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Member	papageno - 7/26/2006 4:46:59 AM Pay personal debt or invest? Reply \| Quote

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papageno - 7/26/2006 4:46:59 AM

RE: Pay personal debt or invest?

As a long time fan of R.K (I first read Rich Dad Poor Dad in 1999 - simply loving the book) I know that his main idea is to focus on my asset column, by building assets that should provide income. However, I could need some advice on what I should do next. My current financial position is like this: (the numbers provided is in Norwegian krone, to get the US$ number divide by 7) Annual income from work: 450K Annual expences: 400K Mutual funds: 70K Student loan: 150K Home mortage: 910K Home equity: 300K My basic problem is this: should I use my " surplus" from work of 50K to reduce my personal debts more than the payment plan from the bank suggest, so that I get debt free (bad debt that is, i.e debt that I pay for vs good debt that someone else pay for) earlier than planned, and then use my former debt payments to increase my assets, or should I let the debt payments follow their own course and use my surplus for investments starting now? Pro debt reduction: - more financial flexibility because I plug a leak in my cash flow - more financial stability because the bank cannot take my house if every things turns against me - more room for taking on good debt because my personal debt load is smaller - debt free in about 10 years vs about 25 years now, leaving 15 more years to invest a larger amount Con - not really building any assets because it increases my " wealth" and not my cash flow - remains dependent on a paid job because my income is earned, and not passive for the duration of the debt reduction program Of course I could do both: use some of the surplus to reduce debt and some of the surplus to increase assets, but this will reduce my focus on a strategy. Any suggestions as what to do? Thanks! Regards, Papageno

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papageno - 7/26/2006 7:07:29 AM

Thanks, Racedriver, I have made the same reflections as you have. So now I have had them comfirmed. Some additional info that was left out of my original post: -my home mortgage rate is around 3,5% with a floating rate (meaning it gets adjusted frequently due to political issues, sentral bank policy etc). - I have an emergency cash fund of 50K that can be turned into cash immediately - I have a disability insurance that will provide income in case of disability - I am employable in most economic situations (Master' s degree in Business) - Norwegian welfare provide public health service free of charge, in case of unemployment I' m guaranteed 65% of my former income in " out of work welfare" for up to three years and student loan payments are frozen in case of unemployment. If I accelerate my mortgage payments, I can eventually " strech" the loan since I' m ahead of payment schedule, lowering my monthly payment, providing addional dollars for saving/investing. That will reduce my leaks, allthough not removing them until debts are paid. Of course 50K invested over 10 years will provide wealth, but the downside of that is the higher interest amount on the mortgage that I have paid over those years. Those has to be deducted. The math basically comes down to how much do I save in interest payments by reducing the years of the debt compared to how much can my investments return over the same years.

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RaceDriver - 7/26/2006 6:40:56 AM

Here are a few things to consider: 1) What are your interest rates on the debt? 2) What is your expected investment return? 3) If you use your income to accelerate your mortgage payment, how will you pay your monthly bills if you lose your job (or become disabled, or whatever)?

Pro debt reduction: - more financial flexibility because I plug a leak in my cash flow

Perhaps, but it doesn' t help you build cashflow or a liquid cushion to cover emergencies. Remember, you won' t have plugged the leak for ten years.

- more financial stability because the bank cannot take my house if every things turns against me

Maybe in ten years, but for the near future, you will be MORE likely to lose your house. 1) You will not have assets to cover an extended loss of income, and 2) your additional equity protects the bank in case of foreclosure, but does little to protect you.

- more room for taking on good debt because my personal debt load is smaller

OK, but why trade one debt for another unless you' re getting a better rate? If your total indebtedness remains the same, than you should be focused on creating as much cash-generating asset wealth as possible.

- debt free in about 10 years vs about 25 years now, leaving 15 more years to invest a larger amount

Think about time value of the investment. $50K today invested wilol be worth far more than double that amount in ten years. Do the math;simulate what happens with steady investment over the next ten years, then steop investing for 15. Now do the opposite. You' ll find the the results will favor investing NOW.

" There's never been a loser who kept trying..."

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Member	sushi87 - 7/26/2006 11:41:48 AM A balance of both would probably serve you best. Reply \| Quote

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kimberland - 7/26/2006 9:21:41 AM

Here' s the issue... If you wait until you' re completely out of debt, it is unlikely that you will ever find the extra funds to invest. There is always some expense coming up. Right now, it' s school debt and mortgage. Later, it could be a renovation and kids off to school. So I did both. I invested and I paid down debt. The total payment was constant but as my debt payments reduced, I increased my monthly investments. : )

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Peaceful_Warrior - 7/26/2006 9:53:08 AM

I' ve found the following to be very useful: - If the investment is for wealth generation and does not bring me direct monthly cash flow, then I compare the yield with my mortgage. If the yield (taxes included) is equal to or more than the % I pay on my mortgage (tax deductions included), then I invest. Otherwise, I typically do not (unless I have information leading me to believe that it will over the duration of my mortgage) - If the investment brings direct cash flow, then I invest before paying down my mortgage. In this situation, I can use the cash flow to either produce more cash flow, or to pay down my mortgage. Then, after my mortgage is gone, I still have this cash flow to purchase other assets and build wealth. So long story short if your investment is for: - Cash flow (YES) - Wealth building (Maybe)

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CashFlowXperts - 11/12/2010 9:41:14 PM

It is much easier faster to save interst than it is to earn interest. So look at the cost of your debt (total interest to be paid over the term). Ask yourself if you can save more money by paying off your debt than money you can earn by investing in the same term.

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alto - 11/13/2010 11:33:10 AM

I know this thread is pretty old and I doubt Papageno still has this situation, so I thought I would throw my own numbers and thinking out loud here.. my current financial position is like this: Stocks: $1100/mo Monthly income from work: $250 (PC repair), $100 blogs Monthly expenses: 1100 ROTH IRA: $120 ($20 monthly autopay) Home mortgage: none, rent silver eagle stash: 17 coins so far my plan: 1. don't buy doodads 2. don't have anymore kids (got 2 already) 3. increase my cashflow - get more clients with my PC repair - work on blogs and/or increase # of blogs 4. Trading - Forex - Options (stocks) 5. buy silver 6. constantly increase financial IQ and knowledge 7. get into other types of investing/cashflow - real estate - business - precious metals - oil - commodities - covered calls - other managed trading Lucky 7 [:d] I think I learned the most about increasing cashflow and getting out of the rat race by playing the cashflow game.. mostly from the egame (202) since that one u can play by yourself over and over as much as u can. I think as long as I avoid the bad stuff (doodads, downsize, kids) and keep on acquiring assets, not liabilities, then its just a matter of time before I can win in my own cashflow game. what does everyone think? is my plan to simple or complex? am I missing something? alto[:)]

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