Pay Down Debt Or Invest? Implement FS DAIR

The decision to pay down debt or invest is a personal one. It depends on a lot of factors such as risk tolerance, your number of income streams, liquidity needs, family expenses, job security, investing acumen, retirement age, inflation forecasts, and bullishness about your future in general.

I've had hundreds of people ask me whether to pay down debt or invest over the years. As a result, I came up with the Financial Samurai Debt And Investment Ratio, or FS DAIR for short back in 2014. Despite interest rates plunging since then, the FS DAIR framework still holds up strong.

The FS DAIR formula for deciding whether to pay down debt or invest is as follows:

Debt interest rate X 10 = percent of cash flow after living expenses allocated towards debt pay down

In other words, if you have a mortgage with an interest rate of 3%, utilize 30% of your monthly cash flow after living expenses each paycheck to pay down debt. Invest the remaining 70% of your cash flow based on your investment preferences.

If you concurrently pay down debt and invest, it's very hard to lose in the long run. Ultimately, it's best to be debt-free when you retiree or no longer have the desire to work.

As the CFO of our own finances, it's up to us to figure out the most efficient use of capital. With FS DAIR, you will approach paying down debt or investing in a rational manner.  

Basic Background Of Interest Rates And Returns

When deciding on whether to pay down debt or invest, it's good to get some fundamental background on interest rates and risk asset returns.

Stocks have historically returned as little as 1% in the 2000s to as high as 19.58% in the 1950s. The average stock market return since 1926 is roughly 10%.

We also know that the 10-year yield has come down from 14.5% in the mid-1980s to around 1.6% today.

The 10-year yield is a great barometer for mortgage interest rates. But credit card interest rates have stayed stubbornly high all these years. We're talking 17-19% in the 1970s to still around 10%-15% today for good creditors.

When times are good, you generally want to invest more money and leverage up. When times are bad, you want to reduce exposure to riskier investments. You also want to improve your financial security by paying down debt and raising cash.

Given interest rates are so low now, there is a tendency for investors to chase yield. The risk is that investors allocate too high a percentage of their capital to risk assets at historically high valuations.

Lack of discipline can result in financial catastrophe. With FS DAIR, an investor with leverage always rationally allocates new capital. Use FS DAIR to decide whether to pay down debt or invest.

Everything Is Yin Yang In Finance

Finance is Yin Yang. Nothing happens in a vacuum. If income growth, the stock market, and inflation all start going ballistic, the Fed will raise interest rates more aggressively to contain inflation. With higher borrowing costs, stocks may fall and income growth may fade. As a result, inflation may come down.

In a protracted bear market with falling stock prices, deflationary income, and rising unemployment, the Fed will lower rates to stimulate the economy through more borrowing.

This is exactly what the Fed did after the dotcom bubble burst in 2000, the housing market crashed in 2008-2009, and the economy tanked in 1H2020 due to the global pandemic.

Unfortunately, the Fed's actions can also create asset bubbles, which often end in tears. Using monetary policy to tweak the economy is not easy, but we're getting more efficient at it.

Interest Rates Tell Us A Lot

You can view interest rates as a reflection of inflation. Tell me the interest rate on a savings account in any country and I can tell you the country's nominal interest rate within a couple percent.

For example, a while back, a couple of readers commented they were earning an 8-9% savings account interest rate in India. That's an incredible return since the average US savings interest rate at the time was only around 0.25%.

The reason why Indian savings accounts were returning 9% a year was that nominal inflation in India was running at least 8% a year! The real interest rate was, therefore, only 1%. There is no free lunch.

The real interest rate is calculated by simply subtracting the nominal interest rate by the nominal inflation rate. In fact, many borrowers have negative real interest rates now because rates are low and inflation is high.

If you are getting a 100% raise a year, but all your costs are going up 100% a year, you're swimming in place. Everything is always relative in finance.

Property Buying During A Low-Interest Rate Environment

Real estate in America is hot partly because mortgage rates have come down. I believe the best time to buy property is when you can afford to do so mainly due to inflation.

Given the average property value is multiples higher than the average income, property will eventually become unaffordable for more and more people due to inflation.

For example, if a $1 million dollar property increases by 3% a year and your $100,000 a year income also increases by 3% a year, you are actually falling behind by $27,000 a year!

You have to increase your income by 30% a year just to keep up! The alternative way a potential homebuyer can benefit is when mortgage rates decline. However, hope is not a great wealth-building strategy.

If you can't afford to buy your primary residence, then at least gain exposure to real estate through REITs and real estate crowdfunding investments around the country.

I personally invested $810,000 in real estate crowdfunding in 2016 and 2017. My investments mostly are in heartland real estate where valuations are cheaper and rental yields are much higher.

What To Do When Interest Rates Increase?

If you believe interest rates will be rising, then your existing debt becomes “more valuable.” When your debt becomes more valuable, you should, therefore, hold onto your debt for longer.

For example, let's say you are borrowing at 3%, but comparable loans rise to 10% in three years. The value of your debt increases because other people would be willing to pay you more for the ability to borrow at 7% lower interest rates. Your debt is more valuable because it is relatively cheaper to fund.

In terms of investing, if interest rates rise to 10% then your investments should aim to return a level of 10% or higher to compensate you for the risk you will take (equity risk premium). Otherwise, you can just lend out your capital, which entails its own risk.

If you believe interest rates will stay stagnant at these low levels or decline, then you should be more inclined to invest in equities, real estate, REITs, private equity, and more given the opportunity cost or hurdle rate to invest in equities has declined.

For example, let's say the interest rate on a 5-year CD drops to 1% from 4%. Two percent-yielding stocks start looking more appealing now. Therefore, incremental capital will likely flow towards stocks.

In fact, common practice is to allocate more to equities whenever the S&P 500 dividend yield is greater than the 10-year bond yield. This is one of my favorite bullish indicators for stocks.

Pay Down Debt Or Invest? Financial Samurai Debt And Investment Ratio (FS DAIR)

Now that you've got a basic understanding of the correlation between interest rates, inflation, and investment returns, let's look at FS DAIR in more detail.

I truly believe FS DAIR is the most logical way to decide how much you should allocate towards paying down debt or investing. FS DAIR smartly helps you allocate capital based on the environment.

Once again, the percentage of one dollar you should consider allocating to paying down debt is the debt interest rate X 10. In other words, if your debt interest level for your student loan is 5%, then allocate 50% of your savings to pay down your debt and 50% of your savings towards investing.

There is one important point about FS DAIR that should also be followed. If you have a debt interest rate of 10% or higher, then you should consider allocating 100% of your savings to paying off that debt. I use 10% because it’s easy to remember and it’s the average return for stocks since 1926.

The only debt interest levels above 10% in this current interest rate environment are debts from credit card companies, payday loans, and loan sharks.

You might also be consolidating your debts by getting a personal loan through a lending marketplace like Credible. You should be able to get a personal loan interest rate that is much is lower than the average credit card interest rate.

