What is your threshold for paying down debt?

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ny_knicks
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What is your threshold for paying down debt?

Post by ny_knicks » Sat Dec 30, 2017 2:42 pm

Two part question: Why are Bogleheads so afraid of debt and what is your threshold between aggressively paying it down or redirecting those payments into investments?

Take student loans as an example. Most people who have them are fairly young. Interest rates are at historical lows. They can be refinanced fairly easy to rates of 4% or lower. Other than for psychological benefits why would the advice be to pay these off immediately after doing the basics (emergency, 401k match)? The individual is likely heavily weighted in equities due to age and would probably do far better over the long-term redirecting excess loan payments into maxing 401k, Roth or taxable. They also likely have very limited liquid investments. They might have a 3 month emergency fund and the rest in 401k/roth/paying down loans. The lower loan balance isn't going to help them if they are unemployed for 6 months. Yet there are countless threads on here where the vast majority say get rid of the debt with these types of situations. After all it is a guaranteed 4% return!

Same with a mortgage. You'll likely never get a mortgage for less than you can right now (or a year ago). You're tying up large portions of your portfolio in an illiquid investment reducing your financial flexibility and potentially setting yourself up for a liquidity crunch if there is a downturn in the housing market and you lose your job/need to cash out. All to get maybe a 1% real return after inflation?

So why are we so debt adverse? There is value to taking on the right debt in reasonable quantities. The vast majority of companies in the U.S. use leverage to increase returns. Yet when it comes to personal finance we take the complete opposite approach where debt is the devil and it should be eliminated at all costs.

I'll take a 3.75% 30 year mortgage all day long and twice on Sunday if it means I can max 401k/roth/beef up taxable but everyone has a different risk tolerance with debt. What is yours?

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Re: What is your threshold for paying down debt?

Post by runner540 » Sat Dec 30, 2017 4:00 pm

It's a very personal part of personal finance: everyone evaluates the opportunity, costs and risks of debt differently.

In general, taking on debt allows people to inflate their lifestyle beyond what might be prudent, and encourages a "monthly payment" mentality.

And as the Wiki says ( https://www.bogleheads.org/wiki/Paying_ ... _investing) the appropriate benchmark is a low risk bond of similar duration.

Edit: would you take on an interest only mortgage if available? If not, why not?
Last edited by runner540 on Sat Dec 30, 2017 5:13 pm, edited 1 time in total.

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TomatoTomahto
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Re: What is your threshold for paying down debt?

Post by TomatoTomahto » Sat Dec 30, 2017 4:20 pm

I’m like that because I couldn’t help but notice that many of the people who called me an idiot for aggressively paying off my mortgage a decade ago are no longer in the neighborhood. Hmmm.

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Re: What is your threshold for paying down debt?

Post by riverguy » Sat Dec 30, 2017 4:24 pm

Leverage increases returns but also magnifies losses. If houses go down what do you think your stocks are going to do? You may be on here next saying my portfolio is down 50%, lost my job and now I can’t pay my mortgage.

8 years into a Fed induced bull market do you really want to be levering up? Maybe, maybe not. These are choices folks have to make on their own based on their own situation.Some will make what look like poor decisions now, but in the future they will look like geniuses. And vice versa...

Are you on full margin in your taxable accounts? If not, why not?

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Re: What is your threshold for paying down debt?

Post by DVMResident » Sat Dec 30, 2017 4:31 pm

ny_knicks wrote:
Sat Dec 30, 2017 2:42 pm
Two part question: Why are Bogleheads so afraid of debt...
I'm not sure why. The anti-debt sentiment is almost religious sometimes.

For example, there was a car loan thread and multiple posters were proclaiming one should never take a car loan because it breeds bad habits. One poster arguing for car loans even had the cash but took a 0 down, 0% interest, 5 year loan. That poster went ignored, but you really can't argue against the math on taking that loan and investing elsewhere (e.g. CDs).

Similar story with mortgages these days.
ny_knicks wrote:
Sat Dec 30, 2017 2:42 pm
...and what is your threshold between aggressively paying it down or redirecting those payments into investments?
My unsophisticated threshold is excepted returns of my AA (forward E/P) * 0.75 in taxable accounts. If interest of the loan is > 0.75 * E/P, I pay the loan. If not, I invest.
I call this unsophisticated because it ignores duration and other factors.
Last edited by DVMResident on Sat Dec 30, 2017 4:44 pm, edited 1 time in total.

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Re: What is your threshold for paying down debt?

Post by adamthesmythe » Sat Dec 30, 2017 4:33 pm

While there are extreme no-debt people here, personally I go for moderation. Sometimes debt is an investment in yourself, and can pay off big time.

One reason to avoid debt is that it increases the number of payments that you have to make sure you don't forget. Or the number of hands in the pocket of your checking account, which means you need to watch your balance carefully. I like the simplicity of having few payments to worry about.

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Re: What is your threshold for paying down debt?

Post by DVMResident » Sat Dec 30, 2017 4:36 pm

riverguy wrote:
Sat Dec 30, 2017 4:24 pm
Leverage increases returns but also magnifies losses. If houses go down what do you think your stocks are going to do? You may be on here next saying my portfolio is down 50%, lost my job and now I can’t pay my mortgage.
I'll disagree a bit with your example. The issue of paying the mortgage is a cash-flow risk. The cash-flow doesn't get better by pre-paying (except with ARMs, which automatically recast). If you invest in the market, at least you have liquid assets to pay. Yes, it's at a lost when you sell those assets, but at least you had assets rather than being foreclosed on.

