Author Topic: Pay down debt or invest - continued discussion  (Read 2475 times)

Behemoth

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Pay down debt or invest - continued discussion
« on: October 16, 2018, 01:33:57 PM »
Summary:
  • Current MBA student graduating in May
  • Approximately $100k in student loans (will likely refinance ~4.5%)
  • Full time job as an associate in an investment bank (Chicago) starts in June

It would be great to get some advice and thoughts from the community as sort of a follow up to this post:

https://www.financialsamurai.com/pay-down-debt-or-invest-implement-fs-dair/

With the debt interest rate at 4.5 to 5%, Sam suggests a 50/50 split on debt paydown and investments.

I have a high risk tolerance, but I am curious to hear what others think.

Orphan

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Re: Pay down debt or invest - continued discussion
« Reply #1 on: October 16, 2018, 03:40:48 PM »
I am with Sam on this one. 50/50. With the exception of credit card debt. Credit card debt should be nil or very close to it.

Sam

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Re: Pay down debt or invest - continued discussion
« Reply #2 on: October 16, 2018, 11:08:10 PM »
I'd stay at 50/50, even though 4.5% is more attractive now that the 10-year bond yield is at 3.5%.

We've had such a bull run that I wouldn't mind locking in a 4.5% annual return starting in 2019 for the next several years.

Congrats on landing your job! Was it hard to get in this job market? How as your MBA experience? I can't believe how expensive it is now. I have a post in the queue.
Regards,

Sam

Behemoth

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Re: Pay down debt or invest - continued discussion
« Reply #3 on: October 17, 2018, 05:50:54 AM »
Quote
Congrats on landing your job! Was it hard to get in this job market? How as your MBA experience? I can't believe how expensive it is now. I have a post in the queue.

Associates are in extremely high demand and I was able to land multiple offers. Since there are a lot more people going to tech and consulting, banks are having to adapt (lifestyle changes, higher pay, etc.)

My MBA experience has been great. There is absolutely no chance that I would've been able to land this job without getting a top MBA. I was formerly in the Marine Corps and before my MBA, hadn't taken a math class since high school. The GI bill paid for half my school, but I still have quite a bit of debt due to having a family and the higher expenses that come along with that  8)

I think whether or not an MBA is "worth" that amount of debt is on a case by case basis. It makes a lot of sense for some people and absolutely zero sense for others.

One thing I have seen - the vast majority of my class are attempting to totally switch careers.

nycrite

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Re: Pay down debt or invest - continued discussion
« Reply #4 on: October 17, 2018, 10:32:48 AM »
50/50 smells about right. In addition to investment returns vs. interest on debt, I would consider your risk tolerance. With a recent bout of market volatility, it could be disheartening to put 50% into investments only to see them correct by 10% or more, especially when that could have made an additional dent in your debt (a guaranteed return in the form of interest avoidance). So if you're risk averse, you may slide the scale in favor of more debt repayment at the expense of investment returns (40/60). Perhaps you're risk seeking. Then, you may slide the other way. No matter what, invest enough to get the guaranteed return of 401k matching, etc. etc.

Money Ronin

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Re: Pay down debt or invest - continued discussion
« Reply #5 on: October 17, 2018, 09:32:33 PM »
I'm going to disagree with everyone so far.  I'm going to assume the 4.5% rate is fixed for 10 or more years.  In your situation, go big on debt for the following reasons:

1. You have a high risk tolerance
2. You have a high earning steady pay check after graduation that helps with #1
3. 4.5% is still a historically low rate--if that's a fixed rate, you're unlikely to get a better rate in the near future
4. With your MBA and banking background, I should hope you can get returns better than 4.5% over the long run
5. Interest rates are climbing.  If you put money in a CD or T-bill instead of paying down debt, you'll likely get a higher rate as time passes.
6. Sooner or later, you will buy a house or perhaps invest in a rental property. That borrowing rate will be at least 4.5%.
7. Outside of a home loan and student loan, it's difficult to get a fixed low rate over a long period (> 5 years).  I have a HELOC, I have a margin line, I can borrow against my apartments, I can even get a car loan, but no lender will lock a low 4.5% rate for 10 to 30 years.

I have an MBA as well and practice what I preach.  I'm highly leveraged because I have a long investment horizon, high risk tolerance, other sources of income, and confidence that I can do better than 4.5% over the long run. 

PDXOregon

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Re: Pay down debt or invest - continued discussion
« Reply #6 on: October 18, 2018, 08:45:24 PM »
https://www.cnbc.com/2018/09/19/kevin-olearys-top-advice-for-paying-off-student-loans.html  -- I ran across this article last month. . . for whatever it is worth.