Below is my FS-DAIR guide to help you decide whether to pay down debt or invest.

Financial Samurai Debt And Investment Ratio (FS DAIR) when deciding whether to pay down debt or invest

FS DAIR is not perfect. But it is formulated in a way that seeks to maximize the efficient use of your capital over time. In our current low interest rate environment, it is rational to invest more than pay down debt. If you follow the FS DAIR framework, you will remove emotion from your decision-making process.

Some of you might be asking what to do if you have multiple debts? The simple answer is to focus on paying down your highest interest rate debt first using FS DAIR.

Paying Down Three Types Of Debt Using FS DAIR

Let's say you find yourself with the following types of debt:

1) 16% interest credit card debt for $10,000

2) 9% interest on a personal loan

3) 3% student loan debt for $10,000 over 20 years.

Using FS DAIR, you would allocate 100% of every dollar saved beyond your comfortable liquidity level (6 months minimum is my recommendation) until the 16% credit card debt is paid off. Then you would allocate 90% of your savings towards paying down your P2P loan debt and 10% to invest. 

Once the P2P loan debt is paid off, then allocate 30% of each dollar saved towards paying off your student loans. The remaining 70% of your savings can be used to invest.

Of course, you are welcome to also pay down the smallest absolute dollar value debt as well to keep motivation alive.

Paying Off A Student Loan And Investing In A 401(k)

Now let's take a look at a common situation where a recent college graduate would like to invest in her 401(k) and pay down student loan debt.

1) 3% student loan debt of $25,000

2) 100% 401(k) company match up to $3,000

Allocate 30% of savings to paying down extra student loan debt each paycheck. At a minimum, contribute at least $3,000 in one year to get the full $3,000 match for an automatic 100% annual return.

Depending on disposable income, the ideal situation is to contribute the maximum possible to a 401(k) ($19,500 for 2021). This way, after 30+ years of contributing, you will likely have at least $1 million in your 401(k).

With any money left over, aggressively build a taxable investment portfolio in order to generate useable passive income.

Paying Off Mortgage Debt Example

Finally, here's another common example of deciding whether to pay down mortgage principal or invest.

1) 4% 30-year fixed mortgage and no other debt

2) $100,000 gross income

It's good to calculate the real mortgage interest rate after deductions. If you are beyond the standard deduction levels and can't figure out the exact deduction value, then a good estimate is to simply take your mortgage interest rate and multiply it by 100% minus your marginal tax rate.

In this case, 4% mortgage X (100% – 32% marginal tax rate) = 2.72%.

Use FS DAIR again to allocate between 27% to 40% of your savings towards paying down mortgage principal. The remaining 60% – 73% should be invested after paying for general living expenses.

Although it may feel off to pay down such cheap mortgage debt, your goal is to remain disciplined in following the FS DAIR framework. You never know how your risk assets will perform. If your risk assets perform poorly, at least you'll feel great knowing that you paid off some debt.

Of course, if you have a 4% 30-year fixed rate mortgage, a no-brainer move today would be to refinance your mortgage to <3%. I would check the latest mortgage rates with Credible, my favorite mortgage lender. Qualified lenders will provide real, no-obligation quotes in minutes.

Lowering your mortgage rate and then continuing to pay down extra principal is a power move.

When You Have No More Debt

So what happens when you no longer have any debt to pay off? The answer is simple. Enjoy life, throw yourself a party, continue building passive income streams, and make sure your money doesn't run out!

Paying down debt is a great feeling. I've never regretted paying off a mortgage in my 20+ years of owning property. Paying off my $40,000 business school loan with a 3.5% interest rate in 2008 also felt great too because the stock market imploded soon after.

However, making money in stocks, real estate, and other risk assets is what will make us richer over time.

If low interest rates are too tempting to ignore, make sure the debt payments are affordable. I've got the 30/30/3 rule for home buying and the 1/10th rule for car buying to cover the majority of purchases using debt.

I never recommend anyone carry revolving credit card debt unless there's just no other way. Credit card interest rates are simply way too high.

Boom times are here again in the stock market and real estate market thanks to an accommodative Fed, effective vaccines, a rebound in corporate earnings, and a recovery in job growth. Just make sure to stay disciplined if you have debt.

If you find yourself asking yourself whether to pay down debt or invest, I say always do both. This way, you'll guarantee to always do at least one thing right!

Related: Ranking Debt Types From Worst To Best

Achieve Financial Freedom Through Real Estate

Real estate is my favorite way to achieve financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income.

In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.

Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build your own diversified real estate portfolio. 

Readers, do you have a pay down debt or invest framework? In such a low interest rate environment, how much extra debt are you paying down each month if at all?

For more nuanced personal finance content, join 50,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off of firsthand experience. 

104 thoughts on “Pay Down Debt Or Invest? Implement FS DAIR”

  1. Hi Sam,

    I don’t have a finance background but I try to build models for certain long term household finance decisions like early primary home debt repayment. I’m having trouble justifying any early mortgage repayment based on my model. Please poke holes in it as necessary.

    Primary home (only debt) $1.82M current balance, originated late 2020 @ 2.875% 30 yr fixed. Total interest over 30 years comes to $947K for the loan. Applying your formula would put 17-28% of our extra savings toward early debt repayment – so call it $2K a month / $24K a year. That repays the loan around year 22. On the flip side, if I throw that annual $24K into the S&P at 8% CAGR * number of periods remaining for each tranche, I calculated $1.2M for throwing in the ~S&P rather than early debt repayment. Total interest paid at end of year 22 is $678K in the early payback scenario since the amortization schedule skews heavily toward interest in the beginning. So net interest saved is only $270K at a cost of losing a $1.2M S&P investment.

    But for someone who would like to be pretty much retired at the end of year 22 on this mortgage, in the early payback scenario I have the extra $96K a year not going to the mortgage. But in these next 22 years, there’s plenty of room for career growth (higher income), and coupling this higher income/inflation against the fixed $96K a year mortgage payments, doesn’t that become more affordable for years 22-30? Meaning at a targeted 3.03% average annual inflation for the next 20 years, that $96K is 80% less expensive then (assuming my employer has kept up with inflation raises).

    Thank you!

    ~Josh

  2. Hi Financial Samurai,

    I had a question about your definition of “cash flow after living expenses.” How do other savings/investments factor into that number? Is the FS-DAIR framework supposed to replace or supplement existing monthly debt payments?

    For example, let’s use the following numbers:

    – $10,000 in monthly gross
    – $1,000 to 401(k)
    – $3,000 in taxes
    – $1,000 mortgage with 3.5% interest
    – $500 to IRA
    – $2,000 in bills and general expenses

    That leaves a net of $2,500. In this example, do I apply the FS-DAIR framework to the $2,500 net (ie. $875 extra to the mortgage)? Or do I apply the framework to the $5,000 left after taxes and expenses (ie. $1,750 to the mortgage)? In the latter case, do I consider the payment I’m already making a part of that total (ie. an additional $750 on top of the $1,000) or do I make that in addition to the payment I’m already making (ie. $1,000 + $1,750 = $2,750)?

