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Taxable investing vs debt paydown

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  • Taxable investing vs debt paydown

    Does contributing to taxable take precedence over low interest rate debt (less than 2.5% fixed)?

    For example, the 20% gross to retirement every year for me would mean max profit sharing 401k, HSA, and Backdoor Roth, with additional ~35k taxable to reach the 20% mark.

    I'm not sure if that makes more sense than just focus on paying down the debt over the next year or so, and then making up by contributing more than 20% the following year to make up for it. Does anyone have any thoughts on this?

  • #2
    It's based on personal preference. It doesn't have to be 0% or 100%, you can pick any split you want between the two. Carrying debt can be emotional for some people and paying that off can reap non-financial benefits.

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    • #3
      Personal preference here only.

      Hit the 20% retirement target.
      Hit the debt payoff target.
      Give your spending or personal investment a nice boost when the debt is gone. The focus is maintaining the process. When the needs change (car, house etc), rinse and repeat. Gross-taxes-retirement = save or spend.

      Accelerating debt payoff comes out of the right side.

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      • #4
        Is the debt backed by an asset? Business or mortgage?
        Either way I would try to invest the 20%.

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        • #5
          I'm always going back and forth on this subject.  Mathematically it makes a lot more sense to invest assuming a long time in the market and assuming that the US economy continues to grow as it always has.  In the short term, paying off debt might make more sense if we run into a recession any time soon.  That is, if it will bother you to invest money now and see it drop in value over the coming years.  If that doesn't bother you and you're going to keep investing and not sell at a low, then it doesn't really matter what the economy does in the short term.  Being able to say "I'm completely debt free" is also a very tempting prospect, so it can be tough to over look that.

          Will freeing up the cash flow associated with this debt allow you to invest more freely during the next recession?  Perhaps then paying it off now might make more sense.

          How much debt do you have?

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          • #6
            Aaaa... the age old question. Well asked though (filling tax advantaged accounts first).

            5-7%: leveraging your investments but not unreasonably
            3-5%: easy to beat with equities in the long run
            <3%: easy to beat with inflation in the long run

            To me whether to pay off depends on one's asset allocation (aka your risk level).

            Consider paying off if
            5-7%: you don't have a business to invest in
            3-5%: you are not ok being 100% equities
            <3%: you have sizeable bonds that are making less

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            • #7




              Does contributing to taxable take precedence over low interest rate debt (less than 2.5% fixed)?

              For example, the 20% gross to retirement every year for me would mean max profit sharing 401k, HSA, and Backdoor Roth, with additional ~35k taxable to reach the 20% mark.

              I’m not sure if that makes more sense than just focus on paying down the debt over the next year or so, and then making up by contributing more than 20% the following year to make up for it. Does anyone have any thoughts on this?
              Click to expand...


              Pretty sure if its over a one year time frame the difference is so neglible as to amount to zero difference at all outside timing factors that arent in your control.

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              • #8
                "For example, the 20% gross to retirement every year for me"

                Single radiologist only saving 20%...tell us about your expensive hobbies.

                If paying down debt that is at interest rates less than inflation makes you feel good, go for it. It's likely not the optimal financial strategy, but there is value to being free of debt.

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                • #9




                  Does contributing to taxable take precedence over low interest rate debt (less than 2.5% fixed)?
                  Click to expand...


                  Generally speaking, early career I would prioritize taxable investments over low interest rate debt pay down.  Later career I would prioritize debt pay down over taxable.  However, I always did some of both, simply altering the percentages based on my goals over time.

                  Debt paydown has a known, guaranteed annual return.  Taxable investments have a variable return, generally quite good over the long run, and generally quite volatile over the short run, including possible short term losses.  Need for liquidity should also factor into your allocation.  Once a debt is paid down, that money is no longer available for other investment opportunities.

                  Early career I would consider investing perhaps 75% of excess cash towards taxable and 25% towards debt.  Late career, I would recommend the opposite allocation.

                  After following this type of strategy over time, I have no debt left to pay off.  I put 100% of excess cash towards investments in stocks and bonds.  We have been flying all over the world in the front of the plane, that is now my alternate allocation strategy, with five trips so far this year and more planned.

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                  • #10




                    “For example, the 20% gross to retirement every year for me”

                    Single radiologist only saving 20%…tell us about your expensive hobbies.

