Does it make sense to pay off debt?

**autoxer** · 07-03-2014, 07:21 AM

Originally posted by Nika View Post

So in effect, am I paying anything for carrying this debt? I'm paying 2%, but this debt money gets devalued more than that every year.

If you are trying to decide between using money to pay down debt, or using it to invest, then you should be comparing the interest rate to what the investments are earning, not the rate of inflation. If you put the savings in a money market, then you would probably be paying more in interest on the debt, then you earn in interest on the savings.

If the investments are earning more than the debt is costing you, then you are better off investing.

**Weird Tolkienish Figure** · 07-03-2014, 07:35 AM

Originally posted by Nika View Post

Mathematically, I mean, from the cold hard numbers perspective.

Say we have a student loan at 2.125% fixed, and a car loan at 2%.
Which is pretty much at the official inflation rate. So in effect, am I paying anything for carrying this debt? I'm paying 2%, but this debt money gets devalued more than that every year.

If you go by not the official rate, but counting the items that are not in the basket (food, gasoline, airfare, etc.) that are rising in price, than inflation rate for our family personally is higher, probably above 6%.

So does it make sense to pay off this debt early?
I do have the money to pay it off, but right now I'm keeping this money invested.

I'm conflicted about this. Am I missing something?

Not really a Dave Ramsey fan but he said something like "managing your finances is 90% behavior and 10% mathematics" which is pretty much 100% true for most people. However, if you don't have this problem then mathematically you may very well be correct.

For me being debt free is a psychological thing, rather than one of pure mathematics.

**bjl584** · 07-03-2014, 09:26 AM

There's something to be said for being completely debt free.

But, if you can manage debt, and the interest rates are low enough, then I don't have a problem with hanging onto it and investing the money instead.

**ua_guy** · 07-03-2014, 09:52 AM

There's real cost, and there's opportunity cost. For example, I have a 0% vehicle loan balance that I could pay off today with savings, but it might not be a good idea to do so. My EF would be temporarily sub-optimal, and I'd lose interest earned on the same money as it sits today in a MM savings acount. There may be opportunity in having that money in savings for a large unexpected expense, but the psychological benefit of holding the vehicle's title in my hand and not being in debt to a bank for it, is strong too. The numbers say "NO", but to do so is still attractive. The other opportunity cost is taking that same vehicle payment and throwing it into my retirement investments which are momentarily doing quite well. I'd lose the MM savings interest on the money used to pay off the loan, but I'd more than make it up investing that same money tax-free.

It all comes down to choices.

**moneysma** · 07-03-2014, 04:27 PM

Speaking purely from a financial perspective, you have to look at the interest rate you are paying versus what you could earn by saving/investing the money. Can you earn more than 2% out in the market? Sure.

But does this make sense for you? Only you can answer that. If you can't sleep at night or are concerned you have debt, then throw out the fact you can earn more by investing your money and pay off the debt. You'll sleep better and will feel better.

If the debt doesn't bother you, then invest the money instead. The great thing (though to some annoying thing) about personal finance is that at the end of the day, you have to do what works best for you. I could sit here all day and tell you to invest and not pay off the debt, but it might not be right for you, specifically.

I personally have a car loan at 1.9%. It doesn't bother me at all, so I make the minimum payment each month and invest the extra money I have. In the end, it's what works for me.

**LivingAlmostLarge** · 07-04-2014, 09:25 AM

Also if you ever want to buy a different home they could look at debt to income ratio. But otherwise who cares?

**dojo** · 07-05-2014, 11:20 AM

What does debt mean to you? In our case it would completely mess up with our 'freedom'. We like to travel and have left the country 3 times already. I was in debt and it was a 'brake', so I'd never do it again. If it's something that doesn't go against your lifestyle and the math is good, you can keep it.

**Patrick_OG** · 07-12-2014, 10:17 PM

I always prefer to be debt free. I know that all of my income can be spent on things that i enjoy rather then one interest and extended payments.

**Patrick_OG** · 07-12-2014, 10:18 PM

Originally posted by dojo View Post

What does debt mean to you? In our case it would completely mess up with our 'freedom'. We like to travel and have left the country 3 times already. I was in debt and it was a 'brake', so I'd never do it again. If it's something that doesn't go against your lifestyle and the math is good, you can keep it.

I used to own a fish called a dojo. I was a fresh water eel.

**Dsquared513** · 07-12-2014, 11:34 PM

I think the OP's logic is that if his interest rate on the loan is the same as the rate of inflation then there is no difference (mathematically) between paying the interest on the loan or losing the value of his wealth from inflation. This doesn't account for the compounding of the interest on the loan, but there's more to the mathematics of inflation also. However; inflation is very insidious and not as easy to see and track as the nice neat numbers on your loan statement, along with the fact that planning to save instead of pay down debt is not the same as doing it. This is why credit cards can offer 0% for a year or two, if people would save money and pay their balances off then the company would be losing money due to inflation, but as far as I can tell the credit card companies are doing ok.

**greenskeeper** · 07-13-2014, 02:15 PM

paying down/off the debt is a guaranteed rate of return, any other investment is a crap shoot other than fixed rate investments.

**krantcents** · 07-13-2014, 04:09 PM

At 2%, you can certainly earn more in the stock market. At the very least, bonds or dividends are paying more. I have a 1.99% car (5 year) loan which I am paying off in less than 3 years. I still invest the max in my 403b (401k), Roth IRA and IRA. I will retire in about 3 years.

**youshallliveinoverflow** · 07-18-2014, 03:41 PM

Being debt free opens up options for you. It puts you in the drivers seat.

Does it make sense to pay off debt?