    In the section “Paying Down Mortgage Debt,” you say the following:

    “Use FS DAIR again to allocate between 27% to 40% of your savings towards paying down mortgage principal. The remaining 60% – 73% should be invested after paying for general living expenses.”

    It sounds like living expenses should come out of the 60% – 73% allocated to investment. That seems like a small amount to be investing, relatively speaking.

    I would appreciate whatever clarification you may be able to provide. Thank you.

    1. Hi Auggie,

      Thanks for your question. It can be both.

      At the basic level, it is the later. Your 401(k) contributions count as a part of the investment portion of FS DAIR. At the same time, I encourage readers to almost max out their 401(k) and take it as given. B/c the ultimate goal, if you want to achieve financial freedom sooner, is to build as large of a taxable portfolio as possible to generate as much passive investment income as possible.

      But once you get used to maxing out your tax-advantaged retirement accounts like your 401(k), then it is about using FS DAIR for your $2,500 in this example. And given you can get a mortgage for ~2.375% – 3% today, then I would only allocate 23.75% – 30% of your $2,500 to paying down extra principal, and investing the rest.

      Then again, since we have negative real mortgage rates today, you might want to pay down an even lower percentage of your cash flow to paying down your mortgage. It depends on how much idle cash you have as well.

      Sam

  3. Edina Chambers

    Is it truly possible to not have closing costs? I tried out the Credible referral you had and for a higher *but still lower than my current* interest rate, they are offering to cover the closing costs.

    I’m aware of points but I don’t see those mentioned. But I’m highly suspicious. It sounds too good to be true.

  4. Roger Stakes

    I have a 3.85% interest rate on an investment property, 30 year loan fixed and the balance of the loan that I have remaining to pay is 100k. I am currently renting out the property. Aside from this, I have 300k in cash in money market and 400k in cash in the stock market. Just want to get people’s opinion on here and I know its not financial advice.

    Option 1

    Simply pay off the 100k balance and then I fully own the property which I rent out

    Option 2

    Re-finance and try to get a lower rate than 3.85.

    Option 3

    Pay off partial loan balance (maybe half) and try to get a lower interest rate.

    Option 4

    Change to a 15 year loan and get lower rate.

    Thoughts and opinions? Am I missing additional possible options?

      1. Roger Stakes

        agree, how would I approach it if I wanted to pay it partially off? Like 50k? Just ask the bank to give me a better rate in exchange for paying 50k off?

  5. Hi Sam, I have taken your guidance to a new level! I have taken 30% of my liquid assets and paying down the mortgage on our primary residence to secure a rock bottom rate. 1 million total liquid assets, taking 300K to pay mortgage down from 800K to 500K to secure a conforming loan (instead of jumbo). Going from a 3% 30 year fixed at 3% to a 15 year fixed at 1.625%!! Never thought I would see a mortgage interest rate this low in our lifetimes!

    1. Wow! GREAT rate and something I’d totally do as well. A double win.

      You can calculate your return on your $300K by dividing it by your annual interest savings. It’s pretty high!

      1. Thank you Sam! Glad to hear I am not the only one that would make that choice. Very interesting thought you have on doing that calculation to determine an effective return on investment (which is a risk free investment/use of funds I might add). I hadn’t thought about doing that type of calculation. Would you take the next year’s interest due on the 30 year loan to do the calculation or would you take the remaining interest on the 30 year loan divided by 15 years (the term of the new loan) and use that annualized interest amount?

  6. I like your first paragraph showing risk appetite, income, age and a lot of other factors as everybody will find what’s right for them. Your simplistic formula is interesting, devil is in the details as usual but at a high level could work.

    Below is my current philosophy for what it is worth:

    I’m 35 and I’m investing 100pct. No way I’m repaying a penny with current interest rates and tax shield I can get too. I am below 3pct interest on debt and there is way too much opportunity for me to make more $ right now. My debt to income ratio is also ok (about 2x). Beating 3pct pre tax isn’t rocket science! I know a lot of wealthy people who don’t use debt to leverage their wealth and I respect this, having said this, from a pure return perspective the income loss is huge. These guys don’t care for the most part and just want piece of mind, they are set for life but if you are here to maximize your wealth (depending on interest rates) you’ll win.

    Ultimately goal is to create enough income streams to pay all your expense including your interest and anything else long run should winter come. Once you achieved financial freedom up to you invest more paydown everything etc. Do you ever need to own your primary house for instance? I’ll argue that you don’t as there’s a high chance you’ll be moving multiple times in your life. Close to retirement makes total sense to own as you may not have time to absorb a crisis. Again lots of factor to come into it, I’m bullish invest invest invest (for low interest rate people, but of course paydown high interest debt!!!).

    The last point to keeP an eye Is total debt to income. You do not want to over leverage and go bankrupt either. One other way to think of is to invest and get some income through your investments (e.g. dividend etc) and use that new source of passive income to paydown debt. It won’t be too painful tax wise (in theory) and you would still feel that you are prepaying a bit which is another question Sam, do you reinvest your dividends or not and if you reinvest is it within same class of assets or do you actually diversify again by reinvesting elsewhere?

  7. I love this framework! I’ve been regularly paying down an extra $1500 in additional principal each month because I built it into my autopays after I refinanced. I figured I’d try and keep my monthly payments the same as before I refinanced but work towards paying down the principal faster. Anything I can automate helps so much because I find myself easily bombarded with things to do otherwise.

  8. Great article and I really like the super simple formula to use when deciding which bucket to put money into. When talking to people early in their career this is a great formula to share, or help people with several debt all going at the same time. I am fortunate to only have housing debt left, and making a solid effort to pay that off while still maxing out the 401k.

    Below is a link to is a really good article from Milliman that talk about the issues with 4% withdrawal rule I got today. Some really good numbers and statistics about retiring. Your .5% is super conservative, but you might not be off by much especially if you have a family history of longevity!

  9. I recently read a book, “How I invest my own money” written by Josh Brown and Brian Portnoy. It’s a collection of stories by some of the most well known financial advisors in the industry. A couple things stood out. First, many value a paid off house more than optimizing debt versus investment returns. Second, they hold a lot of cash.

    There seems to be 3 different types of investor on Financial Samurai. The people who optimize every penny they earn. The people who try to do more than the average and finally the set it and forget it crowd.

    Your FS-Dair method is an easy way for all investors to determine what to do regarding debt repayment vs investment gains. Like you said, at least you guarantee you’ll do one thing right. My opinion is you’ll be doing both things right.

