Pay Off Debt Or Not?

[Token74]

My financial advisor hates my attitude to debt, he goes bonkers with me! Debt is so cheap, he believes I should be maxing my debt and offsetting with investments. But...I hate debt so other than a bit of mortgage, I refuse to have any debt.

So my advice, which is bad financially but good for the soul, is pay off the debt!


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[Jfullm42]

I follow the Dave Ramsey Principles, so.... I'd pay it off :)

[austinp]

Thank you all so much for the replies. The math and my practical/logical side is whats keeping me from using the gains to pay the debt. This account started out as a fun money account 25 years ago in college but has since grown to what I call 'real' money. Im relatively cautious with my spending and have never withdrawn from this account. It doesn't factor in my retirement plan. I am getting older so the idea of no debt is starting to appeal to me more. The mortgages will be paid in 10-13 years. 2 of which are investment properties. I think i will take this next year to think more about this more.

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[GradyPhilpott]

I don't know anything about money, but I do know that living debt-free is a wonderful feeling.

[Razorbackrolex]

Our first financial advisor believed that as long as interest low, saving more money that gains more interest is best policy vs paying aggressively on debt. So over last 5 years we have saved about twice as much money as the total of our debts. We are talking to new advisor (for several reasons) who feels like we should take advantage of market being high, sell off half and pay off the debt. I am about to turn 40. Part of me feels excited about being debt free at 40 but part of me feels nauseated about seeing our savings/investments cut in half. Feels like a big setback...

[Tricolore66]

Paying off debt is the same thing as a no-risk return on your money without tax consequences, so generally it makes sense to do it. The contrary view is that it's only a good idea if you don't plan on just starting to accumulate debt again once you're clear of it. Historically that's what the overwhelming majority of the population will end up doing. Pretty much everyone I've known who got themselves deep into credit card debt and got a HELOC to pay it off just started over and ended up in the same place in a few years, only without any equity left in the house.

If you were going to cash out your brokerage account now is probably the time to do it, as others have pointed out virtually every analyst sees a correction coming sooner rather than later.

It also doesn't have to be all or nothing, so maybe keep the mortgage that nets you the best interest deduction.

[sokoloka]

I tend to err on the side of caution and lean towards the debt free camp. Doesn't have to be all other nothing however - never a bad idea to take gains off the table and start knocking out your debts one at a time.

I personally would clear all the debts you have, and be pumped to see how quickly everything builds back up when a % of your money isn't going out the window to interest.

Everyone is different however.

[Widows Son]

If the interest you're paying on your loans is higher than the interest you're gaining on your investments, it makes sense to pay off your debt. When I retired from the PD I had about 2x in my deferred comp account than I had left on my mortgage, a guy at work said to pay off my house. I was making 2x in interest on my 403B than my mortgage plus I was able to deduct the home interest on my income taxes. I told him he was crazy!!!

[Fat_ninja]

So many conservative guys here. That’s prob the right advice for 99% of the people out there.

[1st amg]

Now that I know your situation a bit better I can give you my personal opinion. Pay off the debt. But, the investment property, no way. Let the renters pay it off for you. Makes no sense to me to pull money out of my pocket to pay off the business property. Then, the renters money if paid off will be taxable at a much higher rate.



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[superdog]

Originally Posted by 1st amg

Now that I know your situation a bit better I can give you my personal opinion. Pay off the debt. But, the investment property, no way. Let the renters pay it off for you. Makes no sense to me to pull money out of my pocket to pay off the business property. Then, the renters money if paid off will be taxable at a much higher rate.



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Well that makes a lot of sense.

[locutus49]

We paid off our debt for psychological reasons, it made us feel free. Yes, we might of made a few bucks if we kept debt and invested the money, but being debt-free is a feeling like no other. Just one opinion.

Originally Posted by austinp

My brokerage account has grown to the point that its now slightly surpassed the amount of all of my debts. 3 mortgages, 2 car loans, and a Heloc. Would it be smart to sell the stocks and pay them off or keep paying the loans? This account is separate from my retirement accounts. Ive never minded borrowing inexpensive money but the idea of being debt free sounds pretty good as well.



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[mfer]

It’s a mix. HELOC is prob highest %, followed by cars. 3 mortgages is its own story. Rentals etc. being debt free would be liberating for me. Just a mortgage for myself. One day.

I could sell enough and pay off all my loans but likely doesn’t make sense for my scenario.

Edit. Saw your response. Do a mix. Get rid of heloc at a min. It is the worst debt unless you have a special deal. Keep rentals for tax reasons. More importantly, I’d ask your cpa.

[Tony64]

Originally Posted by mobster600

If you can make more in the market then your yield your paying on your debt, then keep the debt.

Honestly I wouldn’t keep any debt higher then 4%. I’d pay off some debt.

^^^ This makes sense to me.

Trust the math and leave feelings out of the equation. Money and emotion are notoriously bad bedfellows.

[rob1200]

Originally Posted by austinp

Thank you all so much for the replies. The math and my practical/logical side is whats keeping me from using the gains to pay the debt. This account started out as a fun money account 25 years ago in college but has since grown to what I call 'real' money. Im relatively cautious with my spending and have never withdrawn from this account. It doesn't factor in my retirement plan. I am getting older so the idea of no debt is starting to appeal to me more. The mortgages will be paid in 10-13 years. 2 of which are investment properties. I think i will take this next year to think more about this more.

Based on your comments about 25 years and never having withdrawn from the account, you will be facing a very large capital gains tax bill if you were to sell these stocks. In the absence of additional info, it's probably better that you keep these investments rather than selling to pay off mortgage debt.