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Re: What is your threshold for paying down debt?

Post by nisiprius » Sat Dec 30, 2017 4:36 pm

I can only speak for myself.

If I am sailing in a leaky boat, even if the pumps can keep up, I don't feel safe. No matter how much math you bring to bear to prove that a leaky boat with working pumps is seaworthy, and that if I skip fixing the leaks I will cover more distance every day, I won't believe it. I believe that a leaky boat with working pumps is more fragile than a tight boat; that the distribution of storms has a long tail; and that nobody has a quantitatively accurate risk model.

"But it was a ten-sigma storm!"

Financial sophisticates always seem to like leverage, because they can understand and intuit complex risk models. Their hollowed-out, cantilevered, counterbalanced houses of cards look shaky to the uninitiated, but they can see that despite appearance, they are actually tough and robust. The problem is that their houses of cards keep falling--1987 and "portfolio insurance," LTCM, the 2008-2009 crisis. I find it easier to believe that their risk models are wrong than to believe that they have repeatedly been the victim of once-in-a-trillion-trillion-year storms (which is what "ten sigma" amounts to).

Also, having been a forum reader since before 2007, I followed the thread A different approach to asset allocation while it was all happening. If you haven't read it, it might be worth some of your time. This is the account, as it happened, of a graduate student in economics, as he tried to put into practice the principles espoused by two Yale professors--one economics, one management--who advocated that young investors should be 100% invested in stocks at 2:1 leverage. It didn't turn out well. In fact I think a number of us were alarmed by market timer's apparent frame of mind at one point (when he changed his avatar from Don Quixote to Raskolnikov).

Also, I've read Mandelbrot and Hudson's The Misbehavior of Markets (2004). Everyone should read it. I believe that the investment community regard this book as obscene in the literal sense of the word--something from which you must look (-scene) away (ob-) because it is too horrible to contemplate. Nobody says Mandelbrot is wrong, everybody just avoids talking about Mandelbrot.

P.S. Personally, I'm near the red line on this chart. A bit above it.
Image
Last edited by nisiprius on Sat Dec 30, 2017 4:50 pm, edited 3 times in total.
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Re: What is your threshold for paying down debt?

Post by Bfwolf » Sat Dec 30, 2017 4:41 pm

While debt interest rate may seem low, the risk free rate you could get by investing in US treasuries is also low. If somebody is willing to hold a US 10 year treasury worth 2.4% (because presumably their asset allocation includes some bonds) then it doesn't make sense for them to hold 4% student loans that they're paying back over 10 years.

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Re: What is your threshold for paying down debt?

Post by rob » Sat Dec 30, 2017 4:42 pm

Lack of debt gives me options; It's not fear or any other thing you imply....
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

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Re: What is your threshold for paying down debt?

Post by riverguy » Sat Dec 30, 2017 4:43 pm

DVMResident wrote:
Sat Dec 30, 2017 4:36 pm
riverguy wrote:
Sat Dec 30, 2017 4:24 pm
Leverage increases returns but also magnifies losses. If houses go down what do you think your stocks are going to do? You may be on here next saying my portfolio is down 50%, lost my job and now I can’t pay my mortgage.
I'll disagree a bit with your example. The issue of paying the mortgage is a cash-flow risk. The cash-flow doesn't get better by pre-paying (except with ARMs, which automatically recast). If you invest in the market, at least you have liquid assets to pay. Yes, it's at a lost when you sell those assets, but at least you had assets rather than being foreclosed on.
Paying down a mortgage doesn’t have to mean putting every single penny you have into it...plus you can recast as well to get a lower payment.

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Re: What is your threshold for paying down debt?

Post by bigred77 » Sat Dec 30, 2017 4:47 pm

I think many bogleheads created habits and attitudes concerning debt when they were younger. Debt is usually most useful when your in your 20s and 30s and just starting out (education, buying a house, buying a car, etc) and don’t have a ton of assets to work with. Bogleheads who came of age decades ago were dealing with very high, even double digit, interest rates (even on mortgages and other secured loans). That’s a high burden to work through.

Today my mortgage is at 3.0% and I have a HELOC at 4.0%. Even though the new tax law renders them effectively non-deductible, I don’t have a burning desire to pay them off at any cost. I’d rather invest in tax advantaged accounts first and if I had extra funds I’d invest most of that in taxable accounts before accelerating debt pay down (I do accelerate debt reduction a little, but don’t expect to be debt free for decades). I don’t know what my personal threshold is, but I know it’s higher than 4%.

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Re: What is your threshold for paying down debt?

Post by unclescrooge » Sat Dec 30, 2017 4:51 pm

TomatoTomahto wrote:
Sat Dec 30, 2017 4:20 pm
I’m like that because I couldn’t help but notice that many of the people who called me an idiot for aggressively paying off my mortgage a decade ago are no longer in the neighborhood. Hmmm.
So they upgraded, right? :mrgreen:

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Re: What is your threshold for paying down debt?

