Invest or payoff debts - question on another forum

Invest or payoff debt

  • Invest

    Votes: 26 76.5%
  • Payoff debt

    Votes: 8 23.5%

  • Total voters
    34
  • Poll closed .
Hi everybody,
This was a question on another forum. A whopping 72% have voted pay off debts!
Such a different mindset. Please note that most of the Forumites on that forum are based in North America.

Here was the question:

Since this is nearly a daily question on the forum, I'd like to get a barometer as to where the majority lies on this question. Selfishly I'd also like to just provide a link to this poll every single time the question is asked so I can stop answering it. Obviously there are many variables that could effect your decision including:

1) Fixed or variable interest?
2) How high is the interest rate?
3) Is it tax deductible?
4) Do you get a company match on your 401k?
5) Are you maxing out your 401k?
6) What is your tax bracket?
7) How long until you retire?
8) How long until the debt will mature?
9) Is the stock market, AHEM, overvalued (just joking, ignore this one)?

Well I want you to ignore all that crap because there are just too many variables. Just assume it's not a hair on fire credit card type situation, and everything else is within the range where a reasonable person would ask themselves this question.

I'm going to delay my vote a bit so I can see what others think, but if you've been around a while you likely have a good idea where I stand.

So which camp are you in?


http://forum.mrmoneymustache.com/as...-this-with-a-vote-invest-or-payoff-debts/100/

This was my reply (after noting 72% of respondents voted pay off debt):
Interesting thread. I'm been reading another forum (this one!) for a few years catering to property investors and I'm sure their responses would be completely the other way! I think that way too, I consider myself an investor but then again, I don't have consumer debt except for a home loan and that debt isn't very big, and the house value basically has almost doubled the 7 years we have lived here. So not a bad investment at all. I say invest!! Damn partner is very cautious. Not an investor. He's cost me big bucks... :(

You have to invest to make the big bucks. Use other people's money (OPM). Invest, leverage, take the equity increases when property prices go up. And even if they don't, you still have regular money coming in from rents.
Agree though, anybody with revolving credit card debt at typical credit card interest rates is stupid. I currently work for Australia's biggest bank, (It's the highest value company on the Australian Stock Exchange btw, extremely profitable) and previously worked at Amex for 6 years. Don't borrow money for consumer goods. Don't finance them.

If you don't understand the power of investing, play Robert Kyosaki 's cashflow 101 a couple of times. The take home message i get from the game is, it's ok to borrow money, have debt, but do it to make you money in the long run.
 
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The answer would be

1. Pay off non deductible debt
and
2. reborrow to invest.
this will convert non deductible debt into deductible and will produce income to further pay off more non deductible.
 

Sim

Administrator
Well I want you to ignore all that crap because there are just too many variables. Just assume it's not a hair on fire credit card type situation, and everything else is within the range where a reasonable person would ask themselves this question.

The problem is that "all that crap" is actually very important to the decision making process!

It completely depends on the nature of the debt, the state of the economy, your other personal circumstances, and more.

In general, reducing non-deductible and non-productive debt is the best way to start in my opinion. Not only does it eat up your income (after-tax what's more!), it also greatly reduces your borrowing capacity, so reducing the debt will have a double benefit of increasing income and increasing your borrowing capacity.

However, there are different types of debt and some are less important than others. I'd even suggest that some debts aren't worth paying off in the short term and you would get better long term results by investing now and paying it off later (if that were possible given "all that crap" in unknown variables to the discussion).

As usual, people are looking for a black-and-white answer to a question which is very much right in the middle murky grey of the reality of life.
 
I can't vote in this thread, because there's no one answer. If it's a credit card or a personal loan, you'd obviously pay that off first. If it's an IP mortgage, you invest first.
 
Would the typical Mr MM reader be a consumer rather than an investor-mindset type of person? I would think their readership would be made up of a more general overview of the population whereas Somersoft is made up 100% of investors who can already manage their finances and who already have a "some debt is good" mindset. Would MMM be inclined to be people who are still learning how to manage their finances and how to get rid of consumer debt ?
 

Sim

Administrator
If it's an IP mortgage, you invest first.

Even a PPOR loan is questionable whether it's worth paying off first or investing first.

The best approach is likely more complicated - structure things so that you can minimise repayments on your investment loans while maximising repayments on your PPOR loan ... in which case the actual answer to the "invest or payoff debts" question, would be ... "both".
 
Would the typical Mr MM reader be a consumer rather than an investor-mindset type of person? I would think their readership would be made up of a more general overview of the population whereas Somersoft is made up 100% of investors who can already manage their finances and who already have a "some debt is good" mindset. Would MMM be inclined to be people who are still learning how to manage their finances and how to get rid of consumer debt ?

