Pay Off Debt or Invest Interview 1 (Winning Personal Finance)

I recently wrote about a variety of factors impacting whether one should pay off debt or invest. Everybody’s financial situation is different and this decision has numerous variables. I thought it would be helpful to share stories and reasoning from those who’ve made this decision. Below is a set of questions in which I interviewed the most willing participant I could find:

Myself.

Interview with Winning Personal Finance

Sorry if that’s a little weird. In the coming weeks, I’m going to post the answers to these questions from other bloggers. It will be fun and informative to see how each situation and decision was different.

How much debt did you start with and how did you accumulate it?

I took out a 336K mortgage on my primary residence in 2015. Doing so was part of our family’s plan to reduce our cost of living so my wife could stay home and raise our son. I have no other debt aside from credit cards that we pay in full each month.

Related Posts:
Time or Money – How we cut our budget to become a one income family.
How We Made The Switch From Double to Single Income – Guest post on Keep Thrifty

What is the term and interest rate?

My loan has a 30-year term with a fixed interest rate of 3.625%.

Did you look into refinancing or consolidating the loan?

At one point, I considered refinancing to a 15-year fixed loan. Shorter term loans tend to have lower rates. I wanted to see if the lower rate was enough incentive to speed up my repayment plan.

If so, what was the result and why?

I decided against the refinance (for now). The slight benefit in rate I’d have realized didn’t seem worth paying fees to refinance. A 15-year loan would increase my payments and reduce my available monthly cash flow. I do not want to reduce my options right now.

How much did you have available monthly to use for debt or investments?

After maxing out my 401(k), HSA, IRA and my wife’s IRA, I should have about 8K left this year.

What investments did you consider when you evaluated your debt/invest decision?

I’d put incremental investments into Vanguard’s Total Stock Market Index Fund (VTSAX).

In what type of account(s) would the investment be held?

I’ve already set aside the funds to max out my retirement accounts. My remaining “best available options” are a 529 plan for my children’s college savings or a plain old taxable brokerage account. (A “taxable” account is an investment account that’s funded with after tax money. It doesn’t have any of the advantageous tax benefits that retirement accounts do).

I’m picking the taxable account over the 529 today. I already have a healthy balance in my kids 529s. For this money today, I prefer the increased flexibility of a taxable account over the tax benefits of a 529.

If the likely scenario comes up that we need more than I’ve already saved for college, this decision could be sub-optimal due to loss of the 529 tax advantages. It’s a risk I’m willing to make.

I can use money from a taxable account to pay for college but 529’s have restrictions on use to avoid a penalty. My children are both under four years old after all, so I should have time to catch up on college savings if necessary.

Did you consider the tax deductibility of interest or the tax burden on investments in your decision?

I always consider the tax impact of financial decisions. What kind of money nerd would I be otherwise?

In 2017, the interest paid on my mortgage is deductible because I’m going to itemize my tax return. I’d have itemized with or without any mortgage interest. Therefore, the effective rate I paid on my mortgage was even less than the 3.625% stated rate.

In 2018, the new tax rules change my tax return drastically. The standard deduction increased. Plus the deduction for state income tax and property tax is now capped at $10K combined. This will cause me to take the standard deduction instead of an itemized deduction. The effect is that my mortgage interest will cost more than last year since I will no longer have a tax benefit from deducting it.

Pay Off Debt

There are no tax benefits for investing in a taxable account per se. In 2018, long-term capital gains and qualified dividends are taxed at 0% if your taxable income is under $77,200 for married filing jointly. They are taxed at 15% if your taxable income is between that amount and $279,000. I’d fall in that 15% capital gains tax bracket today.

I plan to sell my taxable investments and realize most of the potential gains when I’m “retired” with lower taxable income. Ideally, this will allow me to pay NO TAX on most of the expected gains.

Did you choose to pay off debt or invest?

