Pay off Debt with Savings?

In reply to volvoclearinghouse :

Yes there are and that's what we've been doing. They're all the same rate and this strategy has worked well so far. I think we've paid off $200k in 7 years so far. 

I plan on paying our house off in about 29 years. That will be our only debt, and at less than 4% I can deal with it. 

volvoclearinghouse said:

In reply to Erich :

The inverse of that is why I'm generally opposed to Making extra payments on, say, a mortgage. The extra cash come out of your pockets now, but doesn't reduce the next month's payment. It just shortens the term. 

What about the savings from the interest you are not paying or the years of not making monthly payments?  Is that not a benefit?

In reply to volvoclearinghouse :

I’m away from my spreadsheet,  but by my calculations paying off early saved about $20,000 in interest on a 15-year, $150,000 mortgage with a rate under 4% by paying it off in 8 years. All I did was double the principal every month. You’d save even more on a 20- or 30-year loan. 

There are valid arguments for and against paying down mortgages ahead of time, but to me, failing to reduce next month’s payment isn’t really one of them. 

I know not all are fans of Dave Ramsey but he states:  pay off debt so you can start building wealth.  

Datsun310Guy said:

I know not all are fans of Dave Ramsey but he states:  pay off debt so you can start building wealth.  

Even if you are a Dave Ramsey fan, you have to acknowledge as Dave himself does that his advice is not perfect for everyone, especially those who can manage their debt well. 

I think the biggest thing that you can take away from DR in this situation is the mental aspect of getting rid of the debt, whether or not it is the right decision from a purely mathematical POV

Datsun310Guy said:

volvoclearinghouse said:

In reply to Erich :

The inverse of that is why I'm generally opposed to Making extra payments on, say, a mortgage. The extra cash come out of your pockets now, but doesn't reduce the next month's payment. It just shortens the term. 

What about the savings from the interest you are not paying or the years of not making monthly payments?  Is that not a benefit?

Depends.  Paying off debt has an opportunity cost of not having that money available to do other things.  If I save $2000 worth of interest, but I could have used that money to invest and make $2500. then I lost $500.  

I think Dave Ramsey, et al assume the average American is a) stupid and b) going to fritter away excess money on lottery tickets and iPads, so using it to pay off debt instead is a better move.  And in fairness, a) and b) are probably safe assumptions for the average American.  

In reply to Duke :

Let's say for example the mortgage on a 150,000 house for 15 years at 4% was 1100 per month.  Let's say you paid off an extra $400 per month, paid it off in 10 years, and saved $20,000 in interest.  

If you had instead invested $400 per month into the stock market, assuming a historical average of 6% returns, you'd have $60,000 in 10 years.  

Of course, there is the matter of year 11.  That's when you can (if you're disciplined) take that $1500/month and start saving it.  And from year 11 to year 15, you're saving $1500 per month while the other scenario is still saving just $400 per month.  

Coincidentally, after 15 years, both plans are about even.  In one you save more later, and the other you save less, but earlier, so compounding is more strongly at work.  

One more bit of math.  Your 6% annually in the stock market is very likely to be interrupted by a minus 25% at least once over 15 years.

In reply to Streetwiseguy :

Good point.

All right.  Since pretty much no one here has said this was a bad idea, this morning I initiated drafts to move some money from the funds they're in to checking.  By end of this week, the student loans will be paid off.  

Crowd-sourcing investment advice FTW.  

Streetwiseguy said:

One more bit of math.  Your 6% annually in the stock market is very likely to be interrupted by a minus 25% at least once over 15 years.

Market corrections do occur but aggressive advances also occur.

The 6% rule of thumb is for a balanced portfolio consisting of stocks, bonds, and some cash reserves and reflects the long term cumulative net effect after both big corrections and big advances are accounted for.

So, you’ll be double dipping on the negative if you think in terms of 6% minus occasional corrections.

FYI, the 100+ year average rate of return for the S&P 500 is actually ~9.8%...the great depression, the great recession, and other miscellaneous bad periods are all baked into that number as are the many market rallies.

One of the biggest mistakes people make is to subscribe to the “new normal” school of thought where they believe things will somehow be different this time.

Of course anything is possible but over the course of a century plus comprised of wars, disruptive technologies, pandemics, political parties Du Jour, natural disasters, etc., etc., etc., the S&P 500 has rewarded investors with an average return of ~9.8%

The average is the average because it’s the average.

Streetwiseguy said:

One more bit of math.  Your 6% annually in the stock market is very likely to be interrupted by a minus 25% at least once over 15 years.

This is incorrect. Going back to 1978, basically the only way that you can make this statement accurate is if you look solely at the early 2000's as a buy-in. Otherwise you're looking at 7% returns on average annualized, inclusive of dips. Even if you bought at the top in 2007, you're still at about 6% annual return today.

Source: My own excel document for the calculations, and the SP500. 

RXRevin beat me, but he said it  better anyways 

mtn said:

RXRevin beat me, but he said it  better anyways 

and yet you didn’t plus-one me…why u so stingy?

RX Reven' said:

mtn said:

RXRevin beat me, but he said it  better anyways 

and yet you didn’t plus-one me…why u so stingy?

I did? It says plus 1, and when I click it nothing happens...

Update: As of today, the student loans are completely paid off!  Got the payoff quote, it was just a hair under 23,000 for the two loans.  Transferred funds over to checking from the mutual funds and made the last payment.  

We celebrated by going out to dinner last night.  Coincidentally, it was also our 5th year of living in this house.  Of course, we celebrated responsibly- the restaurant had a "date night" promotion, buy one entre, get the second half off, and half-price bottles of wine.  ;-)

Thanks, everyone, for your input.  

Congrats! It's a great feeling.

Congrats, Mr and Mrs VCH!