  10. Love the simple formula. By default I am prone to paying down debt over investing. However, over the years I have seen the power in investing and often have to consciously tell myself I’m better off investing. Luckily, I only have mortgage debt at 3.125%.
    I also like the bit about discounting your marginal tax rate from the formula. In an effort to constantly optimize (which is probably often to my detriment, but as an engineer I can’t help myself!), I’m wondering if it makes sense to also discount a risk-free and LIQUID rate of return, e.g. from a savings account. My money market just notched down to a paltry 0.4% APY, but adding to this to the formula would now account for rising interest rates if they ever come. Interest from savings accounts are taxed at ordinary income levels, so it makes sense to reduce by that rate, as well. In this case, I would be left with…
    3.125% mortgage X (100% – 32% marginal tax rate) – 0.4% APY X (100% – 32% marginal tax rate) = 1.85%

  11. Sam, does where you are in the amortization schedule come into play with this analysis? On a 30 year fixed, paying extra principal early jumps you ahead many more payments than it does at the end. It seems prepaying the early years provides a very strong rate of return, far above the actual interest rate on the loan; whereas the value in later years is nominal.

    1. There is none as I don’t want to over complicate things. The FS DAIR rule’s effectiveness is in its logic and simplicity.

      And yes, Paying down debt earlier will help pay off the loan earlier given a greater percentage of the payment will be to paying down the principal.

      1. I had this same thought. Having just “reset” my 30 year fixed rate at 2.5% with the purchase of a new home, I found myself rounding up my payment to add additional principal whereby, my principal payment was a little over the interest portion of my total payment. I guess even on payment number 1, I can’t help but bump my principal payment.
        My credit union account is still paying 1.5% on savings. The (fun) dilemma will be if/when my liquid CU savings account surpasses my 30 mtg interest rate.

        1. If you have extra cash, what you can do is pay a lump some to principal to make the 30-year amortization table match the remaining years left on your previous mortgage if you wish.

          I’ve done this many times before to keep me from straying. It’s also felt good.

        2. It already has, kinda. For example, on a $500,000 30 year mortgage at 2.5%, you will have paid a total of $711,217.62, or $211,217.62 in interest paid. If you put the same $500,000 into your 1.5% savings (which is a hell-of-a rate, btw!), you would have $783,935.76, or $283,935.76 in interest earned. The break even is ~1.18% APY for a 30 year at 2.5% (not considering tax deductions/payment consequences).
          Your savings compounds every month, whereas your mortgage is taxed on a smaller and smaller amount each month due to your principal payments. The two interest rates aren’t really apples to apples. With that said, if that savings APY goes above your mortgage APR, it will definitely be worth celebrating!

  12. I love this article. The chart may be overly simplistic in that it doesn’t take into account what the expected rates of return and inflation environment are, but any tool that attempts to apply broadly will inherently miss details. I think it’s a great rule of thumb and I think it’s great that the question is not answered with a binary: if the interest rate is x then pay all of your debt before investing. This method gives some diversification and acknowledges that we don’t know for sure whether or not our investments will outpace our debt. So it’s better to pay off some of each, depending on how certain you are that one will beat the other.

  13. Point of clarification: There is a modifier that has to be applied if you are talking about investing in taxable accounts vs tax advantaged accounts vs debt.

  14. Nice post with plenty of data for minds to chew on. A couple of nits to pick:

    First, the Fed didn’t cause the housing bubble of the 2000s. This was a direct effect of the removal of Glass-Steagall by Clinton and the ‘Conservative’ Republicans in the mid-90s along with the loosening (or complete abandonment) of sensible regulation to allow subprime mortgages. It was Congressional and Banking greed, no leadership under the pretense of ‘free markets’, nothing more. The Fed sets the Prime as this excellent blog author has pointed out many times — but the housing bubble was ultimately the voter’s fault for whom they chose, and failed to keep on a tighter leash.

    Second — the FS-DAIR is more complex than many may like. A simple formula to decide what gets paid off vs invested can be one’s monthly investment yields minus highest interest rate minus monthly inflation. If the answer is positive, continue directing excess cash into investments. If negative, direct excess cash toward highest debt. (If (Yield – (Debt I + Inflation)) > 0, invest, otherwise pay down Debt. (Or use annual or running 12 month values).

    This becomes more complex when the investor moves beyond easy calculations like cash/equity/bond rates and into real estate, but using the mortgage interest + annual property tax hikes can be a suitable substitute to evaluate paying that down.

    All of this is predicated on paying at least a little attention to monthly trends, without lettings yourself get caught up into daily micromanaging. If debt makes you emotionally uncomfortable, don’t tolerate it in your life at all. However, economically, it makes more sense to let your more liquid assets work for you if you can profit from the spread between your yields and your obligation costs (debt costs+interest).

  15. This is the most comprehensible framework I’ve seen. Well done, Sam. I like this rule since it is so simple and will lead to a better life.

  16. Thanks FS for the article.

    I have a question. If you have a 30 year fixed loan at a very attractive rate 3.1% and you could invest in a 30 year investment grade bond at 4.5%. Would it make sense to invest 100% in the bond to take advantage of the interest rate arbitrage between the two instruments?

    I am assuming that you keep the bond ’til maturity and that you bought it at par.

    1. When paying down debt, you have a 100% chance of earning that return. In your example, you would get a ROI of 3.1% by making a principal payment. Even an investment grade bond has a risk of non-performance by the borrower. You need to discount for this over long periods of time. A bond rate AA has a roughly 99% likelihood of full return of principal. You would want to down rate the investment return based on the likelihood of return of principal. In your example, this would be .99 * 4.5%.

      This needs to be adjusted for taxes in two ways. First, if it’s a loan that allows for interest deduction, then you will reduce your tax benefit at your current marginal income rate (which may vary year to year due to regulatory risk – e.g. changes in tax laws). Second, if you are earning a return on a bond with taxable interest, you will need to determine the after tax income at your marginal tax rate inclusive of the investment earnings.

      A key thing to understand is your aggregate return will be dependent upon the margin tax rate you pay each year during your holding period. An investment may look attractive in this analysis now, but if your marginal tax rate goes up by 33% (133% of what it is now; from 32% to 43%) then your return will be wildly different.

      Similarly, if your loan was tax advantaged, but loses it tax-advantaged status during the holding period, then you will have a very different aggregate return.

      A further complication in taxable accounts, which you avoid in your example, is the tax effect of OID (Original Issue Discount).

      For your example, if you’re in the higher marginal tax brackets (e.g. 32%+), You may be better off paying the loan, if you feel taxes will go up during your holding period for the bond.

  17. It’s amazing to me that after 6 years in the job market I arrived at a very similar conclusion (50% debt payoff to 50% investing) after taking my company match and tax into account. Managing finances in US is hardcore stuff. Thankfully I’m passionate about finances and economics in general. Thanks for all you do, validated my approach and also enlightened me over the years.

  18. I like the overall idea, and thanks for offering a broad rule for many to follow. Great post!

    One proposed modification:
    Shouldn’t the DS FAIR change though based on the risk-free interest rate for investing? If the interest rate on your debts is fixed and the return on investments variable on market conditions, the latter would seem to be an important variable to consider in allocation of capital.

