Pm liquidating corp
How do you decide when to pay down loans and when to invest?
It turns out it can be a pretty personal decision, and there are a lot of factors that come into play, including loan interest rates, current interest rates and inflation, expected returns on your portfolio, current tax bracket, tax-sheltered accounts available to you, attitude about debt, and personal risk profile.
The higher the interest rate on your loans, the faster you should try to pay them off.
Remember to look at the after-tax rate of the loans.
If your credit card debt is accumulating interest at 22%, you should pay that down as your first priority. You won’t find that anywhere, with or without a tax break.
On the other hand, many of my med school classmates were able to consolidate their loans at 1.9%.
Borrowing money at a non-deductible interest rate of 5% to invest at 6% (4% after-tax) isn’t exactly a winning proposition.
Of course, 2010 dollars were only worth 66 cents of a 1993 dollar.
In essence, I borrowed 00, and only paid back 00, and I got to use the money for 17 years for free. When you’re borrowing money at rates below current levels of inflation or the long-term inflation rate (around 3%), you might want to think twice before rushing to pay it back.
I mentioned earlier that paying off a loan with 22% interest is a no-brainer.
That’s because the expected returns on investments available to you are nowhere near that. Imagine a world where 22% after-inflation returns were available to investors. Although estimates differ depending on who you ask, most experts agree that you can expect nominal (pre-inflation) stock market returns of 5-10% over the long run and bond returns of 3-6%. It’s one thing to borrow money at 3% and invest it at a guaranteed 5%.
Although Dave Ramsey recommends paying off all your debts ASAP, many wise people are willing to carry non-callable debt at very low interest rates because of the opportunity costs you would give up by paying it off.