Talk:Paying down loans versus investing

Simplicity

I removed these statements "You no longer need to worry that an investment made instead of paying it off will lose value. Selling a house with no outstanding mortgage is simpler." and simplified the wording. I'm not sure what the first sentence refers to - investment, mortgage, car loan, student loan. Investments and your home can lose value. The second sentence (mortgage) only refers to a few minutes of paperwork during the settlement process - it's not that important. --LadyGeek 18:21, 8 March 2015 (MDT)

FYI these statements were from the Bogleheads wiki. You may want to edit the equivalent page there too... --Quebec 06:14, 9 March 2015 (MDT)

Done. Good point, I edited the Bogleheads wiki page. --LadyGeek 20:48, 9 March 2015 (MDT)

Ready for main space?

Is this article ready for main space?--Quebec 06:56, 9 March 2015 (MDT)

Give it a shot. I assume you will post an FWF forum thread for discussion. Bear in mind the Bogleheads wiki has the page flagged with the {{POV}} template. You may need it here, but see how the FWF feedback goes. --LadyGeek 20:48, 9 March 2015 (MDT)

No action on this page for a few days, so I'm moving it to main space, we can still improve there. --Quebec 13:48, 13 March 2015 (MDT)

Credit cards and consumer loans section

The calculations have been too simplified and don't correctly reflect compounding of interest. While the section demonstrates the general idea, I think more realistic and accurate data is important. For credit cards, minimum payments are also involved. See FCAC - For Consumers - Interactive Tools - Credit Card Payment Calculator for real-life data. How are the various rates involved selected? Will the conclusions/recommendations change if rates change? --Peculiar Investor 09:02, 10 March 2015 (MDT)

The FCAC tool is more about evaluating different debt repayment scenarios than comparing investing with paying down debt. Not sure what you have in mind? --Quebec 16:27, 10 March 2015 (MDT)

I think the point is that the FCAC tool shows a perspective of time saved, which is an important consideration. --LadyGeek 18:36, 10 March 2015 (MDT)

The main point was credit card interest is compounded monthly and minimum monthly payments are required, so the example isn't real life or accurate. While the outcome of the example would lead the reader in the right direction of thought, if the example isn't accurate then the outcome could be questioned as well. --Peculiar Investor 20:06, 10 March 2015 (MDT)

Use this calculator: Bankrate.com credit card calculator -- How much will the minimum credit card payment cost me?, it gives the same information, e.g. "It will take you 93 months to be rid of your debt. In that time, you will pay $698.38 in interest" but I think you can trust the results. The minimum + additional amount Option B isn't available, but I don't think it's needed to prove the point. BTW, I agree on the fixed payment calculations and am guessing the minimum payment calculations are done iteratively vs. time value of money formulas. I didn't dig into the details. --LadyGeek 20:43, 10 March 2015 (MDT)

The intent is not to get into the specifics of minimum payments, compounding frequencies, etc. for credit cards. That can be done on the credit card page. So I removed the problematic "effect on net worth" example. I also shifted up the two calculators that were already in the article from "external links" to near the top of the page, for better visibility. People can play with their own numbers using the calculators (including varying the income tax rate, etc.). --Quebec 07:45, 11 March 2015 (MDT)

External links

Could Pay down debt or invest calculator | Calculators | Investor Education Fund be helpful to reference in the article? Another resource to consider, Pay off the mortgage or invest in an RRSP?. --Peculiar Investor 09:02, 10 March 2015 (MDT)

Done. --Quebec 16:27, 10 March 2015 (MDT)

Newer car

"For example, buy a "newer" instead of a "new" car. Select a reliable shop rather than an ego trip; your transportation will be much cheaper."

- not sure this belongs in this article. Yes, the loan (if any) on a second hand car will be lower. But this is an article on "Paying down loans versus investing", not on how to save on transportation. Saving on transportation is a great topic though, for another article. I'm pretty sure I've figured it out: if you can't take public transit to work, then buy a 5 year-old Yaris, Civic or Corrola with about 100 000 km on it. Pay cash (should be about $7-8k). Insure it with a high deductible. Keep it for 10 years or until it costs more than $500 a year in repairs for two years in a row. Sell it for $1k, and start again.

- Coming back to our "Paying down loans versus investing" article, an example for the "discipline" section could be that if you pay the mortage in a hurry, but then because you've cleared the debt you feel that you can spend more, it's no good. Instead the money that was going towards mortgage payments should be re-directed to retirement savings, for example. --Quebec 17:45, 15 March 2015 (MDT)

It's all about cash flow, regardless if it's a home improvement loan or a car. I always take a member's suggestion (as long as it's appropriate) because this is the heart of finiki - the sum total of the member's knowledge. The members are now fully engaged and will continue to support finiki in the forum and elsewhere. It's why I always post an acknowledgement and thanks in the relevant thread. Perhaps it can be phrased better, but I recommend keeping the suggestion. --LadyGeek 18:24, 16 March 2015 (MDT)