If I was a gambling man, I'd be happy to take a bet that more than 50% of registered users on here don't have a single investment property.
But I agree that MMM is much more about how to stretch a dollar rather than putting it to work.

Even a PPOR loan is questionable whether it's worth paying off first or investing first.
Yes, I just went for simple black and white examples to make my point. I'm currently investing money while not having my PPOR paid off though, so I'd have to agree.
 

Sim

Administrator
Would the typical Mr MM reader be a consumer rather than an investor-mindset type of person? I would think their readership would be made up of a more general overview of the population whereas Somersoft is made up 100% of investors who can already manage their finances and who already have a "some debt is good" mindset. Would MMM be inclined to be people who are still learning how to manage their finances and how to get rid of consumer debt ?

Yes, I think for the vast majority of "consumers" we could assume that the debt they have is personal in nature - credit cards, personal loans, car loans, etc.

With the possible exception of PPOR debt - and low repayment rate debts such as HECS etc - I think the general rule will be to pay down the debt first before investing.

If you can't keep your consumer debt under control, investing isn't going to help you - indeed, paying down a credit card debt at 18%+ per annum is a far better return than getting 10% from some investment.

There is certainly never a justification for accumulating money (above and beyond a pool of "emergency" funds) in a high interest bank account or term deposit earning less than 5% pa ... when you have credit card debt or personal loans at more than twice that rate!
 

Sim

Administrator
Just out of interest, I checked current interest rates published by CBA - even though we are at incredibly low official rates right now, personal debt is still extremely expensive.

  • Credit card ("low fee") - 19.74%
  • Personal loan - 13.90%
  • Credit card ("low rate") - 13.49%
  • Secure car loan - 7.99%
  • Standard variable investment home loan - 5.65%
  • High interest savings account - 3.20%
  • Term deposit (best rate) - 3.10%

If you have credit card debt - I can guarantee you a 19.74% return on your money with absolutely no risk!!! :rolleyes:
 
I'm with Sim 'all that crap' is too important. I read this thread last night and didn't vote as without the details it's too broad a question.

Paying the highest non deductable personal debt should happen first IMO, then there's different ways of repaying debt that will also allow you to invest as well (debt recycling).
 
I know its not the most efficient strategy but I have always payed down some investment debt each year as we dont have any non deductible debt any more. Its a hard mindset to get out of but has created a lot of equity the hard way in markets which have been flat for a number of years and continually allows room for new purchases
 
We've just paid down non deductable debt and about to take on more deductable debt .

Somewhere within the next 5-10 years when our soon to be purchased new batch of IP's have gone up , we will sell them to pay of debt on other IP's

Cliff
 
Everything in moderation. Invest wisely when you can, but don't overstretch yourself, make sure you have a cash buffer and cashflow if things don't go well.
 
Re your partner. I'll just say, I feel your pain and then some..
If only my partner was a realestate investor.... I'd have a property in Frankston, Lavender Bay and a house in Doonside (it would have doubled in value now!)

The answer would be

1. Pay off non deductible debt
and
2. reborrow to invest.
this will convert non deductible debt into deductible and will produce income to further pay off more non deductible.

At least have non deductible debt under control and reborrow to invest. (Partner won't let me borrow from the home loan btw)

The problem is that "all that crap" is actually very important to the decision making process!

It completely depends on the nature of the debt, the state of the economy, your other personal circumstances, and more.

In general, reducing non-deductible and non-productive debt is the best way to start in my opinion. Not only does it eat up your income (after-tax what's more!), it also greatly reduces your borrowing capacity, so reducing the debt will have a double benefit of increasing income and increasing your borrowing capacity.

However, there are different types of debt and some are less important than others. I'd even suggest that some debts aren't worth paying off in the short term and you would get better long term results by investing now and paying it off later (if that were possible given "all that crap" in unknown variables to the discussion).

As usual, people are looking for a black-and-white answer to a question which is very much right in the middle murky grey of the reality of life.
Agree. I just posted the original poll options. Other people on that forum also mentioned it's not just one or the other.

I can't vote in this thread, because there's no one answer. If it's a credit card or a personal loan, you'd obviously pay that off first. If it's an IP mortgage, you invest first.
Yep.

