Conventional investing wisdom, should i disregard

[vulturesrow]

Conventional wisdom says that one shouldnt invest their money if they are holding large amounts of debt, especially high interest debt such as credit cards.

Here is my conondrum. My wife and I have a fair amount of debt. I dont care to get into specific figures, but its not crushing by any means. We pay the bills, get stuff for our kids, and have discretionary cash left over each month. I did the number crunching and figured that I can eliminate all of it in about two years by some pretty dedicated amounts of payoff. The bad thing is we have no investment of any sort, other than life insurance. I am almost 30 and I know I have already lost value by not investing early on. Should I do a mix of investing (and I am talking about index fund type of stuff right now, maybe a few choice stocks that are solid long term holdings) and debt payoff? Or am I really getting more bang for the buck by concentrating on paying off debt? As a corollary, I currently get a bonus each year that amounts to about 10k or so after taxes. Would it be unwise to sink this into debt recovery or should I take a mixed approach? I am very concerned about the time value I am using by not having any investments right now. Thanks in advance for any answers.

[player24]

For a discussion on the economic merits of prepaying a home loan mortgage, see this link (with particular attention to posts by adios, player24 and desertcat: http://forumserver.twoplustwo.com/showthreaded.php?Cat=&Number=2237096&page=1&view=c ollapsed&sb=5&o=14&fpart=1

For installment (credit card) debt, the economics are much more straightforward. You are better off paying off the debt (as opposed to the alternative of keeping the debt outstanding and maintaining an investment portfolio).

The only caveat is that you should separate some liquid assets which you can tap in case of an emergency. A few months of living expenses is ideal. Any financial assets in excess of this amount should be dedicated to repaying debt (rather than investing in financial assets).

Any opposing views will probably point out the potential benefits of having your investment portfolio generate a rate of return that is higher than your borrowing costs. For credit card debt (which is typically much costlier than mortgage debt), you are taking an unwise risk if you adopt this manner of thinkiing.

[meow_meow]

[ QUOTE ]
For a discussion on the economic merits of prepaying a home loan mortgage, see this link (with particular attention to posts by adios, player24 and desertcat: http://forumserver.twoplustwo.com/showthreaded.php?Cat=&Number=2237096&page=1&view=c ollapsed&sb=5&o=14&fpart=1

For installment (credit card) debt, the economics are much more straightforward. You are better off paying off the debt (as opposed to the alternative of keeping the debt outstanding and maintaining an investment portfolio).

The only caveat is that you should separate some liquid assets which you can tap in case of an emergency. A few months of living expenses is ideal. Any financial assets in excess of this amount should be dedicated to repaying debt (rather than investing in financial assets).

Any opposing views will probably point out the potential benefits of having your investment portfolio generate a rate of return that is higher than your borrowing costs. For credit card debt (which is typically much costlier than mortgage debt), you are taking an unwise risk if you adopt this manner of thinkiing.

[/ QUOTE ]

Agree

Pay off the debt, keep some back for emergency purposes.
Besides, if you can pay off the debt in two years you really aren't losing much time value for investing, and you'll feel good once you've paid it off.

[parttimepro]

Well, think about it this way. If you have unpaid credit card debt, you're paying about 20% per year on that money. You don't get any kind of tax deduction either, like you would with a mortgage. So paying off that debt is like finding an investment that pays a guaranteed 20%/year, tax free. Professional investors would wet their pants if they could get a guaranteed 20%.

If you're talking about a mortgage or student loans, you may want to diversify. Student loans in particular are generally subsidized, meaning you're paying below market rates for the debt. If you've locked in a low interest rate, it may be worthwhile to put some money into investments rather than prepay those debts.

[TGoldman]

In general, yes you should pay off your high interest debts before using the money for investments. However, you should also consider the fact that retirement investment accounts that offer favorable tax shelters such as the 401(k) or Roth IRA have maximum yearly contribution limits. It doesn't make much sense to me to devote 100% of your money towards your debts, only to be flooded with additional cash in two years once all of your debts are payed off. You will have lost two years worth of tax sheltered retirement contributions. Since you didn't give specific dollar figures, it's hard to say what's best for your exact siatution. Consider your exact financial situation and possibly consider putting about 80% of your money towards your debts, and the other 20% towards a tax-exempt retirement account. In a few years, your debts will be gone and you'll already have a start on your retirement.

