| Payoff student loans or roth IRA ? |
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andrewniu
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Cash: $ 0.45
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| Payoff student loans or roth IRA ? |
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Hello All,
First post here - hopefully its not too simple. 
I recently came into some money. About 5k.
I have a 9500 dollar student loan with about a 4.5% interest rate. This loan is the total of all my debt. I have no balance on my CC's and no other loans. I'm 29 years old, and it would be great to be debt free by 30.
However, i am interested in putting the money in an IRA.
What would you (forum, money people, all around good fellows) recommend?
Pay off the loan as quick as I can or, invest it one time in an IRA?
Thanks much!
Andy
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Fri Jan 27, 2012 4:30 pm |
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oldguy
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I would definitely pick the IRA, the 4.5% loan is a 'keeper'.
$5000 in an 11%/yr IRA for 30 yrs is $115,000. It's not a good idea to derail a wealth-building plan to save $400/yr in interest, if fact, that is good use of $400.
"Debt -free' is good if you are talking about revolving high interest consumer debt - (short term, high rates). But, other than that, 'debt free' is not a goal, higher net worth is a goal.
Eg, if you can borrow "long, low" capital, say an extra $50,000 on a mortgage for 4% fixed for 30 yrs, your cost is $239/m, ie $86,000. Invest the $50k in an 11%/yr fund for 30 yrs equals $1,145,000 - ie, you earn an extra million by taking the risk and applying the discipline to get it done.
(I've done this with our rental houses for 35 yrs, refi them and take out the equity, then invest the equity.)
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Fri Jan 27, 2012 8:27 pm |
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andrewniu
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Thank you oldguy. i guess i never thought of higher net worth as 'the goal' and have always thought of being debt free as 'the goal'. However, the way explained it in the post makes perfect sense.
The next question - ROTH IRA or IRA? Any preferences?
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Sat Jan 28, 2012 2:31 am |
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fast
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Cash: $ 14.00
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Joined: 20 Oct 2009
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| Re: Payoff student loans or roth IRA ? |
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quote:
Originally posted by andrewniu
Hello All,
First post here - hopefully its not too simple.
I recently came into some money. About 5k.
I have a 9500 dollar student loan with about a 4.5% interest rate. This loan is the total of all my debt. I have no balance on my CC's and no other loans. I'm 29 years old, and it would be great to be debt free by 30.
However, i am interested in putting the money in an IRA.
What would you (forum, money people, all around good fellows) recommend?
Pay off the loan as quick as I can or, invest it one time in an IRA?
Thanks much!
Andy
We can pick up a calculator, and if we know what buttons to push, we might just figure out that in a perfect world, the IRA's gonna be the better of the two choices, but there's a little something that's not factored into our mighty calculator, and that's the real-world risks of things going south, and I'm here to tell you that there's no way I would choose to put my family in jeopardy by taking on the unforeseen risks to invest with borrowed funds. No, what I'd do is pay of the student loan. A higher net-worth is nice (or should I say the potential for a higher net worth—remember, let’s not forget the risks), but the peace of mind that comes with not owing money trumps more than most might think.
Anyhow, that's my two cents.
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Sun Jan 29, 2012 5:43 am |
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coaster
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| Re: Payoff student loans or roth IRA ? |
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quote:
Originally posted by fast
but the peace of mind that comes with not owing money trumps more than most might think..
Peace of mind is psychological; numbers are money. If the psychology costs real money, I think it's a good idea to at least push those buttons so you know how much the trump is costing. Maybe the psychology isn't worth that much .... 
~Tim~
Eye Candy : Why Whimsy
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Sun Jan 29, 2012 8:03 am |
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fast
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| Re: Payoff student loans or roth IRA ? |
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quote:
Originally posted by coaster
quote:
Originally posted by fast
but the peace of mind that comes with not owing money trumps more than most might think..