    To this end, I’d maybe offer the (interest rate on debt) – (risk free interest rate) * 10 to calculate the new DS FAIR? It does add a new wrinkle, but seems to be more logically consistent to me.

  19. PatientWealthBuilder

    I don’t understand why you would pay down any debt? I allocate all of my money to my leveraged stock investments in order to take full advantage of compounding interest. I am confused as to why anyone would remove dollars from a compounding interest investment to pay off debt at a very low interest rate.

    I wrote about my investing approach here: patientwealth.com/extreme-investing/

    1. Sometimes markets go down and the economy turns bad. Have you been investing since circa 2009 or before? How much money are you investing total? I’ve found my risk tolerance tends to go down the more I accumulate.

      For example, let’s say you return 5% on $10 million, that’s $500k, enough to live well. But if you lose 10% on the $10 million, that’s a pretty painful loss.

      Have you considered working as an investment professional given your track record? It’s a pretty lucrative business. I know one guy who simply trades a pretty reasonable $3 million portfolio of his own for a living.

      FYI: in my 20s I went 4:1 leverage on San Francisco property that turned out OK. Now I’m retired and don’t want to take as much risk.

      1. I appreciate that you religiously remind folks that markets go down. Absolutely true. In the short term. And if one is investing by picking individual stocks, there’s much risk with the potential greater reward by not diversifying. I’d suggest you add in:

        Markets can go down (even to $0 in theory). In the short term. The gamble is: will you NEED the money when you are at the trough of a cycle, or somewhere north of it. The fact is, WHEN the market goes down and you need some (or all) of those assets then, you’ll realize a loss rather than just have paper losses. The prudent investor has a spectrum of investments just as Sam has preached in other posts — simple savings like a CD ladder that is cash-available for short to mid-time frame life expense coverage, and a mix of equities/bonds/munis/physical investments in various percentages. Most of us will live long enough to see the far side of whatever recession is on the horizon, and should be coached to think both short and long term.

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  23. I’ve been reading a few of your articles, and I’m now feeling very sick about my retirement savings. And I’m not seeing many, if any, articles that apply to people that make under $100k/yr. (some of us choose to live in areas of the US in lieu of higher paying jobs.) My husb & I have a combined income of $80k/yr. I am 48 and my husb is 52. I feel like, based on your tables and articles, I’m VERY behind in my retirement saving. We have about $250k saved. We have $150k mortage debt (including 2nd mortgage, which I regret taking on, to help with house repairs/renovations), $10k cc debt (and now my $12k student loan debt for a portion of my MBA degree that I will receive in Dec’15 — no regrets on my degree). I have 8% added to my 401k with 4% match and my husb has 10% added to 401k (no match). I’m trying to pay down our cc debt. I have been increasing my 401k contrib amt by 1-2% for the past couple years, but we just don’t have that much extra funds to spare. Any advice?

    1. Abby, my family is in the same boat as yours re lower income. But we live in a lower cost-of-living area, so there’s some compensation there. For those of us making <$100k, the math is simply a longer and not-as-steep gain curve. That means we simply do everything slower.

      Unlike a lot of folks here, I'm not a CFA or work in the Financial sector. But I will say from an emotional stance, that debt is a huge stress burden. That stress isn't something easily calculated into a simple math formula. However, what you wrote suggests you guys are well on your way to where you want to be: Your household is already contribution 18% to retirement (w/o match). You already have a substantial savings.

      I'd say try a de-stressor experiment: Take any additional money you have and pay down the highest interest debt while making minimal payments on all others. Just commit your resources to making ONE headache go away. (Personally, I despise credit cards and would target that, but if the cards have an immutable interest rate lower than other debts and no annual fees, choose the highest rate debt first.) It's amazing what removing one bad element of your life can do to your mood. Becomes addictive toward killing off others. The only caveat here is if you don't have a built up emergency fund — do THAT first, even if it's only a couple of month's living expenses, have that buffer in place with sometime simple and cashable like CDs, even with their crappy interest rates.

    2. Abby,

      Don’t be discouraged, you will be fine. Truth is, you’ve managed to live your life on less income than many others on this site, and you probably will need less than they need in retirement. My advice would be pay off credit card debt first. Don’t even bother saving elsewhere until cc debt is paid off. Once you get to zero cc debt, you will then have significantly more to contribute to your retirement accounts each month. Avoid cc debt at all costs.

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  27. All excellent food for thought from nearly every response. I have a question I’d like to propose. Say someone had $40k left on an appraised $77k rental property condo fully rented out and slightly cash flow ($200 month) at 4.8% and their own home at $130k with $91k left on that loan at 3.7%. Neither property will appreciate much at all. This person also had 60k sitting in the bank doing nothing, puts 5% into their 401k and maxs out their Roth yearly at $5500. This person grosses $50k a year. What would the best course of action be? Paying off the condo leaves 20k savings left over plus frees up $500 a month in rent. This full $500 could be then invested and no loan at 4.8 either? Thoughts…

  28. Sam – Have been passively following your blog for a while and posting my first comment today. I understand that inflation in India is at 7% and hence the saving rate or CD rate in India is at 9%. But in my head I still think its a great, almost risk-free investment. And If an individual is an investor from USA where inflation is less than 2% and if he/she is investing in India at 9% its a good deal. Ofcourse transaction cost and exchange fluctuations do have impact but I give that + or – 1.5%, still its a good deal. Unless I am missing something and which case please enlighten me

  29. As and add on, the framework I like to live by is if my debt interest rate is higher than my rate of return on investments (like today) I like to pay off my debt.

    The math is easy in that I’m getting a higher return paying off my debt (when that interest rate is higher) than allocating another dollar to investments (when that rate is lower).

  30. Sam,

    Great post. I’m not sure DAIR resonates with me because there’s not rationale for your chart other than your own opinion. Please don’t take that the wrong way, your opinion is in line with mine often, but there’s not math or logic to say that the way you’re balancing debt pay off vs. investments is better than some other allocation – why 55% debt pay off if the interest rate is 5.5%? Why not 60% or 50%? Just because it looks good on a chart doesn’t mean it should be done.

    If I’ve learned anything from this post it’s that the general public will latch on to any catchy idea as long as they can remember it. The acronym is cool, the table is completely arbitrary, and everyone loves it. I’d take advantage of that while you can!

    One person referred to this as a model and I’d strongly argue that this is not a model. I think you, with your IB background, would also agree.

    That said, frameworks that help people organize their actions are gold in the self-help aisle of the book store. I think you’ve got a winning framework, I’d just like to see some math behind the rationale.

    1. Ah, an unbeliever! I love it! Why do anything at all?

      Let me turn it around. Share with us your idea of a pay down debt or invest framework with your requirements. Make sure it is easy to understand and follow too with the data I have used from historical interest rates and equity returns.