[MonarchDon]

I'm not an investment Wizard but I will add my .02 (fwiw) "Get Out of Debt" When you stop paying intrest and start collecting intrest is when you will start to make money. I went ahead and paid off my mortgage see (How to be Setup For Life thread) and now I am going to invest the amount I was paying toward my mortgage.
Bottom line is you still have plenty of time to make great gains in your investments so 2 years of working toward a goal is nothing in the bigger picture. Good Luck

[Sniper]

Conventional wisdom is wrong... you should be paying off debt and saving/investing at the same time.

Here are some additional thoughts for you..

1. Negotiate with your credit card companies to reduce your interest rates. With diligence, you should be able to get the rates on your cards down to 10% or less, unless you have a bad credit history.

2. Max out your 401K contributons each year.

3. Pay yourself first... take 10% of your gross, split it in half each check and 1/2 goes to investments, 1/2 to pay credit card debt above your current payment level.

4. Look for ways to reduce your expenses... 1 less cup of starbucks every day adds up, drop a mag subscription that you dont really read anyway, etc... put the extra saved into your investment account.

5. Every year, increase the pay yourself first % by 1-2%

6. Use the Bonus $, 1/2 to investments and 1/2 to extra debt payments immediately when you receive it.

Hope I've given you some things to think about!

[Peter666]

First, consolidate all your present debts at one low interest rate. The best way to do this is to renegotiate your mortgage if possible. It is worth taking penalties to do this too. You must get rid of the usurious interest rate being charged on those credit cards.

This new consolidated debt should then be covered with Universal life insurance that is overfunded. This is an insurance/investment that will make you money in the long run. When there is enough cash value in the Universal life insurance plan, you can take the money out to pay off the remaining consolidated mortgage, or just keep funding it and pay the mortgage separately because this leveraging will produce more money for you.

In a capitalist society, debt is a necessary tool to establish wealth. I don't like it, but it is better than Communism.

[Dan Mezick]

It's important to distinguish between mortgage debt and consumer debt. Consumer debt is caused by the purchase of cars, clothes, vacations, and toys. Moderate mortgage debt is OK. Consumer debt is evil.

The problem is in distinguishing between the two. Consumer debt is habitually converted to mortgage-debt status, via cash-out refi's, 2nd mortgages etc.

The amount of low-interest rate, high-balance "consumption-loaded" mortgage debt people are carrying is really huge, perhaps higher than it has ever been.

[BadBoyBenny]

[ QUOTE ]
Pay off the debt, keep some back for emergency purposes.

[/ QUOTE ]

I would not start an emergency fund until your credit card debt is paid off. Improving your credit will be just as useful if you need some emergency money.

[midas]

Sniper-

Very good advice but I'm going to give it a few tweaks:

1A - I'm assuming he has whole life insurance since he called it an "investment". Dump the whole life for term life and free-up some cash flow. Whole life is a sucker bet!!

2B - Pay off all credit cards - there is no better short-term investment than paying off credit card debt.

2C - Learn to live without credit cards - borrow only for homes and cars.

7 - If he doesn't own a home - buy one - a home is generally a good investment especially in a top 20 market.

[Peter666]

One point should be clarified at 1A:

Whole life insurance is a sucker bet BEFORE you are 45-50. Term insurance will give you more cashflow when you are younger. But if you can handle the cashflow situation, Universal Life insurance will provide you with both the insurance and investment money you seek.

[Harmonica]

I dont not whether this is possible in the US or whether it is sensible advice that I am about to give you but here I go, over here in the UK most credit card companys offer you 0% interest credit cards for a specified period of time, anywhere from 6 - 12 months, so what I do is I get my debt that I have on my credit cards and after the 0% period is over, I change to another credit card with a similiar 0% offer on balance transfers, that way you never pay any interest on your borrowings. /images/graemlins/smile.gif