Post by grabiner » Sat Dec 30, 2017 5:00 pm

I view debt as a negative bond, and use it accordingly. I do my annual portfolio rebalance every January, and I need to buy some more bonds. I have the choice between selling stocks to buy bonds in my portfolio, or getting rid of the negative bonds on my mortgage. And given that choice, I will buy the bond with the higher yield for the same risk level. That is, I would pay down a debt if I cannot get a higher return on a low-risk bond of the same duration.

My mortgage is at 2.625% with 11 years left, and I can still deduct interest (because my state taxes plus charity exceeds $12K), so the after-federal-tax rate in my 24% bracket is 2.00%. If I could pay the whole thing off, that would be equivalent to buying a bond portfolio with a 5-year duration. And even that isn't a good deal, as I can earn 2.09% on a low-risk bond portfolio with a 5-year duration, Admiral shares of Vanguard Intermediate-Term Tax-Exempt. Actually, I can only pay it down, not off, unless I sell stock for a huge capital gain, and paying down the mortgage would be equivalent to buying an 11-year bond.
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Re: What is your threshold for paying down debt?

Post by ThePrince » Sat Dec 30, 2017 5:02 pm

TomatoTomahto wrote:
Sat Dec 30, 2017 4:20 pm
I’m like that because I couldn’t help but notice that many of the people who called me an idiot for aggressively paying off my mortgage a decade ago are no longer in the neighborhood. Hmmm.

THIS!

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Re: What is your threshold for paying down debt?

Post by ThePrince » Sat Dec 30, 2017 5:02 pm

rob wrote:
Sat Dec 30, 2017 4:42 pm
Lack of debt gives me options; It's not fear or any other thing you imply....
+1

ny_knicks
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Re: What is your threshold for paying down debt?

Post by ny_knicks » Sat Dec 30, 2017 5:14 pm

TomatoTomahto wrote:
Sat Dec 30, 2017 4:20 pm
I’m like that because I couldn’t help but notice that many of the people who called me an idiot for aggressively paying off my mortgage a decade ago are no longer in the neighborhood. Hmmm.
Maybe they just moved? Or they kept up the joneses and lost? 100% agree that overextending yourself w/ debt is not a wise decision. But having the only debt you have be a 3.75% mortgage or taking a 5 year car loan at sub 1% (when CDs are paying 2%) etc doesn't seem that crazy of a financial decision. I'll also go out on a limb and say you've built sizable taxable accounts while paying down that mortgage but some might be forced to make a choice.
riverguy wrote:
Sat Dec 30, 2017 4:24 pm
Are you on full margin in your taxable accounts? If not, why not?
nisiprius wrote:
Sat Dec 30, 2017 4:36 pm
Also, having been a forum reader since before 2007, I followed the thread A different approach to asset allocation while it was all happening. If you haven't read it, it might be worth some of your time. This is the account, as it happened, of a graduate student in economics, as he tried to put into practice the principles espoused by two Yale professors--one economics, one management--who advocated that young investors should be 100% invested in stocks at 2:1 leverage. It didn't turn out well. In fact I think a number of us were alarmed by market timer's apparent frame of mind at one point (when he changed his avatar from Don Quixote to Raskolnikov).
A lot of people on here immediately jump to the extremes. I am not advocating for actively trading micro-caps on margin. But I would certainly prefer to hold a properly allocated taxable account over 30 years than prepay a 3.75% mortgage...
rob wrote:
Sat Dec 30, 2017 4:42 pm
Lack of debt gives me options; It's not fear or any other thing you imply....
My post argues otherwise. No clue on your financial situation but young people aggressively paying down low interest rate debt at the expense of building liquidity in a taxable account might have a lot less options if they were to lose their jobs than someone who did the opposite.
Bfwolf wrote:
Sat Dec 30, 2017 4:41 pm
While debt interest rate may seem low, the risk free rate you could get by investing in US treasuries is also low. If somebody is willing to hold a US 10 year treasury worth 2.4% (because presumably their asset allocation includes some bonds) then it doesn't make sense for them to hold 4% student loans that they're paying back over 10 years.
Again it might if liquidity was important. Besides that fact it is unlikely that someone in their mid to late 20's would be wise to hold a portfolio comprised entirely of 10-year treasuries if their investment horizon is 10 years (even though it is likely much longer)...

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Re: What is your threshold for paying down debt?

Post by DrGoogle2017 » Sat Dec 30, 2017 5:18 pm

I’m never in a camp to payoff mortgage, not when it’s this low. I can still deduct my mortgage. Plus another thing, as part of an old couple(not odd couple haha), you don’t know how long you got as a couple, strictly from a financial sense point of view. If one of us go, and relying on standard deduction, I only get to deduct $12,000, and not $24,000. While with a mortgage and high property tax, I can still exceed $24,000 as a single person. I think the shock is the tax rate for single is really high, there is no room in your tax bracket to convert to Roth IRA and you may have to pay IRRMA for Medical part B. Don’t forget the ceiling is low like $85k for a single person. However, I would think about paying it off when the mortgage is getting smaller. Not much mileage out of it is the real reason. I bought a house in 2013, my mortgage is 3.5%, the stock market returns for the year was 30%.
Last edited by DrGoogle2017 on Sat Dec 30, 2017 5:23 pm, edited 2 times in total.

ny_knicks
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Re: What is your threshold for paying down debt?

