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Paying down debt versus buying more DGI - benjamen - 03-10-2015
I wanted to spark a discussion about how people split their cash flow between paying down debt and investing. Is it more important to lower your expenses or raise you income?
Personal goals for each month:
1) Increase my net worth (assets minus liabilities)
2) Increase my net income stream (total income minus expenses)
In order to accomplish the above goals, I have the personal choice of allocating free cash to buying more dividend paying stocks (increase assets/increase income) or paying extra towards debt (lowering liabilities/lowering expenses).
If a personal debt's interest rate is higher than most dividend stock's yield (5%+), should you allocate most, if not all, of you free cash flow to debt instead of dividend stocks? Conversely, if you debt's interest rate is lower than easily attainable dividend yield (2% or less), should you forgo paying more than the minimums and invest extra cash fully into dividend stocks?
A bigger challenge for me is the case when the interest rate in debt is roughly equal to typical dividend yields (3-4%). Which do you focus on? Do you split your cash evenly?
Thoughts?
RE: Paying down debt versus buying more DGI - rapidacid - 03-10-2015
Good question. Age old question, but good nonetheless.
From a quantitative, common sense, perspective what you laid out is the correct path: pay down if debt interest rate is higher, purchase equities if debt interest rate is low.
But with all of life there's a subjective quality as well: peace of mind. Paying down debt is extremely satisfying and head-clearing. Being debt free, if ever really possible, is the holy grail to clear thinking.
I doubt if you've spent months, years or decades being true to your goals of paying down debt you would immediately go bananas with your spending once you reached the land of No Debt.
Go with what allows you to think more clearly.
RE: Paying down debt versus buying more DGI - Jimbo - 03-10-2015
The wife and I put a huge chunk into the 401k reducing income.
Pay double the mortgage on primary residence, pay regular on 2nd home.
With every day living expenses hard to put much away for stocks at this time.
RE: Paying down debt versus buying more DGI - benjamen - 03-10-2015
(03-10-2015, 11:35 AM)Jimbo Wrote: The wife and I put a huge chunk into the 401k reducing income.
Pay double the mortgage on primary residence, pay regular on 2nd home.
With every day living expenses hard to put much away for stocks at this time.
My life long financial goal has always been to keep my spending to half of my income. Buying used cars, never having cable TV, buying a house far below what the bank would allow me to borrow, ect. help me do so. This allowed me to pay extra on debt/invest even when our household income was under 50k
RE: Paying down debt versus buying more DGI - ChadR - 03-10-2015
benjamen, those are some of the things that my wife and I also do. This way we can do both. Though with her not working and staying home with the kids, we don't get to invest as much as I would like. Though I was able to buy 24 shares of NOV yesterday and will hopefully get in another purchase next month.
RE: Paying down debt versus buying more DGI - crimsonghost747 - 03-14-2015
To me this question is about risk management. Sure the high interest debt like credit cards etc has to be paid off, that much is obvious. But with mortgages and other loans where the interest rates fall under 5% then it's a tough call. Can't really talk from personal experience as I have 0 debt at the moment.
But if you have good job security and a nice little cash buffer in case something bad happens such as your car breaks down, then I think it's a good idea to invest part of the money. You will still want to get rid of the debt, at least most of it, at some point but with the low interest rates we have nowadays I really don't see a reason to hurry with it.
RE: Paying down debt versus buying more DGI - carpenter333 - 03-19-2015
Some really good comments and mind sets. It really is individual specific.
I am currently pushing hard to finalize payment of my home in the next 7 years. I don't expect to see interest rates rising any time in the near future, but I am not very comfortable with where the global economy is sitting right now either. For me its the less of two evils.
At the same time I am making minor weekly contributions to my portfolio (RRSP) for both myself and my spouse so that we still gain some exposure and growth.
RE: Paying down debt versus buying more DGI - benjamen - 03-19-2015
By the end of the summer we should have payed off all student loan and auto debt, leaving us will just the primary mortgage. Then the question becomes do I either invest in dividend stocks yielding 3-5% or pay extra on a loan that has (net of tax deductions) a 2.7% fixed interest rate. While it would be nice to have no debt, it may be better in the long run if we put any extra cash towards investing.
RE: Paying down debt versus buying more DGI - ChadR - 03-19-2015
You can hedge your bets and do both. Best of both worlds. It's what my wife and I do.
RE: Paying down debt versus buying more DGI - Jason - 04-01-2015
It seems like a lifetime ago since my wife and I decided to take the plunge and purchase a home. I do remember we didn't qualify for a first time home buyers loan because we had saved to much money. The guy handling our loan offered some advise which was to invest the money we had accumulated for a down payment which was close to 20 thousand. I was in my mid twenties at the time and my investment knowledge was limited at best. I opted to plow every possible penny into reducing our mortgage(5.4%interest back then) and came up with a five year plan to do so. It ended up taking 7 years but since 2006 we have been mortgage free. I remember that we were so excited to make that final payment that we literally only had $300 dollars in the bank after we wrote the check. Probably one of the more insanely stupid things I have ever done but it worked out. We ended up buying a brand new car that year and paid it off a year later. Since that day we have been debt free and there is no better feeling. A couple of weeks ago we traded off that car and bought another brand new car. This time we paid cash which felt good. Although it was hard to part with has,csx, and some pepsis shares to pay for it, my dividend income was surprisingly unaffected. For me piece of mind is king and now I can focus on my new 14 year plan. Retirement
RE: Paying down debt versus buying more DGI - Jimbo - 04-02-2015
Jason, good for you and good luck on the 14 year plan.
We are busy paying hard(doubling up) on the front end of a mortgage will probably slow the double as the interest payment drops.3 more $700 payments on the wife's new car, the boys are finished with college (all paid) Have a decent savings acct and still able to put a little money away now and then.
That said, still looking at another 12-15 years to play catch up with stocks and retirement funds.
RE: Paying down debt versus buying more DGI - Jason - 04-02-2015
(04-02-2015, 02:09 PM)Jimbo Wrote: Jason, good for you and good luck on the 14 year plan.
We are busy paying hard(doubling up) on the front end of a mortgage will probably slow the double as the interest payment drops.3 more $700 payments on the wife's new car, the boys are finished with college (all paid) Have a decent savings acct and still able to put a little money away now and then.
That said, still looking at another 12-15 years to play catch up with stocks and retirement funds.
Thanks Jimbo, I think doubling up is smart. I made one big payment at the end of each year. I would have saved some money if I would of done it your way. Congrat's on putting your kids through college. With what they charge these days that couldn't have been easy.