      Thanks!

  31. I am changing my approach on my mortgage this year at renewal. I can make more money investing than aggressively paying down the mortgage. I got it to a point where I am comfortable regardless of where I work. With a 50% pay cut, I would still manage. Based on that, I want to invest more.

    I currently pay 2.40% and can probably renew close to that for a couple of years in a early 2015.

  32. Your model may apply to typical consumer/salaried employees, but it doesn’t really address those that have their own businesses or own income producing real estate. Debt is a tool we use to generate wealth and cash flow.

    I can speak for real estate, where borrowing cheap and fixed rate money, on an income producing property, is a great way to use OPM to build your wealth. Of course your success depends on your talents, controlling leverage, and having reserves for unexpected economic turns. But this approach is entirely different than managing consumer debt.

    It would be interesting if you spoke more about that type of debt.

    1. This model also helps people manage risk. Cheap debt isn’t always good if you’re over leveraged

  33. I think this is a great ‘beta’ draft of this concept, and something I’ve been wrestling with myself lately.

    One thing the ‘final’ version should address is leverage. Do I really want to put 25% of my savings paying down debt if my debt is a small proportion of my assets (low d/e).

    Maybe it would be simple enough to add a additional factor where you multiply your d/e (with a max value of 1 or 2) by your dair score so if I have a high proportion of debt to equity I will pay it down even faster, while if my d/e is 0.1, I may not pay any extra towards it (or even seek to increase leverage).

    Thanks for all your good advice.

    ~g

    1. Maybe. I wanted to keep the concept simple. Once I start adding XYZ variables, folks check out. The primary purpose is to give people a framework to pay down debt and invest in order to build their wealth over time.

      thx

  34. wallstreet26

    I love the FS-DAIR idea. pretty good rule of thumb. personally though i like leverage. Any rate less than 3% is a steal, anything less than 5% is ok, anything above it, i’d get rid asap. btw your 6 to 8% returns in the 1900s do not include dividends. Tack that in and it gets bump 8% to 12%. Also the best time to lever is when everyone else is scared because prices are low, brian says the troof. In any case, RESPECT.

  35. IMHO I prefer to leverage down during good times as my pay/bonus is tied to the economy. Meaning if it’s hitting the fan, I have risk in my income. However, I make sure that I have a war chest available to take advantage of opportunities if they arise!

    My advice is to truly understand where your income is derived from….as they should drive your strategy.

    1. Damn auto correct…. I meant to say that it is best to understand where your income is derived from as this should define your long term strategy.

      In other words, my income is a function of the software industry therefore most of my investments are not in the this space.

      1. It’s definitely a good idea to invest AWAY from one’s industry given one might get stock, and the career and income is already leveraged.

        I used most of my bonus money every year to invest in real estate or private equity, and not back into the financial services industry.

  36. Your DAIR table makes a lot of sense! With interest rates so low, you should not dedicate all your disposable funds to paying down debt. After all, you would miss out on a Bull market and time in your 401k. The amount of time your money is invested relates very strongly to your return.

    1. Indeed. The fear of missing out is a bad feeling. If everybody is getting rich around you through investing, and you’re not, it might feel worse than losing money to some.

  37. The only debt we have is a 3.8% 30 year mortgage. I hadn’t planned on paying extra towards it because with our marginal tax rate (33%) we’re effectively paying less than 3% for that money.

    It would feel a little wrong to divert 25% of our savings to this 30 year note. Not saying that it _is_ wrong, just that it feels weird. We are saving a lot each month, and 25% would be nearly the entire mortgage payment again.

    Maybe I have more of an appetite for risk?

    On the other hand, if someone straight up offered me a 3.8% loan that I could use to invest in the market… I don’t know if I’d take that. Especially with where valuations are currently.

    This really provides food for thought. Thanks for making me look at my mortgage in a slightly different light! Still not sure if I’ll modify my strategy, but it’s always great to have my assumptions challenged!

    1. The question is: What are you doing with your savings? If you are just keeping it in a money market account earning less than 1%, then it is a suboptimal use of your cash. Investing is a tricky one due to risk.

      But since it seems like you only have one mortgage, and you feel it’s fine, then feel free to carry on!

  38. Done by Forty

    I like it! Systems are more effective than willpower when it comes to paying down debt. Better to have a clear plan than to try to gut it out over a long period of time. And the one you’ve created is flexible enough to account for opportunity costs, too.

  39. I know a couple in their mid 60’s with a 150k mortgage left on their house. They have a NW well into the millions but keep the mortgage because it’s only a little over 3% interest rate and because of tax deductions. An interesting perspective – they just have no desire to pay it off even though they could write a check tomorrow.

    1. That is interesting they’d happily keep a $150K mortgage with a NW in the millions. I would think it’d feel like such a nuisance, since their deduction isn’t beyond the standard deduction at that level.

      To each their own!

      1. I disagree with you here Sam. If I can put my money into a Muni with a 5% CPN and collect that interest, why would I pay off my 3% mortgage? With mortgage rates being so low, it makes absolutely no sense to pay down debt. The correct response would be to take cheap $ as long as possible. Rates will eventually rise and when they do, my 3.5% 30yr mortgages will be looking pretty darn good.

        Paying a penny more to the balance of the loan makes absolutely no sense.

          1. Completely disagree. If I am buying hybrid munis I.e. Zero coupons that convert to a fixed rate (usually 6%+). I’m pretty set.

            Just as an FYI all of my bond purchases are at or better than a 7% TEY. And once again, with the eventual 6%+ coupons I am protected against any move in interest rates.

            I am only 30yrs old and am more then comfy earning a 7%+ TEY on my portfolio. My business partner who is 62 has used the same strategy for 30+ years and is worth a cool 30mm

            I know you will try to blow holes in this strategy but to be honest I have been as objective as possible viewing this and not sure you can come close to a 7% TEY in this environment with any portfolio.

            you are trying to be a man of too many hats here, munis are cheap and hybrid munis are a no-brainer

            1. Ah, I’d love to be 30 years old and start investing when the stock market and bond market have only gone up every year since 2009. There’s nothing I can say to tell you that non risk-free assets do go down as well. You just have to experience it for yourself.

              But I do think your response is indicative as to why everybody should be multi-millionaires at some point. It’s so easy to get rich nowadays and retire early. 6-7% compounded gets there quick. Now imagine if you are worth $30M at 40! Now that’s living good.

              BTW: I’ve been heavily buying muni bonds and zero coupon bonds post the Presidential election FYI. See: The Allure Of Zero Coupon Municipal Bonds

          2. Just another little counter point to your about bonds “going down too”. What do you think is going to happen to real estate when interest rates go up?! Just an FYI the economy is still fragile and once we see a pop in interest rates, housing will get crushed.

            I’ve seen enough as a fixed income professional to know where to put my money. The stock market is a certified Ponzi scheme and casino.

            Like I said, show me a 7% TEY on an A+ security.