Even after the change to the tax impact of my loan, I’ve continued to make the minimum mortgage payments and invest the extra money. As of this writing, my investment of choice has returned 6.69% since its inception on 11/13/2000. Yes, future returns are uncertain. Even so, I’ll happily make a calculated bet that my investment will outperform the 3.625% interest I’m paying on my loan.

I'd Invest

After all, the Stock Market Will Always Go Up Over Time.

Whenever I begin to live on my investments, I’ll probably want to change my plan. I’ll pay off the mortgage to reduce sequence of return risk to my portfolio. While I’m in the wealth accumulation phase, I’m willing to roll the dice on the positive expectation of stock market returns.

I’d also bet $200K on a coin flip with positive expectation!

What three key factors drove this decision?

1) My willingness to take calculated risks to reduce the time it takes to reach my financial independence goal.

2) The after tax expected returns on my investment being greater than the mortgage interest rate.

3) The benefit of liquidity of my investment. I can sell shares and cash out my investments if necessary. Having investments accessible may be helpful if I want to take a risk and change careers in the future.

Did you give up a 401(k) match or similar “free money” opportunity to accomplish your goal?

Nope. I’d never give up a 401(k) match to pay down low interest rate debt.

When you started paying it off, when did you anticipate finishing the payoff?

We took out a 30-year loan in 2015. I was 32 and anticipated paying it off when I retired. At the time, I’d have guessed (without knowing the 4% rule) this would happen around age 55. After running the numbers, it’s looking to be closer to age 45. I plan to pay off the remaining mortgage in large chunks once I’m close to my financial independence number.

Looking back, would you do anything differently?

Not at this time. The market has been on fire (no pun intended with the financially independent retire early acronym) lately. But I’m not expecting this run to continue for the next 10 years. How sweet would it be if it actually happened though? If it did, I’ll probably be FI sooner than my goal. I’d have the cash to pay off the loan and can use my time for whatever I wish.

Would you like to be featured here? Want to share your pay off debt or invest story? Please reach out via my contact page or on Twitter.

Questions:

Will you choose to invest or pay off debt with your next available dollar?

What do you think of this interview format? Was it helpful? Is there a question missing that I should add?

Make sure you’re on my email list so you don’t miss my next Pay off Debt or Invest Interview!

26 thoughts on “Pay Off Debt or Invest Interview 1 (Winning Personal Finance)”

  1. Hey Jason –

    Nice recap of the conversation between the interviewer and interviewee. It appeared that the two were usually in sync – usually 🙂 .

    Overall, the questions were good. I’d suggest asking what % (not number) of your monthly cash flow goes toward paying the particular debt. Percentages are useful because people can make comparisons to their respective situation.

    Thanks again for the post. – Mike

    1. We were so much in sync that this may have been the quickest post I ever drafted!

      I like your proposed question. It may help show the magnitude of the debt on the persons day to day life. Both total dollars and percent of income can be relevant to putting the debt into perspective.

  2. My decision to pay off $100,000 of mortgage debt was based purely on emotion. I didn’t want to be in debt because I felt it would keep me a prisoner of the corporate grind. I was so right and have no regrets.

    1. That’s great Dora. I’m so glad it’s worked out for you.

      If I put this money towards my mortgage, it would still take years to get the balance to zero. I’d be stuck in the corporate grind until it’s gone. By investing, I’m hoping the investment returns beat the mortgage rate and give me the ability to pay the mortgage off in full as quickly as possible.

      As of today, I’d rather maximize my net worth more than calm my emotions.

      1. A $336,000 mortgage is quite the sum. One of my thirty-ish friends bought a $520,000 home, borrowed from her 401k for the down payment, and has a huge mortgage. Yikes!

        Did I mention that I saved $50,000 while paying down the mortgage? I prefer doing a little of both, paying down debt and saving/investing.

  3. Great start Jayson! The questions asked pretty much cover all the basic stuff, 401k, Real Estate, taxes, stocks and other investments and debts. You can always expand in the future depending on each individual’s situation such as age and financial situation.