Peace of mind is psychological; numbers are money. If the psychology costs real money, I think it's a good idea to at least push those buttons so you know how much the trump is costing. Maybe the psychology isn't worth that much ....
Yes, peace of mind is psychological, but it's a function of not being exposed to the many treats the boogie man around the corner has in store for us. I'm talking about the risks that I think some may do well not to minimize. As is often uttered, life happens, and I think we'd fare better by not having debt looming over our heads like a gray sky when a job is lost, a person becomes sick, or a new child is born into a family embraced with the cold love of suffocating debt. Sure, that's hyperbole, I know, I get it, and we're only talking about a small amount of debt in this situation, but wouldn't you think there's an underlying principle lying in wait for us to scrounge up that just might cause us to take a step back? After all, we don't advocate people going into debt at a low interest rate to in turn invest it at a higher interest rate just because the calculator shines a pinhole of promising results do we?
Not only is it a good idea but in fact a very good idea to run the numbers (push those buttons, that is) because there are times (and I do hear your message) when the psychological comforts do not outweigh the consequence of money needlessly going down the drain. For example, a person with an $8,000 loan at 16% interest and a $12,000 loan at 3.75% interest might just be psychologically comforted by paying off the larger debt first with the frame of mind that the larger harder-to-pay-off loan will be over and done with and no longer a burden to endure. In this case, pushing those buttons and running those numbers lays out in clarity which action is and which action isn’t foolhardy—to Dave Ramsey’s dismay, I might add, lol. Of course, that’s comparing debt to debt. In the case of the OP, I think we should strive to be fair and balanced as we outlay the pros and cons of each choice. My overall point is that if we’re going to run the numbers, then let’s run them all; hence, let us not neglect to thoroughly and realistically take into account the potential risks; that way, the positives aren’t the only things glowing in a counterfeit light. If that’s too subtle, let me know; I haven’t written in a while.
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Sun Jan 29, 2012 3:46 pm |
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oldguy
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Cash: $ 280.50
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Joined: 21 May 2006
Location: arizona
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quote:
After all, we don't advocate people going into debt at a low interest rate to in turn invest it at a higher interest rate just because the calculator shines a pinhole of promising results do we?
Well, I have done that very thing for >40 years, I did it before HP's 1972 invention of the scientific calculator so I missed the pinhole, lol.
The Law of Investing - Risk & return are directly proportional. The risk/return trade study must be analyzed, evaluated for every investment - and managed/mitigated.
But a no-risk plan cannot build wealth - all of the no-risk products - CDs, savings - are designed to provide safe storage of your money, the returns are about the same as inflation, an offset.
So if you desire to build wealth, you must select products that outpace inflation - ie, products that carry risk. If you are extremely risk averse, you would select 4% or 5% products. If you want slightly more risk, you select 11%/yr products - or a mix of the 5% and 11% products. And if you want more risk, you apply leverage to the 11%/yr products.
There is no right or wrong to any of these methods - you must pick your own goal and make your own plan that gets you there. The DR method is right for some (especially for credit card addicts), he has helped millions of "shop-till-you-drop" people see the light.
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Sun Jan 29, 2012 4:26 pm |
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fast
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quote:
Originally posted by fast
After all, we don't advocate people going into debt at a low interest rate to in turn invest it at a higher interest rate just because the calculator shines a pinhole of promising results do we?
quote:
Originally posted by oldguy
Well, I have done that very thing for >40 years, I did it before HP's 1972 invention of the scientific calculator so I missed the pinhole, lol.
The Law of Investing - Risk & return are directly proportional. The risk/return trade study must be analyzed, evaluated for every investment - and managed/mitigated.
But a no-risk plan cannot build wealth - all of the no-risk products - CDs, savings - are designed to provide safe storage of your money, the returns are about the same as inflation, an offset.
So if you desire to build wealth, you must select products that outpace inflation - ie, products that carry risk. If you are extremely risk averse, you would select 4% or 5% products. If you want slightly more risk, you select 11%/yr products - or a mix of the 5% and 11% products. And if you want more risk, you apply leverage to the 11%/yr products.