            We can go on for hours with this chat my man

            1. Agreed. But sometimes, higher interest rates are a signal for a strengthening economy with higher inflation on the horizon.

              What type of property do you currently own if any and what do you do for a living? I’m always looking to learn from others and I LOVE fixed income right now.

            2. For some reason I can’t respond to your other posts, cannot see the reply feature on my phone.

              Anyways I was trading equities during 08-09 and got a glimpse of how fast things start to drop. For that reason, I always keep some dry powder and currently have 50% of my bet worth in 5% front end munis that mature 2017-2019. And yes, I am earning 4-5% a year on 1-3 yr paper that is tax free. The TEY on this stuff is 8-10% depending maturity.

              The other part is my portfolio which i call the “kids college fund” is locked up in longer zero coupons. If/when these back up, I will just buy more. The beautiful thing with zeros that most people don’t know is you can make $ and still take a loss.

              I currently own my house, have a 3.5% 30yr and about 230k left on the 300k mortgage. If I wanted I could pay this off tomorrow, but earning 5% on my cash, tax free it doesn’t make sense to pay it down as I am
              Picking up a 1.5% Arb.

              I really like your Realtyshares idea and I have opened an account that I will be funding once I see how the deals react to a slower real estate market. I think we are at peak levels in US real estate and we will see 2010-2011 pricing again soon. The younger generation is not buying houses and I think that will create excellent opportunities in the next decade.

              Keeping my powder dry and adding to my muni portfolio whenever I can.

  40. Sam,

    Great post as always. Had a question that is semi-related to FS-DAIR, I have a triplex that I purchased a bit ago and the mortgage on it is my only debt at a very low rate. I don’t want to live at the property because I pay less in rent at my other job as a property manager than my triplex tenants do. Debt is being paid down with cash flow of the property.

    My SO (will be wife soon) wants our own house or duplex badly, so we’ve been saving for the down payment on that. Question is, if it will take 3-4 years to save for the down on this theoretical house in question, what would you do with the saved cash in the meantime? Bond and CD yields are low but at least they’re safe. Hesitant to buy securities with it because of the potential loss. Any input would be appreciated, thanks!

    1. John,

      Welcome to my site, and great question which I have a post on soon. The #1 thing now that you’ve earmarked the money for a purpose is Capital Preservation. The desire to make more returns from your earmarked capital should be tempered. I personally look at one year structured note products that have downside protection, and extra yields. https://www.financialsamurai.com/example-of-how-a-structured-note-works/

      But CDs, and even online savings accounts for 0.5%-1% is fine b/c it’s all about preservation once again.

      Sam

  41. Hi Sam,
    First post, but started following your blog a few months ago and love the regular posts with my recent interest in finance, investing, and planning the long haul towards retirement (28, aiming for 50).

    Love the concept of DAIR. I’ve been using a somewhat similar model, breaking down my extra pay between my car loan (1.9%), mortgage (3.75%), liquid savings, and long time equity investments, but not targeting the highest % first due to different loan terms and goals.

    Anything above 10% in your model in my mind has to be CC debt, right? You would have to be insane to finance anything above 10% today. But I guess in the case of sub-prime, you may have people financing cars, etc. at 15-20+%, which is scary, but honestly they probably aren’t reading your blog, but they should!

    Where I challenge or think the caveat for the DAIR is, if that >10% is for CC debt, with todays variety, you should be looking to transfer that debt to a 0% interest card for 18 months to save some money. Still allocate that 100% (or whatever necessary) of what you can towards paying it off to make sure that balance hits zero before full term.

    Keep those posts coming!

    1. Hi Troy,

      Always good to have new readers. Anything above a 10% interest rate is credit card debt, P2P loans, or a loan shark, frankly.

      But for P2P, if you borrow at 11% to consolidate 20% CC debt, that’s a win!

      Transferring CC debt to a 0% interest card is a nice short-term solution. But I fear people will stay in the borrowing trap and never bother to pay it off. We need a good system to stay the course. FS-DAIR, I think is it!

  42. I don’t have any debt other than 0% Barclay travel promotion debt and my mortgage. Your analysis makes much sense, but I prefer to just pay any debt off as long as I can maintain my 12 months liquid fund of expenses. Paying off a mortgage early on a single family home in the bay area isn’t that easy though unfortunately for most people.

  43. I agree that the inclination is to invest and leverage up when times are good and reduce exposure and pay down debt when times are bad, but I’m trying my best to fight that inclination and do the opposite. It seems to be how real fortunes are made, at least in real estate.

    I still disagree that the best time to buy property is when you can afford to do so. I think the best time to buy property is during a deep recession (but SF is a market I do not follow or understand, so you may be right in your market). You just have to beg and borrow wherever you can and then refinance if necessary when the market improves. I had a great mentor in an industry group who was the embodiment of stealth wealth (centa-millionaire who lives in a 4-bedroom house, drives a prius and sends his kids to public school – made his first million in technology then made the rest by buying real estate only during recessions and selling on the way up, then waiting patiently for the next cycle).

    Very good analysis on the debt payment calculator. Thank you for including it.

  44. I’ve been grappling with this issue ever since I graduated but I feel I’ve come to a good balance that is pretty close to DAIR. My highest student loan, which I’m currently trying to pay off, is at 6.5% and my next highest loan is at 4% so I will be able to free a good amount of money for investing once I get rid of the 6.5% loan. You’re definitely right that the need for liquidity comes into play as well. When me and my wife didn’t have a kid we could keep a good amount of money towards saving and investing but with a kid we need to be a little more liquid.

    But this is a great rule of thumb. Thanks for the great post.

    1. Good stuff Syed. 65% to debt pay down to squash that student loan, and 35% to investing says the FS-DAIR formula!

      If you two make under $150K, then you should be able to deduct up to $3,500 of loan interest too. Have you done this before?

      1. I have been able to deduct $2500 the last few years for student loan interest. Recently got a raise and doubled my student loan payment amount to get rid of them (interest rates range from 5.25 to 7.25%). Would rather be debt free and put the 1K plus a month into investments.

        Still contribute to a 401K and Roth IRA (considering eliminating these contributions until my loans are gone after reading this blog the last few months)

        Thanks for the post!

  45. Sam, very interesting lean to your recent posts…very in-line with my thought process as well. Okay so here is the question for you: if you had a sudden windfall today of cash that was enough to erase exactly 100% of all your mortgage debt, would you write the check and be debt free?

    1. Fun question! I would follow FS-DAIR :)

      I would definitely not allocate 100% of the entire windfall to pay off all mortgage debt, given there is a Yin Yang balance in terms of debt and investing.

      1. So I can see how that would sort of shoot the premise of the FSDair in the foot paying it off early, so I good answer! As long as the end goal is eventually to be debt free it is a pretty good plan : )

        1. In your specific situation consider paying off the mortgage. If you put down some of the windfall on a mortgage, but it does not pay it off, the monthly payment does not change. But if you are able to pay off the entire mortgage, it opens up your entire monthly payment as positive cash flow. The investment possibilities for all that cash are endless. Use the windfall to change your life, not just advance your net worth. Pay off the mortgage or invest it all, doing a little of both doesnt significantly change anything.