    1. Age and financial situation are great questions to add. In my interview’s with others (to be posted), I’ve asked for an overview but did not include the same for myself. Ooops. In case you are curious, I’m 34 and a little less than halfway to my FI number.

  4. Great post and great questions to ask yourself! I have always been between the idea of paying off or investing, and it’s definitely a personal choice. It’s refreshing to see another happily investing in taxable accounts outside of all the tax-advantaged options. We do that as well even though it is not “mainstream” due to our awful options in public employment for tax-advantaged accounts. So, our main option outside of IRAs is taxable as they are lower fees and we’ll do better in the long run. I’d be happy to share my answers to your interview 🙂

    1. I’ll be sure to send you the questions. Thanks for offering.

      Are you saying that the fees in your job’s tax advantaged accounts are so high that it’s worth passing on the tax benefits?!?! That’s crazy! Do you have a post where you’ve done that analysis? I’d love to read it. Maybe you can get enough traction with it to convince them to change the plan.

    2. Jason – enjoyed this post.

      Kate – very surprising to hear that your tax advantaged options as a public employee are that bad. Not sure if you work for a state or municipality but in either case I would think your employer would be able to attract either better offers or better vendors given the number of investors/employees they would bring to the table.

  5. Great post, Jason! I actually had a fun debate with my friend about taking out a 30 vs. 15 year mortgage. He chose to argue in favor of taking out the 30 year mortgage because he could use the extra cash flow to invest in the market. I played devil’s advocate and argued that paying off your mortgage in 15 years vs. 30 is guaranteed to save you money, whereas there is no guarantee that your investments continue to net you a nice return. It was a fun debate and I don’t think there is any right answer. Just interesting to see everyone’s thought process.

    1. I see both sides of this one. A 30 year will give you more cash flow flexibility a 15 year should give a better rate. It will also force you to save into home equity more.

      1. I agree! No debt is good debt. Some debt is better that others, as you mentioned, with higher and lower interest rates. However at the end of the day, it’s still debt, and you are still paying someone else interest on that debt.

        1. Yes, it’s still debt and you are still paying interest. But, if you earn more with your money than you pay in interest you are winning. If you do so with risk free investments, it’s arbitrage!

  6. Nice interview Jason. You are a great interviewee and interviewer.

    This question is very tricky. For us, we choose to do a little bit of both to make sure we hopefully come out of the next recession unscathed.

  7. I enjoyed the interview! I always go back and forth on this too. Mortgage debt is the only debt we have. We were paying down the mortgage until we moved recently and now we are just focused on investments. I can’t really fault either decision.

  8. I’m doing the same thing for the same reasons. The mortgage is the cheapest money you can borrow. It’d be a different story if the mortgage interest rate is 9%. At that point, I’ll take the 9% guarantee returns and pay extra.

  9. This was cool! This is always a heavily debated topic.

    I don’t think there is ever a “right” decision. My gut has told me to take a balance approach. I am investing way more then my mortgage pay down and carry no other debt.

    I do choose to actively pay down the debt though faster then the normal 30 year schedule. 30 years just isn’t me! With this heater of a market I don’t mind paying off some debt either. If the market takes a tank I would most likely shove more chips in the market.

    Great write up.

    1. Thanks DM. It’s an interesting point about current market dynamics. They currently are proving why I prefer to invest. Still, when the next recession comes, this plan could make me look silly. There have been many more comments on here about splitting between the two options than I expected. I tend to try and figure out the “right” play for me and go all in with it.

  10. Great post! I love the format of interviewing yourself. I may have to borrow this idea for my own blog sometime in the future. I always ask myself whether I should be paying down debt or investing my income and your post gives helpful questions to ask yourself anytime you find yourself in this situation. Nice work!

Leave a Reply

Your email address will not be published. Required fields are marked *