck either way.

gilgamesh
Posts: 1178
Joined: Sun Jan 10, 2016 9:29 am

Re: Pay down 1.9% loan or invest

Post by gilgamesh » Sat Jan 21, 2017 8:25 pm

I have a question for those who favor paying down the 1.9% interest debt. In retirement, do you have a plan of survival if your investement return is less than 1.9%?

If one cannot take a risk of 1.9% return during the working years, how could the same person take that risk in retirement?

Is paying down debt a better feeling than being in poverty in retirement?

Also, if someone asks you for advice on nest egg for retirement. Will you tell them to plan for a 1.9% or less return?

Dimitri
Posts: 427
Joined: Sun May 31, 2015 10:51 pm

Re: Pay down 1.9% loan or invest

Post by Dimitri » Sat Jan 21, 2017 8:52 pm

gilgamesh wrote:I have a question for those who favor paying down the 1.9% interest debt. In retirement, do you have a plan of survival if your investement return is less than 1.9%?

If one cannot take a risk of 1.9% return during the working years, how could the same person take that risk in retirement?

Is paying down debt a better feeling than being in poverty in retirement?

Also, if someone asks you for advice on nest egg for retirement. Will you tell them to plan for a 1.9% or less return?
Absolutely. Last weekend I started a thread about TIPS -- viewtopic.php?f=10&t=208222#p3193985. If one has enough - and puts their money in TIPS - what return are they necessarily expecting? Maybe is is 0.9%. Maybe 10.9%. As long as TIPS keep up with inflation the rate of return doesn't matter. My answer to the OP would be if they can't beat 1.9% risk-free after tax, then pay down the debt. That, to me, is the only logical answer.
Let's never come here again because it would never be as much fun.

gilgamesh
Posts: 1178
Joined: Sun Jan 10, 2016 9:29 am

Re: Pay down 1.9% loan or invest

Post by gilgamesh » Sat Jan 21, 2017 9:39 pm

Dimitri wrote:
gilgamesh wrote:I have a question for those who favor paying down the 1.9% interest debt. In retirement, do you have a plan of survival if your investement return is less than 1.9%?

If one cannot take a risk of 1.9% return during the working years, how could the same person take that risk in retirement?

Is paying down debt a better feeling than being in poverty in retirement?

Also, if someone asks you for advice on nest egg for retirement. Will you tell them to plan for a 1.9% or less return?
Absolutely. Last weekend I started a thread about TIPS -- viewtopic.php?f=10&t=208222#p3193985. If one has enough - and puts their money in TIPS - what return are they necessarily expecting? Maybe is is 0.9%. Maybe 10.9%. As long as TIPS keep up with inflation the rate of return doesn't matter. My answer to the OP would be if they can't beat 1.9% risk-free after tax, then pay down the debt. That, to me, is the only logical answer.
Great! The way I see it (which could be Wrong), you are being consistent. My retirement plan also includes TIPS ladder and an SPIA later. In fact 80% of my retirement income will come from this. To me, I'd rather take the risk while I am working and not take much risk in reitirement. So, I will definitely invest and not pay down a 1.9% debt while I am working. My cut off is probably 2.5% - 3% in the current environment.

I just cannot fathom anyone not willing to take a 1.9% during working years yet rely on a 4% SWR in retirement.

Dimitri
Posts: 427
Joined: Sun May 31, 2015 10:51 pm

Re: Pay down 1.9% loan or invest

Post by Dimitri » Sat Jan 21, 2017 10:00 pm

gilgamesh wrote:
Dimitri wrote:
gilgamesh wrote:I have a question for those who favor paying down the 1.9% interest debt. In retirement, do you have a plan of survival if your investement return is less than 1.9%?

If one cannot take a risk of 1.9% return during the working years, how could the same person take that risk in retirement?

Is paying down debt a better feeling than being in poverty in retirement?

Also, if someone asks you for advice on nest egg for retirement. Will you tell them to plan for a 1.9% or less return?
Absolutely. Last weekend I started a thread about TIPS -- viewtopic.php?f=10&t=208222#p3193985. If one has enough - and puts their money in TIPS - what return are they necessarily expecting? Maybe is is 0.9%. Maybe 10.9%. As long as TIPS keep up with inflation the rate of return doesn't matter. My answer to the OP would be if they can't beat 1.9% risk-free after tax, then pay down the debt. That, to me, is the only logical answer.
Great! The way I see it (which could be Wrong), you are being consistent. My retirement plan also includes TIPS ladder and an SPIA later. In fact 80% of my retirement income will come from this. To me, I'd rather take the risk while I am working and not take much risk in reitirement. So, I will definitely invest and not pay down a 1.9% debt while I am working. My cut off is probably 2.5% - 3% in the current environment.