If you have children and plan to leave them an inheritance when you pass away, these stocks would be a perfect candidate. The cost basis of the stocks would be reset to the current market price when inherited. Another way to avoid capital gains taxes when selling stocks is to fund a college education with the proceeds.

[Lgear080]

Solid advice here OP ... I’m sidelining some holds for similar concerns.

[mikea]

Opportunity cost. If your investments are out earning the interest on debt...I’d stay put

[Wcdhtwn]

I wouldn’t all at once. Pay off the car loans and see if that improves how you feel about your debt situation. Having an emergency fund is a basic financial foundation, so don’t give that up to save some interest expense. If you lose your job or something else bad happens you’ll still have to pay to live. If you use all your savings you’ll be back to living on debt, credit cards specifically, and how will you pay those off?

[Tricolore66]

I just did some car swapping and took around $100k loan at just over 3% (Porsche GT3) until I sold another car to pay it off. Sold the other car and have plenty to pay off the Porsche and then some. I called my broker and and asked his opinion regarding keeping the loan (my pre-tax gains have been 2x+ return compared to the loan interest, and accelerating the payoff to knock it out in a couple of years. He said I'm already tracking where I need to be regarding retirement and there's no point in investing at the top of the market right now, so pay off the Porsche. The thought of owing significantly more for a car than I owe on my house makes me dizzy so I'm doing that this week.

[LandWatch]

No one can really answer this for you, but there are two elements to consider; financial and psychological. First, do the maths on the interest rates. Then consider your psychological attitude to having debt. Pay off high interest first. Let rental tenants pay mortgage on rental properties.

And invest as much as you can afford into low cost S&P 500 index funds. Once it’s invested, forget about it. The market will rise, fall, rise again. Volatility is expected, the important thing is not to get spooked an sell when it’s down! That’s exactly the time to buy more.

[GoingPlaces]

At the very least pay off the cars and the heloc for sure. I think you should keep at least 1 to 2 years reserves and then pay off whatever you can of the remaining mortgages.

[Keadog]

Debt free feels great.

[AzPaul]

Cash it all in and head to Vegas.

[1William]

Without knowing how much money we are talking about and what you and your families financial goals are makes it a little tough to offer advice beyond the basics. Vehicle ownership is almost always a loser financially but it is a lot of fun and depending on where you live, a necessity. I do not pay off cars typically as I trade on a 2-3 year window. I have made my car expense part of my entertainment expense and a portion of the payment is offset by these funds. Mortgage and rental property is a different thing and financial advisers will be able to better advise you as they will have the specifics of your goals and situation. I have set up my families expenses to be covered by my pension and my wife's job covers the extras. Should everything hit the fan we can pay our mortgage, vehicles, insurance etc. and never hit our savings. We would not have a lot of extras but we are covered. I would look at setting up things in a hope for the best but planning on the worst. I think most of us end up in the middle. I would not owe any more on my primary mortgage than what the tax benefits meet. I would also have ready cash reserves that can be accessed without tax liability for any need. Good luck with everything.

[encarter13]

Two main arguments are something like:
1 - Why would I pay off debt when my return rate is higher than my interest rate?

2- Being debt free removes the burden of worry from your life.


That being said, why don't you take a combo approach?

Cash in 50% of your brokerage account and pay off all the cars, the HELOC, and as much of the 3 mortgages as possible. Then, consolidate the money you were paying for everything and apply it to your remaining balances (debt snowball method). You should be debt free rather quick.

By only cashing in 50% you can continue to make money while the market is good. If there is a correction, you are still fine because the 50% you cashed was essentially removing all the profit you have made over the years.

Once all debt is cleared, start to build the brokerage account back up.

[123Blueface]

Originally Posted by brandrea

You’re going to get a lot of varying opinions (which is a good thing).

IMO, it’s never a bad idea to pay off debt. Being totally debt free is a wonderful feeling.

Agree, as long as doesn’t get right back in debt again.

[JohnGingerwood]

I would probably pay off the cars. What's the rates on the mortgages? Any plans of selling any of the homes soon?

[singe89]

Take taxes into consideration when cashing out large amounts of stock in a single year. CA you can get hit with up to a 13.3% income tax as well as 20% federal cap gains and 3.9% obamacare surtax. Since we are close to the end of the year it might be better to take only the long term cap gains and spread it out over 2 tax years.

I like being debt free except I will carry a mortgage on my primary property (low interest rate, low loan vs value and get a tax deduction) as well small ones on my investment properties as long as rent income is significantly higher than the costs. No car payments, no CC debt, no student loans, no HELOC, etc.

Market is on a long run right now but most of my non qualified accounts have been in cash for a few months. Not a great idea though because my wife convinced me we needed to remodel the outside of our house with a pool entertainment area and kitchen. Break ground tomorrow. Don't like spending $ but being pretty much debt free and saving $ allows these larger expenses without taking out debt.

[PackPride]

If you have loans that most of the interest has been paid already (interest is paid first on most loans), there is little point in emptying your account to pay principle.


Want to correct this one-

The percent interest you pay is the same at the start of the loan as at the end. A simple interest loan multiplies the amount owed by your interest rate. So you aren’t paying all of the interest on the front of the loan. It’s simply the balance owed is higher on the front end so you are paying a lot more interest.

For example (using easy numbers), if you took out a new mortgage of $100k and had a 1% monthly interest rate you would pay $1,000/month in interest charges the first month. Years later you have paid the principle down to $50k- that same 1% now costs you $500. It’s not because you paid the interest on the front it’s because of the owed balance.

[tadbart]

Though this board is a little more "refined" than most of the other boards I visit, I feel it would be a travesty to not at least suggest

"Hookers and blow."