cozmopakParticipantStatus: PhysicianPosts: 77Joined: 01/08/2017
I have 128k left in my buy in loan at a 5.5% interest rate. I could pay all of it off today, but that would completely deplete my emergency fund. Would you do it anyway? This would increase my monthly cash flow by about 5100 dollars/month.August 14, 2019 at 3:00 pm MST #238964ZaphodParticipantStatus: Physician, Small Business OwnerPosts: 6177Joined: 01/12/2016
Its not a great rate all things considered. I probably wouldnt completely deplete my emergency fund for it though.
You have 128000/5100=25 months of that level of cash flow already in the bank.
Any refinancing or loan switches you could use to get a better rate? Rates are super low right now.CordMcNallyParticipantStatus: PhysicianPosts: 2806Joined: 01/03/2017
How much of an emergency fund do you really need? I would consider paying the difference towards the practice loan.
“But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
― Benjamin Graham, The Intelligent InvestorAugust 14, 2019 at 3:12 pm MST #238967childayParticipantStatus: PhysicianPosts: 1009Joined: 01/09/2016Any refinancing or loan switches you could use to get a better rate?Click to expand…
AgreedAugust 14, 2019 at 3:45 pm MST #238973cozmopakParticipantStatus: PhysicianPosts: 77Joined: 01/08/2017
I could, but I’m lazy considering that I plan to have it paid off very quickly.August 14, 2019 at 3:48 pm MST #238974Molar MechanicParticipantStatus: Dentist, Small Business OwnerPosts: 394Joined: 10/29/2017
5+% interest sucks.
Kill off $113,000, keep $15k in the bank. Pay loan anytime it goes over $15k.
Have a nice dinner when the loan is gone.
Rebuild e-fund. Invest.jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 8113Joined: 01/09/2016
You do need to consider the tax component. A buy-in for a practice you are actively working in is fully deductible, so it may not costing as much as you think. Freeing up $5,100/mo cash flow is actually a straw man reason. [NOTE – see clarification on “fully deductible” in response to @humbleinvestor below]
- That said, I never recommend a client make a decision based solely upon tax savings.
- That said, early debt payoff for a HIP who is on a path to early FI has a negligible impact on lifetime wealth. Seriously negligible. At that point, it is an emotional decision. As much as I rail against emotions in investing, this is an appropriate consideration for this scenario:
- Is the debt a huge weight on your shoulders? Do you think about it every day/constantly? Does it make you feel bad to have to deal with it? Pay it off asap. [This is especially relevant for student loans, which feel especially onerous since clients are sending out $ into what feels like a black hole.]
- otoh, is it just a math equation to you? If so, in this situation, I might suggest waiting a few months rather than depleting your e-fund. Doing so is, again, negligible to the point of irrelevancy in the overall lifetime results.
It helps to keep in mind that, from your perspective, where you are today is the reality of your life. But it’s only a feeling – rationally, you need to accept that it’s not your reality, just your current reality.
The real reality is your long-term projections – will your choice affect your ability to meet your most important goals? Over the long term, the difference between the two thins out to nil.
I have this conversation with clients regularly and hope this perspective (awkward as it comes across, sorry) will help non-clients who have these debt payoff issues.PedsModeratorStatus: PhysicianPosts: 4405Joined: 01/08/2016
You have a130K efund……August 14, 2019 at 5:13 pm MST #238983jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 8113Joined: 01/09/2016
You have a130K efund……Click to expand…
You have a gift.August 14, 2019 at 5:26 pm MST #238985HumbleInvestorParticipantStatus: Physician, Small Business OwnerPosts: 207Joined: 12/28/2016
@jfoxcpacfp is the whole monthly payment for the buyin deductible? I thought only the interest is deductibleAugust 14, 2019 at 7:17 pm MST #239026Molar MechanicParticipantStatus: Dentist, Small Business OwnerPosts: 394Joined: 10/29/2017
J-Fox can give a better answer, but it will come down to “It depends on how the deal was structured.”
Did he buy hard assets? Yes, over time on a depreciation schedule.
Did he buy stock? No. Not deductible.
Pay a management fee? Yes, in the year it was paid.
It all comes down to the contract, and if it’s like mine, the answer is all of the above.August 15, 2019 at 4:10 am MST #239077jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 8113Joined: 01/09/2016
@jfoxcpacfp is the whole monthly payment for the buyin deductible? I thought only the interest is deductibleClick to expand…
I apologize for the lack of clarity – I should have said the interest on the buy-in is fully deductible. The point I was trying to make is that investment interest is typically deductible only against investment income. In your situation, the interest is fully deductible.August 15, 2019 at 4:58 am MST #239086