I just cannot fathom anyone not willing to take a 1.9% during working years yet rely on a 4% SWR in retirement.
Whatever works for you. Can you beat 1.9% risk free? If you can't then I would pay it down. I'm not so sure I understand the logic of taking risk when you are working and eschewing that same risk in retirement. Risk is risk. Take it now or take it later. It is still risk.
Let's never come here again because it would never be as much fun.

gilgamesh
Posts: 1178
Joined: Sun Jan 10, 2016 9:29 am

Re: Pay down 1.9% loan or invest

Post by gilgamesh » Sat Jan 21, 2017 10:05 pm

Dimitri wrote:
gilgamesh wrote:
Dimitri wrote:
gilgamesh wrote:I have a question for those who favor paying down the 1.9% interest debt. In retirement, do you have a plan of survival if your investement return is less than 1.9%?

If one cannot take a risk of 1.9% return during the working years, how could the same person take that risk in retirement?

Is paying down debt a better feeling than being in poverty in retirement?

Also, if someone asks you for advice on nest egg for retirement. Will you tell them to plan for a 1.9% or less return?
Absolutely. Last weekend I started a thread about TIPS -- viewtopic.php?f=10&t=208222#p3193985. If one has enough - and puts their money in TIPS - what return are they necessarily expecting? Maybe is is 0.9%. Maybe 10.9%. As long as TIPS keep up with inflation the rate of return doesn't matter. My answer to the OP would be if they can't beat 1.9% risk-free after tax, then pay down the debt. That, to me, is the only logical answer.
Great! The way I see it (which could be Wrong), you are being consistent. My retirement plan also includes TIPS ladder and an SPIA later. In fact 80% of my retirement income will come from this. To me, I'd rather take the risk while I am working and not take much risk in reitirement. So, I will definitely invest and not pay down a 1.9% debt while I am working. My cut off is probably 2.5% - 3% in the current environment.

I just cannot fathom anyone not willing to take a 1.9% during working years yet rely on a 4% SWR in retirement.
Whatever works for you. Can you beat 1.9% risk free? If you can't then I would pay it down. I'm not so sure I understand the logic of taking risk when you are working and eschewing that same risk in retirement. Risk is risk. Take it now or take it later. It is still risk.
I dont want to hijack this thread. The difference in risk is the consequences of taking that risk. While working, it's a matter of working longer, at age 80 it's food on the table. That's the difference.

If 'risk-free' is your criteria in this decision, should that 'risk-free' be the criteria in retirement?

Dimitri
Posts: 427
Joined: Sun May 31, 2015 10:51 pm

Re: Pay down 1.9% loan or invest

Post by Dimitri » Sat Jan 21, 2017 10:10 pm

gilgamesh wrote:
Dimitri wrote:
gilgamesh wrote:
Dimitri wrote:
gilgamesh wrote:I have a question for those who favor paying down the 1.9% interest debt. In retirement, do you have a plan of survival if your investement return is less than 1.9%?

If one cannot take a risk of 1.9% return during the working years, how could the same person take that risk in retirement?

Is paying down debt a better feeling than being in poverty in retirement?

Also, if someone asks you for advice on nest egg for retirement. Will you tell them to plan for a 1.9% or less return?
Absolutely. Last weekend I started a thread about TIPS -- viewtopic.php?f=10&t=208222#p3193985. If one has enough - and puts their money in TIPS - what return are they necessarily expecting? Maybe is is 0.9%. Maybe 10.9%. As long as TIPS keep up with inflation the rate of return doesn't matter. My answer to the OP would be if they can't beat 1.9% risk-free after tax, then pay down the debt. That, to me, is the only logical answer.
Great! The way I see it (which could be Wrong), you are being consistent. My retirement plan also includes TIPS ladder and an SPIA later. In fact 80% of my retirement income will come from this. To me, I'd rather take the risk while I am working and not take much risk in reitirement. So, I will definitely invest and not pay down a 1.9% debt while I am working. My cut off is probably 2.5% - 3% in the current environment.

I just cannot fathom anyone not willing to take a 1.9% during working years yet rely on a 4% SWR in retirement.
Whatever works for you. Can you beat 1.9% risk free? If you can't then I would pay it down. I'm not so sure I understand the logic of taking risk when you are working and eschewing that same risk in retirement. Risk is risk. Take it now or take it later. It is still risk.
I dont want to hijack this thread. The difference in risk is the consequences of taking that risk. While working, it's a matter of working longer, at age 80 it's food on the table. That's the difference.

If 'risk-free' is your criteria in this decision, should that 'risk-free' be the criteria in retirement?
Life is short and the grave is deep. Risk-free is what you make of it.
Let's never come here again because it would never be as much fun.

gilgamesh
Posts: 1178
Joined: Sun Jan 10, 2016 9:29 am

Re: Pay down 1.9% loan or invest

Post by gilgamesh » Sat Jan 21, 2017 10:17 pm

Dimitri wrote:
gilgamesh wrote:
Dimitri wrote:
gilgamesh wrote:
Dimitri wrote:
Absolutely. Last weekend I started a thread about TIPS -- viewtopic.php?f=10&t=208222#p3193985. If one has enough - and puts their money in TIPS - what return are they necessarily expecting? Maybe is is 0.9%. Maybe 10.9%. As long as TIPS keep up with inflation the rate of return doesn't matter. My answer to the OP would be if they can't beat 1.9% risk-free after tax, then pay down the debt. That, to me, is the only logical answer.
Great! The way I see it (which could be Wrong), you are being consistent. My retirement plan also includes TIPS ladder and an SPIA later. In fact 80% of my retirement income will come from this. To me, I'd rather take the risk while I am working and not take much risk in reitirement. So, I will definitely invest and not pay down a 1.9% debt while I am working. My cut off is probably 2.5% - 3% in the current environment.