          Paying off debt is good. Investing is good. Investing and paying of debt is good. I don’t see a downside to however you want to slice this pie.

  46. I really like this rule-of-thumb overall, but I’d add a few points:

    1) This is likely obvious, but even if your highest interest rate on debt is 10%+, I’d strongly argue that anyone who is offered a 401k match or similar incentive should take full advantage. If an employer is matching you dollar-for-dollar, your return is essentially 100%.

    2) Even if you’re not getting an employer match, there’s a value in the tax deduction of your 401k contributions. I would factor this into my own personal decision between investing and paying off debt.

    3) Student loan interest is also deductible for many, so take this into consideration when looking at your student loan interest rates.

    1. Great reminder that student loan interest is deductible for some! I didn’t put it in because once again, the government implements discriminatory taxation policy that is not available to everyone. But let me add an annotation in the post now.

      From the IRS:

      “Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $75,000 ($155,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2013.”

      https://www.irs.gov/publications/p970/ch04.html

  47. This is brilliant. There is such a huge market for debt reduction that you could probably turn DAIR into a completely trademarked financial franchise. Turn this post into a 30,000 word book and you’re off to the races. If I was you I would register debtdair.com immediately and keep it in your backpocket while mulling the idea.

    1. Sounds good Austin. I’ll get to work.

      If you want to help build the website and make FS-DAIR a world famous concept, let me know. I’ll give you a cut! The website is already registered :)

      1. I really don’t think it would be that hard to crank out a 20-40K word book on the matter. I would imagine that mining your existing data would render plenty of content. I’d be interested in skeletoning the content, perhaps even drafting. Sure, I could I build the site as well. I have some decent marketing ideas. Only question is, do you want to go full fledged Dave Ramsey, or is that too cheese dick and perhaps you’d prefer to just put your material out and what will be will be.

  48. This is something that I have been struggling with. I only have students loans left to pay with an interest rate of about 5.5% so based on your table I should be allocating 55% to the debt. I think this is pretty reasonable and straight forward. I was trying to pay off my student loan as soon as possible and not investing (on taxable accounts, I’m still contributing to my 401K and Roth IRA), but I’m going to reconsider and split it up.

    Good article.

    1. Remember, that if you are below the annual income threshold your student interest is tax deductible. Therefore, according to Sam, your pay down amount would be less than that 55% that you’re assuming. It would mirror his example of a mortgage pay down where you would have to calculate your effective student loan interest rate, which would be about 1/3 lower. Of course that is only one factor to look at when it comes down to paying off student loans.

      The other factor that everyone tends to ignore and I think should be addressed more regularly is the fact that student debt is not eliminated through bankruptcy. This factor alone should play a huge part in your decision to pay off your student loans early. As part of any financial planning, you’re allocating your assets in such a way as to protect your futures interests. Part of this planning should include a plan to protect yourself from a bad situation or a worst case scenario, this is why someone would establish an emergency fund. If you’re truly planning for a worst case scenario, you would have to assume that you will have to file for bankruptcy and start from scratch. If this is the case while you might lose the house that you bought, the car that your drive and all of the other nice things you bought on debt, you would start off with a blank slate and your debt would be gone. But in the case of student loans, you’ll now have a degree that will be fundamentally useless, try to get well-paying job that requires a college degree with a bad credit history, and you are still responsible for that student debt.

      If you’re really looking out for your best interests, pay off that student loan as fast as you can.

      1. Great point about student loan debt not YET being forgiven in bankruptcy. But it sounds like legislation is underway to have student debt forgiveness after 10 or 20 years, and capped at 10% of one’s annual income. What are your thoughts on this?

        1. Our dual income is probably a little too high to get any student debt forgiven under Biden’s proposed plans. But if it’s close I or my wife have considered taking a half year “unpaid sabbatical” so that we would qualify for loan forgiveness if the numbers work out. It’s a paid vacation of sorts. I’ve been working full time for 18 years now… I could use a break.

          Meanwhile we’re glad we kept my wife’s loans as FED LOANS… paying zero interest and making no payments for the past 8 months has given us a sizeable emergency cash fund.

          Also, keeping them fed loans is kinda like insurance for a job loss… with the consolation prize of eventual debt forgiveness.

  49. I still like to use debt to increase my cash flow and net worth by buying real estate. My only concern is that my bank will stop giving me mortgages; I have 11 now. I don’t have any cc debt or any debt above 5%.

    Real estate is a fantastic way to beat inflation. When rents rise your mortgage payment stays the same. When values rise your mortgage amount stays the same. Since you can put less money down then the value of the house, rise in rent and value increase your returns much higher than than inflation.

    1. Do you have to deal with deadbeat tenants with that much property? I’ve had few friends who tried being a landlord, but bailed after getting few bad tenants. I don’t have personal experience, but have read at least in SF, evicting a tenant is expensive and difficult.

  50. Money Beagle

    I like the approach. Very straightforward and it does give a nice balance (once your highest rate is below 10% of course).

  51. Jay @ ThinkingWealthy.com

    I agree! Though I tend to use a more conservative market return of 8% so I think 8% interest would be my magic number but the difference between 8-10% is not much in the sense that if something is costing you 8%, then it likely is costing you 10% and it’s unlikely you’ll have something in between.

    I hate carrying CC debt, even though my CC that I use is 0% for another few months, I hate seeing the balance on it and just throw money at it. Bad money management but at least I won’t accidentally pay interest when the time comes!

    Jay

    1. Jay,
      If you hate carrying a cc balance then why do you do it? How much of a balance do you have and when do you plan on paying it off?

      We use our CC cards extensively, between $5-15grand a month but always pay off in full two days before the bill is due. (Gotta get that .8% interest :) )

      Once I thought we missed the cc date and it was the worst feeling ever. I got physically sick, stomach turning in a knot, headache, clammy skin, until I was able to get on a computer and check my payment and realized my partner paid it off on time. Have never missed a payment so I have no idea what happens but it felt like the second my payment was late I would be hit with >20% interest and the end of the world was nigh.

    2. Jay,
      If you hate carrying a cc balance then why do you do it? How much of a balance do you have and when do you plan on paying it off?

      We use our CC cards extensively, between $5-15grand a month but always pay off in full two days before the bill is due. (Gotta get that .8% interest :) )

      Once I thought we missed the cc date and it was the worst feeling ever. I got physically sick, stomach turning in a knot, headache, clammy skin, until I was able to get on a computer and check my payment and realized my partner paid it off on time. Have never missed a payment so I have no idea what happens but it felt like the second my payment was late I would be hit with >20% interest and the end of the world was nigh.

      I’ll loan you $25,000 at 15% ;)

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