Would the typical Mr MM reader be a consumer rather than an investor-mindset type of person? I would think their readership would be made up of a more general overview of the population whereas Somersoft is made up 100% of investors who can already manage their finances and who already have a "some debt is good" mindset. Would MMM be inclined to be people who are still learning how to manage their finances and how to get rid of consumer debt ?
I agree. Somersoft is much more an investor mindset but Mr Money Moustache is more about living frugally, not wasting money stupidly, living on as little as possible, having extreme savings rates like 50%, put money (and maxing out) your 401k contributions (like our super accounts) to get the maximum employer match, cycle everywhere instead of a car (many people on the forum would do that even in the middle of a North American Winter... I suppose driving anywhere with snow everywhere is extremely unsafe) all with the aim of retiring early. Much less focused on investments.
I'll add, my partner sometimes buys the Money magazine. I actually prefer the thoughts of the Forumites here than Paul Citheroes' advice he dishes up to readers. Often readers write in, I have xxxxxx salary, a PPOR, 2 IPs, share portfolio xxxxxx. A lot of the time I always got the feeling in his reply: you have enough money in property now, put your money in shares. However, I personally think, if you can do property well, stick with it. Plus, my super is all in shares. Unfortunately the magazine is not a forum and as such, it's not a platform that is open to debate, but I'd love to see other peoples opinions on his advice.

Even a PPOR loan is questionable whether it's worth paying off first or investing first.

The best approach is likely more complicated - structure things so that you can minimise repayments on your investment loans while maximising repayments on your PPOR loan ... in which case the actual answer to the "invest or payoff debts" question, would be ... "both".
Yep.

Very black and white poll. It at least needs an option to "Reduce debt and borrow to invest".
I just copied the original poll from the other forum as stated. I don't disagree with you though. And it depends on the interest rates of those other debts, what options you have for Investments, the economy etc etc etc,

We've just paid down non deductable debt and about to take on more deductable debt .

Somewhere within the next 5-10 years when our soon to be purchased new batch of IP's have gone up , we will sell them to pay of debt on other IP's

Cliff
Yep. Invest now, get gains, sell later, and have plenty of IPs but on lower LVRs... Good plan for retirement!

Everything in moderation. Invest wisely when you can, but don't overstretch yourself, make sure you have a cash buffer and cashflow if things don't go well.
If in doubt, sell an ip, give some breathing space.


Anyway, I don't have much non deductible debt. To me, my Deductible debt is relatively high, but since my rents cover it and more I'm very comfortable with it. PPOR debt is extremely manageable.
I've made the decision to prepay the HECS-HELP debt... Yes, it's basically interest free however I would have had to pay it off anyway with the annual taxes this tax year, and if I pay it voluntarily I get a 5% discount.
I've scheduled the payment for the end of April, before indexation kicks in. (Indexation is applied June 1, but the ATO say to give them time to process your payment). I just think of it as just paying that debt off maybe 6 months earlier than required, gaining the 5% bonus and avoiding indexation (last year indexation was apparently 2.9%)

Cheers all for all your comments.
 
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Damn partner is very cautious. Not an investor. He's cost me big bucks...
Leave him and make me your plaything.

Just joking.

My take is this - and I'm one of the oldest and made the most mistakes on this site....

1. Pay off any debt when you can. It's all good.
2. However; further to point 1 - pay off any non-deductible debt first, and pay off the highest interest rate debt first (credit cards).
3. Pay down investment debt too - after non-deductible debt is paid out.
3. Depending on your level of sophistication as an investor - pay only the minimum into Superannuation. Any decent investor (everyone here on SS) will be able to generate better returns on their after-tax dollar than Super can.
4. Above all else; cashflow is King.
 
Would the typical Mr MM reader be a consumer rather than an investor-mindset type of person? I would think their readership would be made up of a more general overview of the population whereas Somersoft is made up 100% of investors who can already manage their finances and who already have a "some debt is good" mindset. Would MMM be inclined to be people who are still learning how to manage their finances and how to get rid of consumer debt ?
From my observation as an old b@stard who's been around the block a couple of times; the majority of Mr.Averages are out there trying to narrow the gap between the end of the week and the money.

You can put any amount of zeros on that.

What this means is that the majority of folks will fill up their income with spending.

Not on investments - consumer stuff; car, clothes, holidays, school fees and so on.

All stuff that keeps them poor

Some here will scoff and say; "you are a frackwit and don't know what you are talking about"." Maybe I don't; just giving my observation of humans living life.

Sorry, but it's true (not the bit about me being a frackwit - the bit about the spending despite the zeros on the end of the payslip.)

The reality is many folks play their life at looking rich, but aren't.

This place - SS - is a minority of folks in the wider community who are on the correct page financially and financially educated, so you cannot compare yourselves or include even your small circle of friends and acquaintances as a good example as a representation of the wider community...

The wider community is broke..
 
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