Post by ny_knicks » Sat Dec 30, 2017 5:23 pm

grabiner wrote:
Sat Dec 30, 2017 5:00 pm
My mortgage is at 2.625% with 11 years left, and I can still deduct interest (because my state taxes plus charity exceeds $12K), so the after-federal-tax rate in my 24% bracket is 2.00%. If I could pay the whole thing off, that would be equivalent to buying a bond portfolio with a 5-year duration. And even that isn't a good deal, as I can earn 2.09% on a low-risk bond portfolio with a 5-year duration, Admiral shares of Vanguard Intermediate-Term Tax-Exempt. Actually, I can only pay it down, not off, unless I sell stock for a huge capital gain, and paying down the mortgage would be equivalent to buying an 11-year bond.
This. We hit historical lows in interest rates w/ people locked in sub 3% and after tax rates hitting 2%. Why would you ever pay this off early? Especially if you can lock in risk free bonds that will exceed that rate?

MathWizard
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Re: What is your threshold for paying down debt?

Post by MathWizard » Sat Dec 30, 2017 5:26 pm

Don't paint everyone with the same brush.

I used loans when it was in my best interest. Today's low interest rate was not around when I was in grad school and first married. I had 9% student loans and paid 16 and 18% interest on housing and auto loans, because I needed both and had no money, but was increasing my human capital. The early 80's were a tough time to be a borrower and maybe the of my age are big on the get rid of debt mantra.

I only had 3 auto loans, all in grad school, and for the cheapest car I could find, which meant higher rates.

For my current house, I started out with a 30 yr 7% loan, refinanced multiple time, down the the last 7 yr 3.875% loan.
The house was paid off in 17 yrs rather than 40.

Unfortunately for us, interest rates were huge when we needed loans, but are extremely low now that we have excess cash to save.

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Re: What is your threshold for paying down debt?

Post by runner540 » Sat Dec 30, 2017 5:30 pm

MathWizard wrote:
Sat Dec 30, 2017 5:26 pm
Unfortunately for us, interest rates were huge when we needed loans, but are extremely low now that we have excess cash to save.
But those low interest rates have benefited you by pushing asset (your house and stocks) prices higher than they would be in a 7% mortgage rate enviroment.

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Re: What is your threshold for paying down debt?

Post by Smorgasbord » Sat Dec 30, 2017 5:32 pm

As a guy in my mid-30s, I would say about a 5% interest rate is about my threshold for aggressively paying off debt. My two 30-year mortgages (primary & rental) are at 3.5 and 3.75%, so I'll be keeping them around for a while.

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Re: What is your threshold for paying down debt?

Post by riverguy » Sat Dec 30, 2017 5:43 pm

ny_knicks wrote:
Sat Dec 30, 2017 5:14 pm
TomatoTomahto wrote:
Sat Dec 30, 2017 4:20 pm
I’m like that because I couldn’t help but notice that many of the people who called me an idiot for aggressively paying off my mortgage a decade ago are no longer in the neighborhood. Hmmm.
Maybe they just moved? Or they kept up the joneses and lost? 100% agree that overextending yourself w/ debt is not a wise decision. But having the only debt you have be a 3.75% mortgage or taking a 5 year car loan at sub 1% (when CDs are paying 2%) etc doesn't seem that crazy of a financial decision. I'll also go out on a limb and say you've built sizable taxable accounts while paying down that mortgage but some might be forced to make a choice.
riverguy wrote:
Sat Dec 30, 2017 4:24 pm
Are you on full margin in your taxable accounts? If not, why not?
nisiprius wrote:
Sat Dec 30, 2017 4:36 pm
Also, having been a forum reader since before 2007, I followed the thread A different approach to asset allocation while it was all happening. If you haven't read it, it might be worth some of your time. This is the account, as it happened, of a graduate student in economics, as he tried to put into practice the principles espoused by two Yale professors--one economics, one management--who advocated that young investors should be 100% invested in stocks at 2:1 leverage. It didn't turn out well. In fact I think a number of us were alarmed by market timer's apparent frame of mind at one point (when he changed his avatar from Don Quixote to Raskolnikov).
A lot of people on here immediately jump to the extremes. I am not advocating for actively trading micro-caps on margin. But I would certainly prefer to hold a properly allocated taxable account over 30 years than prepay a 3.75% mortgage...
rob wrote:
Sat Dec 30, 2017 4:42 pm
Lack of debt gives me options; It's not fear or any other thing you imply....
My post argues otherwise. No clue on your financial situation but young people aggressively paying down low interest rate debt at the expense of building liquidity in a taxable account might have a lot less options if they were to lose their jobs than someone who did the opposite.
Bfwolf wrote:
Sat Dec 30, 2017 4:41 pm
While debt interest rate may seem low, the risk free rate you could get by investing in US treasuries is also low. If somebody is willing to hold a US 10 year treasury worth 2.4% (because presumably their asset allocation includes some bonds) then it doesn't make sense for them to hold 4% student loans that they're paying back over 10 years.
Again it might if liquidity was important. Besides that fact it is unlikely that someone in their mid to late 20's would be wise to hold a portfolio comprised entirely of 10-year treasuries if their investment horizon is 10 years (even though it is likely much longer)...
Except it’s not extreme. IB has margin rates well under 3%. Cheaper than your mortgage. So why not? Why would you rather use debt on your dwelling instead of on your stocks? Way easier and cheaper to use margin instead of a mortgage as well.