Jon Sharpe

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Re: Pay down debt or invest - continued discussion
« Reply #7 on: October 19, 2018, 05:37:58 AM »
I'm going to disagree with everyone so far.  I'm going to assume the 4.5% rate is fixed for 10 or more years.  In your situation, go big on debt for the following reasons:

1. You have a high risk tolerance
2. You have a high earning steady pay check after graduation that helps with #1
3. 4.5% is still a historically low rate--if that's a fixed rate, you're unlikely to get a better rate in the near future
4. With your MBA and banking background, I should hope you can get returns better than 4.5% over the long run
5. Interest rates are climbing.  If you put money in a CD or T-bill instead of paying down debt, you'll likely get a higher rate as time passes.
6. Sooner or later, you will buy a house or perhaps invest in a rental property. That borrowing rate will be at least 4.5%.
7. Outside of a home loan and student loan, it's difficult to get a fixed low rate over a long period (> 5 years).  I have a HELOC, I have a margin line, I can borrow against my apartments, I can even get a car loan, but no lender will lock a low 4.5% rate for 10 to 30 years.

I have an MBA as well and practice what I preach.  I'm highly leveraged because I have a long investment horizon, high risk tolerance, other sources of income, and confidence that I can do better than 4.5% over the long run.

I would agree with Kevin O'leary on this one. Your expenses will likely only increase over time and while your career may take off, not all do. You may be glad to have that student loan monkey off your back sooner rather than later. This is a risk mitigation strategy, not a portfolio optimization strategy. But, you never know what the future will bring.

Sam

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Re: Pay down debt or invest - continued discussion
« Reply #8 on: October 20, 2018, 08:46:22 PM »
Behemoth - I've heard the finance companies have had to adapt to a better work life balance due to so many people going into tech.

Lucky you guys! It was a grind when I was in banking. No mercy! Sweep the leg.

Sam
Regards,

Sam

Rdizzle

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Re: Pay down debt or invest - continued discussion
« Reply #9 on: October 29, 2018, 11:21:11 AM »
I'm a big believer in holding no debt except mortgage. Missing an investment payment hurts no one. Missing debt payments can cause long term financial damage. While I'm not at all risk averse I tend to avoid debt like the plague. Easier to use your full financial might and eradicate it quickly before quickly watching your positive balances rise with nothing to negate them on the opposite side of the net worth scale.

jm0365

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Re: Pay down debt or invest - continued discussion
« Reply #10 on: November 01, 2018, 12:59:00 PM »
I've never regretted paying off debt. I you can get that off your back now, you'll thank yourself for the next 50 years.

Money Ronin

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Re: Pay down debt or invest - continued discussion
« Reply #11 on: November 02, 2018, 11:24:39 PM »
I'm going to chime in again as the minority opinion.  Especially as someone going into finance, you should be well-equipped to learn to manage and master debt, not just avoid or fear it.  I regularly shift debt around to where I get the best terms.  I increase/decrease debt depending upon investment opportunities.  Debt/leverage is an important component of wealth building.  I didn't have a finance career, so you are ahead of the game.  Take advantage of your knowledge and access to favorable debt.

If you're a reader of this site and going into a career in finance with an MBA from a top school, I would be willing bet that like Financial Samurai, your rate of increase in your income will exceed that of expenses (because you have the power to manager your expenses).  You're at the start of your career--this is the time to play offense not defense.  I'm going to attempt a military analogy.  If you dropped a civilian in a war zone, the best advice for him/her would be take cover and maybe safely retreat.  If you drop a Marine into a war zone who was specifically trained for the mission, I would expect him/her to advance.

To me, 4.5% (if fixed for a long-term, e.g., 7 years or more) is "good" debt, and it will only become more valuable as the cost of other types of borrowing increases.  Think of it like a reverse bond, so when interest rates rise, the value of your fixed term loan increases.

I recently did a cash out-refi netting me $300K in cash at 4.5% for 5 years.  In the past I would have used it to invest in more real estate.  I feel that cycle is topping out.  Now, I'm waiting for a downturn in the stock market (or some other investment opportunity) and will have the cash to take advantage of it.  I'm willing to pay the 4.5% for that shot.  I currently have the funds in a money market account earning 2.25% so at least I've cut my short-term loss in half.

mbb_boy

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Re: Pay down debt or invest - continued discussion
« Reply #12 on: November 06, 2018, 06:31:51 AM »
Another Marine Corps Officer turned MBA here (went consulting instead of IB though). We should be internet friends

Mark me down as another vote to ignore the debt, and focus on investing instead. 4.5% guaranteed return is attractive generally speaking, but based on age, lack of cash flow issues, and high risk tolerance --> I think you should invest with the intent of beating that rate. Historical norms support the odds, and your financial flexibility is likely to decrease over time (house, marriage, kids, etc), unless until retirement that is! This is the best season of your life to make the "high" risk financial decision.

