Here is a guest post I wrote for Crystal @ www.Budgetinginthefunstuff.com. Check her site out when you get a chance.
This morning wasn’t the usual morning. Late-night storms left much of Charlotte out of power with noticeable debris on the roads. Replacing stop lights with policemen caused my morning commute to last 2 hours (which it’s usually not). I was understandably PO’d until I cranked up the radio and heard one commercial which stole my attention for the rest of the ride.
It was a Mortgage Loan Officer convincing people to switch from 30-yr mortgages to 15-yr which I’m completely onboard with (assuming your budget allows). The benefit is undeniable when comparing the difference in interest you’ll pay, but I had a major problem with what he said next: “No one is making money in stocks; no one is making money in the market. Any extra money you have should go towards your biggest asset, YOUR MORTGAGE!”
Problem #1 – I believe the house is the asset, the mortgage is a liability.
Problem #2 – Who is No one? And why aren’t they making money right now?
This small radio advertisement had me reevaluating my personal situation. I currently have $9200 left to pay on my student loan at an interest rate of 4.8% (much like you’d see on a mortgage). Last year, after my Roth IRA contribution and making sure I had an emergency fund to cover 6 months, I invested $12000 into a Mutual Fund. I’ve been extremely pleased with the 16% it’s been earning. The way I see it, if I can earn >4.8% then why would I bother paying off my student loan? I wouldn’t be losing money per se, but I’d be foregoing earning more. If I left the $12000 in my savings account earning 1.2% then I would certainly pay off the loan.
This is what I call “Indebting vs. Investing.” Should I pay down debt or invest funds? The answer to your specific scenario isn’t just about numbers, it’s about Psychology; it’s how you think. I broke it down to Earning more or Finding Freedom. What drives you more?
As long as the interest I pay on my loan (mortage or student) is less than the interest I can earn by investing, I’m not going to worry about my debt. This is because I’m more driven by earning more rather than finding freedom. If I were to be offered a job that pays more than my current one, but requires more time away from home and in the office, I would accept the new position. No matter what the circumstance (within my morals) I would choose to earn more.
On the other hand, someone else may value their freedom more. In the above scenarios they would:
1. Choose to pay off the loan because they don’t like the feeling of owing someone or worse, being “owned” by someone.
2. Turn down the job offer so they can have more free time.
So when asking yourself if you should pay down your debt or invest your excess funds, first ask yourself what kind of person you are (you may surprise yourself). To some, time is money. To me, money is money.