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Re: What is your threshold for paying down debt?

Post by Daryl » Sat Dec 30, 2017 6:06 pm

2.25% (fixed) <-- The rate of my student loans. All other debt is lower than this rate, and fixed.

I've considered opening an Interactive Brokers Margin Account; however, I'm uncomfortable with variable rates and the fact that they would be able to liquidate any of my positions at their discretion.

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Re: What is your threshold for paying down debt?

Post by Atilla » Sat Dec 30, 2017 6:07 pm

My threshold for paying down debt is if I have any.

I've had lots of debt and I've had no debt.

No debt is a lot better.
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Re: What is your threshold for paying down debt?

Post by KlangFool » Sat Dec 30, 2017 6:10 pm

OP,

I do not pre-pay my 30 years 3.49% mortgage.

But,

A) In my case, I am "cash flow" positive. My PITI plus other housing expense is cheaper than renting.

B) My taxable account portfolio is large enough that even if I take a 50% hit, I can still pay the mortgage off.

KlangFool

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Re: What is your threshold for paying down debt?

Post by ny_knicks » Sat Dec 30, 2017 6:14 pm

riverguy wrote:
Sat Dec 30, 2017 5:43 pm
Except it’s not extreme. IB has margin rates well under 3%. Cheaper than your mortgage. So why not? Why would you rather use debt on your dwelling instead of on your stocks? Way easier and cheaper to use margin instead of a mortgage as well.
Daryl wrote:
Sat Dec 30, 2017 6:06 pm
2.25% (fixed) <-- The rate of my student loans. All other debt is lower than this rate, and fixed.

I've considered opening an Interactive Brokers Margin Account; however, I'm uncomfortable with variable rates and the fact that they would be able to liquidate any of my positions at their discretion.
Was just looking at it shocked at the rates they offer...
Last edited by ny_knicks on Sat Dec 30, 2017 6:47 pm, edited 1 time in total.

smitcat
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Re: What is your threshold for paying down debt?

Post by smitcat » Sat Dec 30, 2017 6:19 pm

We have no problems carrying debt when it makes financial sense. Over the years the details of what makes sense change but the ability to analyze the situation at the time is not hard. Currently we carry a smaller mortgage, business loan, and school loan, but if/as the rates change we will again evaluate those positions and adjust.

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Re: What is your threshold for paying down debt?

Post by bigred77 » Sat Dec 30, 2017 6:25 pm

ny_knicks wrote:
Sat Dec 30, 2017 6:14 pm
TomatoTomahto wrote:
Sat Dec 30, 2017 4:20 pm
Except it’s not extreme. IB has margin rates well under 3%. Cheaper than your mortgage. So why not? Why would you rather use debt on your dwelling instead of on your stocks? Way easier and cheaper to use margin instead of a mortgage as well.
Daryl wrote:
Sat Dec 30, 2017 6:06 pm
2.25% (fixed) <-- The rate of my student loans. All other debt is lower than this rate, and fixed.

I've considered opening an Interactive Brokers Margin Account; however, I'm uncomfortable with variable rates and the fact that they would be able to liquidate any of my positions at their discretion.
Was just looking at it shocked at the rates they offer...
Margin debt isn’t comparable to mortgage debt for 2 main reasons.

1) It’s callable, meaning they can force a sale of your secured assets to pay the loan off, usually at depressed prices.

2) The interest rate isn’t fixed, meaning you haven’t locked in a low rate for 15 or 30 years like many do with fixed rate mortgages.


I would personally never borrow on margin primarily for investment purposes (maybe to address a cash flow issue or for short term financing like a bridge loan). I probably would take a mortgage on a paid off primary residence if the rate, terms, and my personal investment horizon were attractive enough.

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Re: What is your threshold for paying down debt?

Post by travellight » Sat Dec 30, 2017 6:33 pm

My threshold is between four and five percent.

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Re: What is your threshold for paying down debt?

Post by TomatoTomahto » Sat Dec 30, 2017 6:40 pm

ny_knicks wrote:
Sat Dec 30, 2017 6:14 pm
TomatoTomahto wrote:
Sat Dec 30, 2017 4:20 pm
Except it’s not extreme. IB has margin rates well under 3%. Cheaper than your mortgage. So why not? Why would you rather use debt on your dwelling instead of on your stocks? Way easier and cheaper to use margin instead of a mortgage as well.
Was just looking at it shocked at the rates they offer...
For the record, that quote is misattributed to me.

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Re: What is your threshold for paying down debt?

Post by ny_knicks » Sat Dec 30, 2017 6:48 pm

TomatoTomahto wrote:
Sat Dec 30, 2017 6:40 pm
ny_knicks wrote:
Sat Dec 30, 2017 6:14 pm
TomatoTomahto wrote:
Sat Dec 30, 2017 4:20 pm
Except it’s not extreme. IB has margin rates well under 3%. Cheaper than your mortgage. So why not? Why would you rather use debt on your dwelling instead of on your stocks? Way easier and cheaper to use margin instead of a mortgage as well.
Was just looking at it shocked at the rates they offer...
For the record, that quote is misattributed to me.
Fixed! :oops:

awval999
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Re: What is your threshold for paying down debt?

Post by awval999 » Sat Dec 30, 2017 6:56 pm

Yes, debt can be good.