Sorry, I still don't see how the sentence relates to this article. The sentence is about managing car costs, not the decision to pay down a loan versus investing... Maybe it belongs to an article about "how to avoid debt" in a world of consumerism and "5 easy payments". --Quebec 16:47, 17 March 2015 (MDT)

OK, I see your point. Would removing just the last sentence ("Select a reliable shop rather than an ego trip; your transportation will be much cheaper.") help? It's useful as a second example of discipline, but does not dig into the details. Otherwise, don't let this hold up your page going "live". Remove or edit as you wish, it's really a minor point. --LadyGeek 17:33, 17 March 2015 (MDT)

Done. I've deleted the 2 sentences, but will keep the car idea in mind for a future "avoiding debt" article. --Quebec 06:26, 18 March 2015 (MDT)

Leverage

I find the following sentence confusing: 'Bob is not using leverage, as he is using his own cash. By borrowing against his home, John is using leverage'

Yes Bob is using his cash but he also owes the same amount on his mortgage. As written in the previous version, he could have used is cash to pay his mortgage then re-borrowed against his house to buy the stocks, ending up in John's situation. So implicitly Bob is using leverage too. If Bob wants to avoid using leverage, he should clear his mortage with available cash, save another $10k, and buy the stocks.

This sentence is also confusing: 'John is counting on the value of his home rising, thereby magnifying his utilization of debt'. Both Bob and John are counting on their home values rising.

But the key point is that they expect to make more on stocks than the interest they are paying on their mortgage or HELOC. --Quebec 06:25, 29 March 2015 (MDT)

^^^ I inserted extra blank lines to show the paragraph breaks (easier to read).

Here is the previous version:

If you are deciding to invest available cash instead of paying down loans, the net effect is the same as borrowing to invest. For example:

• John has just finished paying off his mortage. He takes a HELOC (Home Equity Line of Credit) for $10k, and uses the money to buy stocks.
• Bob stills owes $10k on his mortgage, but has $10k of cash available. He chooses to buy $10k of stocks.
• At the end of the day, both John and Bob have $10k of debt and $10k of stocks. John knows that he has borrowed to invest but Bob is less clear about it.
• Yet Bob could have used his cash to clear his mortgage, and then taken a HELOC to purchase the stocks, ending up in the same position ($10k of debt and $10k of stocks). Had he done this, it would have been clear to him too that he was effectively borrowing to invest.

My understanding is that Bob borrowed against available cash, not directly against the home (mortgage). Yes, they both expect the value of the home to rise and increase their net worth. However, Bob is not using the concept of leverage - which is applied against the home.

The previous version of "implicitly" using leverage is not clear, as Bob did not borrow against his home. He could have borrowed against his home; but mixing an implicit "could have done" with "what was actually done" was very confusing. I did not understand your intention. The current version shows what Bob and John actually have done. Then, the use of "good" leverage follows as a clear commentary of the example.

I now see your key point - expecting to make more on stocks than the interest paid on a mortgage or HELOC - is missing from this discussion.

However, I don't think the concept of implicit leverage can exist, as this is a decision of investors choosing to borrow against their home - or not. "Available cash" is not borrowing against any equity, it simply changes your asset class. Perhaps to add before the last paragraph (?):

John made a choice that investing in stocks will provide a better return on his investment than getting a HELOC.

Is this a step in the right direction? We can always get more opinions in the forum. --LadyGeek 18:54, 31 March 2015 (MDT)

= = = = =

I think the leverage section is too long: this is an article on paying down loans vs investing. Leverage can be introduced, but we shouldn't go into details, like the formulas (Leverage = Debt / Equity, or Leverage = Borrowed funds / Value of the home). Removing the example (Bob vs John) will also shorten the subsection. Here is the version of the example being deleted:

For example:

• Bob stills owes $10k on his mortgage, but has $10k of cash available. He uses his available cash to buy $10k of stocks.
• John has just finished paying off his mortgage. He takes a HELOC (Home Equity Line of Credit) loan for $10k, and uses the money to buy stocks.

At the end of the day, both John and Bob have $10k of debt and $10k of stocks.

Bob is not using leverage, as he is using his own cash. By borrowing against his home, John is using leverage.

The 'external links' sends the readers to the leverage article on the Bogleheads wiki, where a full presentation of leverage is given. Is that good enough?--Quebec 06:12, 1 April 2015 (MDT)

This section was introduced due to comments by kcowan in Wiki: Paying down loans versus investing. Perhaps we've gone too far with the example; I agree with its removal. I further clarified the sentence starting with "If you are deciding to invest available cash..." This should be "good enough" - unless you wish to revise my wording further. --LadyGeek 17:57, 1 April 2015 (MDT)

Yes I've revised the wording slightly, see if you still like the sentence. Thanks, --Quebec 14:14, 2 April 2015 (MDT)

I still like the sentence. The meaning has changed slightly, but it's more tuned to the context of the discussion. --LadyGeek 20:45, 2 April 2015 (MDT)