There is no right or wrong to any of these methods - you must pick your own goal and make your own plan that gets you there. The DR method is right for some (especially for credit card addicts), he has helped millions of "shop-till-you-drop" people see the light.
Taking risks is fine, just like diving into a pool is fine, but timing is important. When do we take the plunge, before or after the water is in place? I don’t see that it’s wise to have any substantive investment taking roots to secure anyone’s future while debt provides the protective cushion to our lives that’s reminiscent of a cement pool bottom.
To take it a step further, I have no qualms with plans that are more tolerant of risk, but shouldn’t we temper the risks with the competency and skill set of an advisee? Let me put it another way. I’m in favor of a more paternal approach. Yes, we can outline the options of those methods purportedly devoid of “right or wrong” for others to mull over and contemplate, but it’s incumbent upon the advisor to appropriately tailor his advice. You are awesome in that you know what to do and how to do it, so whether you’re behind the wheel of a car when it’s raining or behind the wheel of your financial train, you can fully appreciate the risks, but I don’t think I’d be all that comfortable characterizing the difference between A) risk-averse (a reference to your 4% or 5%) and B) slightly more risky (a reference to your 11%) as being comparable to the difference between B) slightly more risky and C) more risk (a reference that included leverage).
To elaborate a bit, the degree of risk involved is important and age is important, but unless I feel that a person has a substantial grip on reality (knowledge base and genuine understanding of the risks involved), I’m not so sure I would highlight the options available as if they were (as if they were, I said) just another choice. Another choice, yes, but not ‘just’ another choice, as leverage used by a novice is akin to something that ain’t gonna turn out quite purty—life sees to that, especially for those that are new to driving and haven’t experienced the dangers of driving in a hurricane—something that just might be less risky than a novice using leverage to build her net worth.
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Sun Jan 29, 2012 6:06 pm |
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coaster
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quote:
Originally posted by fast
.... but timing is important...
No, because, as you say, "life happens", and nothing can be timed to occur at the best possible time. So it's not timing per se that's important, it's clockwork that's important: starting early, and being regular and consistent, just like a clock. When you make your saving/investment automatic and regular then after a while, just like a clock's tick-tock, it becomes routine, it fades into the background, and sooner than you know it, you discover you have a pile of money that you find kind of surprising, because you never missed not having it in your pocket.
~Tim~
Eye Candy : Why Whimsy
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Mon Jan 30, 2012 4:23 am |
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littleroc02us
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quote:
Originally posted by andrewniu
Thank you oldguy. i guess i never thought of higher net worth as 'the goal' and have always thought of being debt free as 'the goal'. However, the way explained it in the post makes perfect sense.
The next question - ROTH IRA or IRA? Any preferences?
Yes, but networth is your calculated this way (assets - liabilities=networth)
So IMO you can have both and also less risk or you can have high risk with higher reward or total failure. When you choose the path of high risk, if one part of your plan goes wrong you could lose everything. Being debt free and having great wealth is more obtainable then you think. My wife and I are debt free except the house and we have a ton of money stalked away in investments. It's up to you to decide your philosophy.
“If you want to stay in debt forever, keep borrowing money.”
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Mon Jan 30, 2012 2:57 pm |
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fast
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Joined: 20 Oct 2009
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quote:
Originally posted by coaster
quote:
Originally posted by fast
.... but timing is important...
No, because, as you say, "life happens", and nothing can be timed to occur at the best possible time. So it's not timing per se that's important, it's clockwork that's important: starting early, and being regular and consistent, just like a clock. When you make your saving/investment automatic and regular then after a while, just like a clock's tick-tock, it becomes routine, it fades into the background, and sooner than you know it, you discover you have a pile of money that you find kind of surprising, because you never missed not having it in your pocket.
I'm going to think about that.
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Tue Jan 31, 2012 2:16 am |
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