In college I took out student loans to earn my professional degree so I can make >$100k.

When I graduated I bought a car and took out a car loan so I could get to work in a reliable car to make that $100k.

But here's what I noticed in my adulthood....

People use the excuse of "low interest" rates to justify an asinine car loan, or a large mortgage that makes them house poor. Oh but the interest rate... 0% for 72 months? I mean it's free money right? Oh... a 4% 30 year mortgage on a McMansion... I mean that's like FREE MONEY, amirite?

When you buy a $40k SUV because they give you a 0% interest rate... instead of a used $20k one at 4%, who comes out ahead? It's not the zero interest rate.

When you buy a $400k 4000 sqft McMansion because the interest rate is 4%, does that "put you ahead" of someone with the same interest rate that bought a $200k house?

Yes, I can do the math.

Stock market returns at 8% will return a greater return over 30 years than prepaying the 4% mortgage at 10 years. But you have to ACTUALLY INVEST THE DIFFERENCE. It's not just math, it's behavior.

There's a reason that automakers, furniture stores, mattress stores, and electronic stores offer 0% interest. It's because it induces a larger purchase.

It's the curse of the monthly payment.

IT DOESNT MATTER IF THE INTEREST RATE IS 0%, YOU STILL CANNOT AFFORD THE PORSCHE. YOU CAN'T AFFORD THE PRINCIPLE PAYMENT!

Daryl
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Re: What is your threshold for paying down debt?

Post by Daryl » Sat Dec 30, 2017 6:56 pm

bigred77 wrote:
Sat Dec 30, 2017 6:25 pm
I would personally never borrow on margin primarily for investment purposes (maybe to address a cash flow issue or for short term financing like a bridge loan)
Same. Most of my accounts are margin enabled for emergency cash flow purposes, providing a little extra breathing room and a couple extra days to complete an orderly liquidation of the next tranche of emergency funds, if necessary.

evilityb
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Re: What is your threshold for paying down debt?

Post by evilityb » Sat Dec 30, 2017 10:05 pm

I think people's personal examples above give the best answer. The common theme is risk tolerance and opportunity cost.

1) Bogleheads aren't against debt across the board; however, what I believe we see are a lot of people who tend to be risk averse on here. Or, at the least, prefer only very well calculated risks. Not everyone, of course. There are certainly more than a few risk takers on here, as well. Everyone has a different tolerance for risk and some people choose not to have any debt, no matter what, simply because it feels risky to them.

2) Several people talked about the opportunity cost of that debt and using that to draw the line. To determine that line, the question you have to answer, is "what will I do with this money if I don't pay down this debt?" Let's say you pay off the loan immediately ($12k) and you save $1,000 in interest over the life of the loan by doing this, but you would miss out on $12,000 of 401(k) contributions this year, meaning you cost yourself $52k in 401(k) growth by the time you retire. Clearly, you fund the 401(k) before paying off the loan. If you have a credit card with 18% interest rate.... well, the math might work out differently there.

In reality, I would guess that people make decisions about debt based on a combination of both risk analysis and opportunity cost. The risk itself is somewhat quantifiable, but more than anything, it's the emotional component. The opportunity cost is the part that's almost entire quantifiable.

At the end of the day, you have to be the person to decide what your risk tolerance is and what else you want to do with that money. Then just make sure your math is solid. :)
Make sure the fortune that you seek is the fortune you need - Ben Harper

setnsettled
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Re: What is your threshold for paying down debt?

Post by setnsettled » Sat Dec 30, 2017 10:49 pm

We don't carry any debt. Probably stemming from having a -$18,000 net worth when I was 30. That was when I discovered what net worth was, and calculated ours. Credit cards? Who knew?

Getting out from under that we decided to just not do debt. To the point of, when we came into a lump sum (not inherited, the company I worked for went public and I exercised my stock options and sold a bunch), even paying cash for our house. Back before it was cool; got a ration of %#*! from friends about "missing out on all the tax benefits" and "don't spend it, invest it!" That was in late 1999. Had a vanguard IRA back then, small and slowly growing, but pretty much nothing liquid except an emergency fund - raising a family and all. Most of the non-IRA money, ie, the liquidated stock, went to pay for the house.

If I'd kept the stock I would have lost over 70% in 2000-2001, and never recovered to higher than -33% for what I sold at. (We let the IRA ride.) If we'd taken a mortgage we would have spent at least $100,000 interest net tax savings, and probably more.

I'm a lousy investor. (Unlike 2001 I panicked in 2008 - had "too much to lose" and ended up losing 30% moving to cash and not jumping back in for a while. :oops: ) And I'm old enough to know it, so I never leverage investments. Since I don't do that, any debt would be simply paying more for something we want to buy. And we quit doing that decades ago. :)

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watchnerd
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Re: What is your threshold for paying down debt?

Post by watchnerd » Sun Dec 31, 2017 12:39 am

I did a pretty big analysis when I bought my new house to determine if I should pay cash or get a mortgage.

In my case, I have the opportunity to participate in an ESPP up to 15% of my salary, but that has to be funded from wages cashflow, not lump sum.

So the math worked out better to have no mortgage.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% Int. Treasuries || Taxable: 20% US Stock | 20% ex-US Stock | 40% Int. Treasuries | 20% Munis

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Sandtrap
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Re: What is your threshold for paying down debt?