                    If paying down debt that is at interest rates less than inflation makes you feel good, go for it. It’s likely not the optimal financial strategy, but there is value to being free of debt.
                    Click to expand...


                    No expensive hobbies sadly, just used all the discretionary $ I had last year for debt paydown.

                    Edit: I take that back, I just got a Tesla 3.

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                    • #11



                      Early career I would consider investing perhaps 75% of excess cash towards taxable and 25% towards debt.  Late career, I would recommend the opposite allocation.

                      After following this type of strategy over time, I have no debt left to pay off.  I put 100% of excess cash towards investments in stocks and bonds.  We have been flying all over the world in the front of the plane, that is now my alternate allocation strategy, with five trips so far this year and more planned.
                      Click to expand...


                      Sounds like a good life.

                      I know it's irrational thinking, but I just can't get myself to invest in year 10 of the longest bull market in history, outside of the tax-advantaged accounts. What goes up must come down at some point, correct?

                      Comment


                      • #12






                        Early career I would consider investing perhaps 75% of excess cash towards taxable and 25% towards debt.  Late career, I would recommend the opposite allocation.

                        After following this type of strategy over time, I have no debt left to pay off.  I put 100% of excess cash towards investments in stocks and bonds.  We have been flying all over the world in the front of the plane, that is now my alternate allocation strategy, with five trips so far this year and more planned.
                        Click to expand…


                        Sounds like a good life.

                        I know it’s irrational thinking, but I just can’t get myself to invest in year 10 of the longest bull market in history, outside of the tax-advantaged accounts. What goes up must come down at some point, correct?
                        Click to expand...


                        I agree Goggles but most are in the just dollar cost average camp.

                        Since we are in a nervous year 10 of the bull, I think you should put any extra into your educational debt or other debt if the interest rates are higher. Not good to carry a lot of debt so early on until you build comfortable equity elsewhere, get that ratio down. If it was 2009 or 2010 I may have said differently.

                        Comment


                        • #13




                          Aaaa… the age old question. Well asked though (filling tax advantaged accounts first).

                          5-7%: leveraging your investments but not unreasonably
                          3-5%: easy to beat with equities in the long run
                          <3%: easy to beat with inflation in the long run

                          To me whether to pay off depends on one's asset allocation (aka your risk level).

                          Consider paying off if
                          5-7%: you don't have a business to invest in
                          3-5%: you are not ok being 100% equities
                          <3%: you have sizeable bonds that are making less
                          Click to expand...


                          When you say bonds, are you referring to munis?

                          Comment


                          • #14
                            "What goes up must come down at some point, correct?"

                            No, not necessarily.

                            Google first hit $500/share 11/21/2006. Numerous articles then talked about how that was an insane price for google, how it was overvalued, etc. Sure, it did drop after that. 2008 happened. Fall of 2018 happened. There have been several corrections. But even if you bought at that 'insane' all time high...your $1M is now worth $4.65M.

                            Markets go up and down. There will be corrections and bears. If you're confident in your abilities to see them ahead of time and bet the right way at both the tops and bottoms, then you definitely shouldn't pay down low interest debt. With your market timing vision, it would actually behoove you to borrow as much as you can, because you'll quickly parlay that into wealth beyond your wildest dreams if you're prescient at calling tops and bottoms.

                            Comment


                            • #15
                              “What goes up must come down at some point, correct?”

                              Yes! No! Maybe! For how long? Pull up an S&P 500 chart. The problem is every up is followed by a down and then another up. Regardless what time period, the left is “always lower”. The trend for the long term is up. I cannot guarantee a continuation. But I can say it is likely that any down will be followed by a larger up. At least that’s what has happened throughout history.

                              No one has perfected “hunches” or a system with advanced leading indicators. You are wise to address your “fears”. December through January is a great example. Sitting on the sidelines would have forfeited a tremendous run. Your risk tolerance and capacity need to leave you in a comfort zone. More stock is more volatility. Maybe stocks aren’t for you. I would suggest you focus on AA (stocks/bonds) before you even consider placement or tax efficiency. Some folks are perfectly happy with CD’s. When to buy, when to sell, and when to go back in is a fool’s game. Data shows behaviors result in significant under performance.
                              Time in the market is more important than when you buy. The “Wall of Worry” never disappears. There is a big difference between volatility and permanent loss.
                              Pick an AA and hold your nose and follow your plan.

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