Although to level set, investing to beat 4.5% doesn't really require truly high risk decisions - plain vanilla VTSAX should deliver that for you. Make sure you have an emergency fund and I think you're all set

Behemoth

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Re: Pay down debt or invest - continued discussion
« Reply #13 on: January 08, 2019, 04:00:34 AM »
SF! I agree with your POV.

Nigel

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Re: Pay down debt or invest - continued discussion
« Reply #14 on: January 09, 2019, 04:09:46 AM »
50/50 is fine once you are settled but for a fresh out I would first:

  • max out 401K matching
  • priorize building emergency fund with remainder exceeding 50/50 ratio until complete

Once the fund is built then go 50/50 into tax advantaged investment and loan pay down.  I might do a little more loan if you don’t get the student loan interest tax deduction.  Volatility is high but you don’t want to time the market and miss the good days.

If you want military analogies...every good commander keeps reserves.  Develop your two ECOAs...most likely and most dangerous.  50/50 covers the most likely scenario.  What covers the most dangerous?  Building tactical and strategic reserves first.

david123

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Re: Pay down debt or invest - continued discussion
« Reply #15 on: January 09, 2019, 06:35:36 AM »
Here is the way I deal with debt and investments -
1.  Pay off credit cards every month (NEVER pay interest)
2.  Pay off other loans on a monthly basis (normal payment, or a little more - mortgage and cars or student loans).
3.  Invest monthly - dollar cost average in 401K and regular account - do it though automatic investments so you don't have to think about it
4.  Pay down student loans, cars, mortgage with "extra" money - work bonus, tax refund, gifts, inheritance, ...

Works well if you get annual bonuses.

Also - live below your means.  A lot of people when they get a job and have money go a little nuts with spending.

Sam

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Re: Pay down debt or invest - continued discussion
« Reply #16 on: January 09, 2019, 08:06:58 AM »
Here is the way I deal with debt and investments -
1.  Pay off credit cards every month (NEVER pay interest)
2.  Pay off other loans on a monthly basis (normal payment, or a little more - mortgage and cars or student loans).
3.  Invest monthly - dollar cost average in 401K and regular account - do it though automatic investments so you don't have to think about it
4.  Pay down student loans, cars, mortgage with "extra" money - work bonus, tax refund, gifts, inheritance, ...

Works well if you get annual bonuses.

Also - live below your means.  A lot of people when they get a job and have money go a little nuts with spending.

Absolutely on paying off credit cards in full each month. Not even the great Warren Buffett has made an annual return equal to the average credit card interest rate!
Regards,

Sam

david123

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Re: Pay down debt or invest - continued discussion
« Reply #17 on: January 09, 2019, 12:02:44 PM »
Here is the way I deal with debt and investments -
1.  Pay off credit cards every month (NEVER pay interest)
2.  Pay off other loans on a monthly basis (normal payment, or a little more - mortgage and cars or student loans).
3.  Invest monthly - dollar cost average in 401K and regular account - do it though automatic investments so you don't have to think about it
4.  Pay down student loans, cars, mortgage with "extra" money - work bonus, tax refund, gifts, inheritance, ...

Works well if you get annual bonuses.

Also - live below your means.  A lot of people when they get a job and have money go a little nuts with spending.

Absolutely on paying off credit cards in full each month. Not even the great Warren Buffett has made an annual return equal to the average credit card interest rate!

My other credit card wisdom (maybe that is too strong a word), is that there are a lot of advantages to having and using credit cards.  I'm shocked that some people I know are afraid of them and don't have any.
1.  Establish a credit rating
2.  Relatively secure to use - even when they get compromised (which they will), credit companies are getting much better and recognizing fraud, and you are not responsible.
3.  Find one with good reward program - it does add up
4.  Convenience of not carrying cash
5.  Most utilities and services let you automatically bill your credit card (to get more points)

I don't apply for store cards.  I have 2 major credit cards (Visa or Mastercard).  One I put all my recurring charges against (Utilities, streaming services, gym membership, ...) and the other I use for purchases, online or in person.  The recurring charge card never gets compromised, the other one does every year or so.  This way, I don't need to change my recurring charges to a new card very often.

Behemoth

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Re: Pay down debt or invest - continued discussion
« Reply #18 on: January 12, 2019, 03:48:07 AM »
Here is the way I deal with debt and investments -
1.  Pay off credit cards every month (NEVER pay interest)
2.  Pay off other loans on a monthly basis (normal payment, or a little more - mortgage and cars or student loans).
3.  Invest monthly - dollar cost average in 401K and regular account - do it though automatic investments so you don't have to think about it
4.  Pay down student loans, cars, mortgage with "extra" money - work bonus, tax refund, gifts, inheritance, ...

Works well if you get annual bonuses.

Also - live below your means.  A lot of people when they get a job and have money go a little nuts with spending.

My question is specifically about whether or not I go 50/50 on debt/investing or take another strategy (for a student loan). Not looking for credit card wisdom (although I appreciate the thought)