Post by Sandtrap » Sun Dec 31, 2017 1:43 am

I had a mortgage, once, many many decades ago. Never again.
I had a car loan, once, many many decades ago. Never again.
etc.
"Don't owe nobody nothin'." (old school).
j :D

Dandy
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Re: What is your threshold for paying down debt?

Post by Dandy » Sun Dec 31, 2017 6:41 am

Depends on the reason for the debt, the size of the debt and the interest rate. e.g. a mortgage with 20% down or more on a house that you can afford is probably a decent use of debt if it is a traditional 15 years or more mortgage at 4%. Not so good with no money down, adjustable rate etc.

Going forward jobs seem less secure, pensions are rare, there are ongoing issues related to programs such as Social Security and Medicare so future income streams/safety net etc aren't like they were in the past but debt is debt. Lose your job and have to take one for half the pay -- debt is debt. Get a serious illness but don't have a job or health insurance and a long way from Medicare - debt is debt. Incur 150k in student debt and can't get a good job - debt is debt.

Leverage is great when it works really bad when it doesn't.

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DaftInvestor
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Re: What is your threshold for paying down debt?

Post by DaftInvestor » Sun Dec 31, 2017 7:09 am

ny_knicks wrote:
Sat Dec 30, 2017 2:42 pm
The vast majority of companies in the U.S. use leverage to increase returns.
And numerous companies go bankrupt or simply go out of business every year. I know people that were over leveraged and had to file for personally bankruptcy (specifically during the 2008 crisis).
I will never file for personally bankruptcy. I will never have to ask family for financial help (the way others with higher incomes have asked me).
I also know right now, although loans are relatively cheap, the stock market is relatively expensive.
Also - a lot of folks preferred a guaranteed return - it's not necessarily fear - it's going with the guarenteed return.

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TomatoTomahto
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Re: What is your threshold for paying down debt?

Post by TomatoTomahto » Sun Dec 31, 2017 7:39 am

unclescrooge wrote:
Sat Dec 30, 2017 4:51 pm
TomatoTomahto wrote:
Sat Dec 30, 2017 4:20 pm
I’m like that because I couldn’t help but notice that many of the people who called me an idiot for aggressively paying off my mortgage a decade ago are no longer in the neighborhood. Hmmm.
So they upgraded, right? :mrgreen:
:D

I remember, back then, my wife had an employee who lived in our town. As his boss, she knew precisely how much he made; I don't remember, but it was more than $200k. His house was near someplace that we went to occasionally, so we'd drive by his house and see new cars, construction on an addition, and that kind of thing. My wife always scratched her head and remarked that she didn't know how he was doing all that on his income. Well, the day came when she had to let him go. His house was for sale almost overnight. It's a surprisingly small community in this business, so you can hear how someone is doing; he never did get his head fully above water again.

student
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Re: What is your threshold for paying down debt?

Post by student » Sun Dec 31, 2017 7:39 am

My reason is that I am somewhat paranoid and I would rather have a payoff house. I did not do a cost analysis. It is 100% psychological.

TwstdSista
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Re: What is your threshold for paying down debt?

Post by TwstdSista » Sun Dec 31, 2017 7:43 am

Ha! Having any.

I try. I really do. I take a very low interest car loan. Then I make slightly higher payments for about 8 months. The I get sick and tired of it and spend the next 6 months paying it off from our cash flow (instead of taking it from savings).

We finally got smart and just paid cash for our last two vehicles. We also paid cash for our house. The husband can't sleep at night thinking the bank can just come and take our house if stuffs goes all cattywompous.

Olemiss540
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Re: What is your threshold for paying down debt?

Post by Olemiss540 » Sun Dec 31, 2017 7:47 am

OP,

It would seem you are over generalizing that Bogleheads "hate debt and aggressively pay it down". I have only been around for a year or two, but there has not been a whole lot of folks around here that advocate paying off a mortgage instead of investing for retirement (quite the opposite as this is a forum dedicated to investing). It would seem if there was someone on the "aggressive" end of the spectrum around here it would be you.

Personally, I advocate paydown of mortgage once you have invested enough to meet your long term financial goals for the same reason people advocate a higher bond allocation to those that have met their goals. Leverage increases risk, and why take risk if you have won the game?
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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Sandtrap
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Re: What is your threshold for paying down debt?

Post by Sandtrap » Sun Dec 31, 2017 11:06 am

TomatoTomahto wrote:
Sun Dec 31, 2017 7:39 am
unclescrooge wrote:
Sat Dec 30, 2017 4:51 pm
TomatoTomahto wrote:
Sat Dec 30, 2017 4:20 pm
I’m like that because I couldn’t help but notice that many of the people who called me an idiot for aggressively paying off my mortgage a decade ago are no longer in the neighborhood. Hmmm.
So they upgraded, right? :mrgreen:
:D

I remember, back then, my wife had an employee who lived in our town. As his boss, she knew precisely how much he made; I don't remember, but it was more than $200k. His house was near someplace that we went to occasionally, so we'd drive by his house and see new cars, construction on an addition, and that kind of thing. My wife always scratched her head and remarked that she didn't know how he was doing all that on his income. Well, the day came when she had to let him go. His house was for sale almost overnight. It's a surprisingly small community in this business, so you can hear how someone is doing; he never did get his head fully above water again.
For many decades, I have seen tenants with new cars in the parking lot. Often the one's that are consistently behind on rent and struggling financially.
And, somehow here's the "logic"? that one must buy another car when the last payment on one is made.
There is logic and then illogic logic.
j :D

warner25
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Re: What is your threshold for paying down debt?