I just cannot fathom anyone not willing to take a 1.9% during working years yet rely on a 4% SWR in retirement.
Whatever works for you. Can you beat 1.9% risk free? If you can't then I would pay it down. I'm not so sure I understand the logic of taking risk when you are working and eschewing that same risk in retirement. Risk is risk. Take it now or take it later. It is still risk.
I dont want to hijack this thread. The difference in risk is the consequences of taking that risk. While working, it's a matter of working longer, at age 80 it's food on the table. That's the difference.

If 'risk-free' is your criteria in this decision, should that 'risk-free' be the criteria in retirement?
Life is short and the grave is deep. Risk-free is what you make of it.
IMO, risk free is not what you make of it. This forum is to make informed decisions based on facts. Risk has to be based on facts. Yes, paying down debt has major psychological component to it, but 1.9%, ... really? This irrational fear of debt is astonishing to me. How could one rely on firecalc for retirement calculations yet cannot even take a 1.9% risk now.

I totally understand one paying down a 1.9% debt and taking similar measures in retirement. But,those who don't, seems to me to be irrational.

Dimitri
Posts: 427
Joined: Sun May 31, 2015 10:51 pm

Re: Pay down 1.9% loan or invest

Post by Dimitri » Sat Jan 21, 2017 10:26 pm

gilgamesh wrote:
Dimitri wrote:
gilgamesh wrote:
Dimitri wrote:
gilgamesh wrote:
Great! The way I see it (which could be Wrong), you are being consistent. My retirement plan also includes TIPS ladder and an SPIA later. In fact 80% of my retirement income will come from this. To me, I'd rather take the risk while I am working and not take much risk in reitirement. So, I will definitely invest and not pay down a 1.9% debt while I am working. My cut off is probably 2.5% - 3% in the current environment.

I just cannot fathom anyone not willing to take a 1.9% during working years yet rely on a 4% SWR in retirement.
Whatever works for you. Can you beat 1.9% risk free? If you can't then I would pay it down. I'm not so sure I understand the logic of taking risk when you are working and eschewing that same risk in retirement. Risk is risk. Take it now or take it later. It is still risk.
I dont want to hijack this thread. The difference in risk is the consequences of taking that risk. While working, it's a matter of working longer, at age 80 it's food on the table. That's the difference.

If 'risk-free' is your criteria in this decision, should that 'risk-free' be the criteria in retirement?
Life is short and the grave is deep. Risk-free is what you make of it.
IMO, risk free is not what you make of it. This forum is to make informed decisions based on facts. Risk has to be based on facts. Yes, paying down debt has major psychological component to it, but 1.9%, ... really? This irrational fear of debt is astonishing to me. How could one rely on firecalc for retirement calculations yet cannot even take a 1.9% risk now.

I totally understand one paying down a 1.9% debt and taking similar measures in retirement. But,those who don't, seems to me to be irrational.
Alright, let us go with facts. What pays 1.9% risk free (same duration as OP's loan).
Let's never come here again because it would never be as much fun.

gilgamesh
Posts: 1178
Joined: Sun Jan 10, 2016 9:29 am

Re: Pay down 1.9% loan or invest

Post by gilgamesh » Sat Jan 21, 2017 10:37 pm

Dimitri wrote:
gilgamesh wrote:
Dimitri wrote:
gilgamesh wrote:
Dimitri wrote:
Whatever works for you. Can you beat 1.9% risk free? If you can't then I would pay it down. I'm not so sure I understand the logic of taking risk when you are working and eschewing that same risk in retirement. Risk is risk. Take it now or take it later. It is still risk.
I dont want to hijack this thread. The difference in risk is the consequences of taking that risk. While working, it's a matter of working longer, at age 80 it's food on the table. That's the difference.

If 'risk-free' is your criteria in this decision, should that 'risk-free' be the criteria in retirement?
Life is short and the grave is deep. Risk-free is what you make of it.
IMO, risk free is not what you make of it. This forum is to make informed decisions based on facts. Risk has to be based on facts. Yes, paying down debt has major psychological component to it, but 1.9%, ... really? This irrational fear of debt is astonishing to me. How could one rely on firecalc for retirement calculations yet cannot even take a 1.9% risk now.

I totally understand one paying down a 1.9% debt and taking similar measures in retirement. But,those who don't, seems to me to be irrational.
Alright, let us go with facts. What pays 1.9% risk free (same duration as OP's loan).
None that I know of.

Post Reply