The Motley Fool Discussion Boards

Previous Page

Personal Finances / Credit Cards and Consumer Debt

URL:  http://boards.fool.com/kahunacfs-you-wrote-it-is-actually-quite-easy-to-30376908.aspx

Subject:  Re: Student loan scenario Date:  11/12/2012  2:11 PM
Author:  joelcorley Number:  306414 of 308474

kahunacfs,

You wrote, It is actually quite easy to find investments that will earn more than a 6.8% rate of return. Some Quality Utility companies as well as Master Limited Partnerships and Pipeline Companies have dividend yields that exceed 6.8%.

But is he paying the 6.8% with after-tax money? If so he needs to consider tax consequences too. Assuming a 25% marginal tax bracket, he'd need about a 9.1% APY to break even. Even assuming the government renews the qualified dividend rate of 15% (unlikely with Obama re-elected), he'd need an 8% APY. You simply can't get those kinds of yields today without taking big risks.

In any case, Flashq213 simply does not give enough information about his finances to give any well-informed opinion.

However, the general advice found in the Credit Card / Consumer Credit Board FAQ applies and is probably the best advice anyone here could give, without more specific information. The applicable advice from the FAQ ( http://boards.fool.com/okay-here-it-is-thanks-for-the-help-w... ) is here:

Do I pay off my credit cards/student loans/mortgage before investing? -
If your employer offers a 401(k)/503(b) plan, at the very least invest the maximum amount your employer will match. (if applicable)
After that, pay off ALL your credit cards. Period. End of story. They are most likely going to have an interest rates far exceeding what you can reasonably expect to earn on your investment, after costs and taxes. Paying them off is like an instant 10+%, guaranteed, tax-free return. No investment can do that. There are certain very limited exceptions to this rule, (6-month, no interest deals) but that is it.
For a student loan: It depends. If you have a loan locked in at a low interest rate, maybe you can invest first. Otherwise no. The same guaranteed-return statement above applies here. (NOTE: Student loan interest is sometimes tax-deductible. This can lower your effective interest rate.)
Mortgage: For a regular (as opposed to sub-prime) mortgage, it is purely an emotional decision. From a financial perspective, the historical, after-tax, returns from the stock market exceed that of tax-deductible mortgage interest. From an emotional perspective, it can be a great lift to own your home free-and-clear. Obviously, if the mortgage is paid off it takes a lot more traumatic financial event to have you leave your house
As a side note, you should really build up a 3-6 month e-fund before you go investing "spare" cash.


So the correct answer is, It depends...

- Joel
Copyright 1996-2014 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us