Post by warner25 » Sun Dec 31, 2017 1:36 pm

If your premise is that it's always best to take on debt below x% to invest in stocks, then you have to ask why another party would ever offer such debt. And that basically boils down to "why not 100% stocks?" or "why bonds?" (your debt is someone else's bond). Many threads answer that question in detail.

Now if you're going to hold bonds that are earning the market rate, then there's nothing to gain from taking on market-rate debt.

There may be some special circumstances. I got an exclusive unsecured loan in early 2008 before the meltdown at 1.9% which looked great when my savings account had a higher APY, but I paid off the loan early when I realized that my cash was earning only 0.5% by late 2010, and bond yields weren't much better. If you can get a 0% loan, great, but that probably entails paying too much for a new car.

I'm not persuaded by what corporations do with debt and investments. First, I'm already exposed to that (at my desired allocation) through my stocks. Second, for the executives making those decisions, the worst-case scenario is exercising their "golden parachutes," so the incentives are not the same as in personal finance.

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TinkerPDX
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Re: What is your threshold for paying down debt?

Post by TinkerPDX » Sun Dec 31, 2017 1:47 pm

ny_knicks wrote:
Sat Dec 30, 2017 2:42 pm
Two part question: Why are Bogleheads so afraid of debt and what is your threshold between aggressively paying it down or redirecting those payments into investments?

* * *

I'll take a 3.75% 30 year mortgage all day long and twice on Sunday if it means I can max 401k/roth/beef up taxable but everyone has a different risk tolerance with debt. What is yours?
I think of our highest-interest debt as our effective "cost of capital." Right now that is 3.875% on a rental property. So every time we do something other than pay it down, we have to expect better than 3.875% nominal. I do expect retirement contributions to do it, as I hope to beat that return handily over the long-run, even before tax benefits.

That said, the effective 3.875% is a guaranteed return - so provided the tax-advantaged space is maxed and the EF is full enough, I'll chip away some extra at the mortgage, since I can't get a guaranteed return like that anywhere.

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TinkerPDX
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Re: What is your threshold for paying down debt?

Post by TinkerPDX » Sun Dec 31, 2017 1:52 pm

Bfwolf wrote:
Sat Dec 30, 2017 4:41 pm
While debt interest rate may seem low, the risk free rate you could get by investing in US treasuries is also low. If somebody is willing to hold a US 10 year treasury worth 2.4% (because presumably their asset allocation includes some bonds) then it doesn't make sense for them to hold 4% student loans that they're paying back over 10 years.
This logic, which I agree is correct, kills me every time I buy more bonds/bond funds. We're sitting on a load of 3.5% and 3.875% debt, but yet I accept lower expected returns of I bonds, EE bonds, and total bond funds.

But I remind myself of some of the other value of holding bonds, besides return, including helping one maintain discipline to the AA, and providing assets to use to re-balance into stocks in the event of big dips. I figure that makes it worth it.

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rob
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Re: What is your threshold for paying down debt?

Post by rob » Sun Dec 31, 2017 2:19 pm

ny_knicks wrote:
Sat Dec 30, 2017 5:14 pm
rob wrote:
Sat Dec 30, 2017 4:42 pm
Lack of debt gives me options; It's not fear or any other thing you imply....
My post argues otherwise. No clue on your financial situation but young people aggressively paying down low interest rate debt at the expense of building liquidity in a taxable account might have a lot less options if they were to lose their jobs than someone who did the opposite.
Well yeah but I was not arguing for extremes which your example shows....

I've had a mortgage since my 30's BUT... I never loaded up with the max of what my income could support (according to the banks), so lived in places I could "afford". Now days, I still carry a small mortgage even thought I could pay it off without raiding retirement accounts (I prefer to pay the drag so I can have some rainy day cash dollars since I have a family). Would have done far better by borrowing the max and investing... Yeah with hindsight.

In the meantime, the low level of debt allowed me to take off a few years overseas traveling while young, took a couple of summers off with the kids doing cool stuff, allows me to take jobs that pay less than the max I'm able to get but provided more interest to me etc. I'm not sure that would have been possible if I carried a larger debt load because of the need to service it.

In the end... neither end of the extremes is likely the best answer for most of us.

Edit: The point about about FAR higher interest rates is a great point.... I had a small CD back in the day paying 17.75% (guaranteed from a bank). My first mortgage was over 10%.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

book lover
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Re: What is your threshold for paying down debt?

Post by book lover » Sun Dec 31, 2017 2:30 pm

In 1990, my wife and I purchased our house for $81,000 in a low cost of living area. After reading the book The Debt Squeeze by Ron Blue, I thought it would be prudent to pay it off which we were fortunate to do in four years. Since that time, no debt. In addition, after attending college, before being married, paid that debt off in three years. A few caveats: College costs have grown leaps and bounds since I graduated and the area that we live in housing prices are usually ranked around 247th out of 250 for housing costs. My parents were products of the Great Depression and were risk averse and it has rubbed off a bit.
Last edited by book lover on Thu Jan 04, 2018 12:22 pm, edited 1 time in total.

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