General rule of thumb when deciding between eliminating debt or investing is to compare if the debt interest is greater than investment interest (investment rate of return).
If (debt.interest > investment.interest ), pay off debt first. Else, invest.
That's the equation, but you also have to consider risk when you make it, and weigh it against your personal risk tolerance. Paying off a mortgage is like making a risk-free investment for the term of the mortgage with a (pre-tax) return equal to the interest rate. Right now, 10-year T-bills are yielding around 2.4%, most mortgage loans are in the 3-4% range. Your risk tolerance may be higher, in which case by all means put your mortgage principle toward investing in the stock market or your startup, but be aware that a market crash can leave you deep in debt.
If (debt.interest > investment.interest ), pay off debt first. Else, invest.
I disagree with this tremendously. With your strategy, essentially what you are doing is buying stocks on margin. This magnifies your profits if things goes your way and magnifies your losses if things go against you.
Think about it this way - Interactive Brokers is an online brokerage with extremely low margin rates which are often half of current mortgage rates (see https://www.interactivebrokers.com/en/index.php?f=interest&p...). Using your logic, the right thing to do is to leverage yourself to the hilt for every penny Interactive Brokers will loan you at 1.63% or less and cross your fingers you make the right investment choices otherwise you're bankrupt.
Buying investments on margin, no matter how it is done, is extremely risky. You might understand those risks and have a high enough risk tolerance but please don't pretend investing on margin is a general rule everyone should follow.
When they said "investment.interest" I think they meant investment return percentage. I don't think they were advocating for investing on margin and maximizing leverage/risk, but rather deciding whether to put your $ towards your debt or towards an investment.
I don't think they were advocating for investing on margin and maximizing leverage/risk, but rather deciding whether to put your $ towards your debt or towards an investment.
It's the same thing. If it makes sense to keep $300,000 in debt to keep a $300,000 investment then it makes sense to go into $300,000 debt to make a $300,000 investment.
Whether that debt is a mortgage on a primary residence for a tax-equivalent-rate of 2.75% or margin interest for a tax-equivalent-rate of 1.63% makes little difference. This is what people who keep a high mortgage and invest the proceeds of that mortgage don't get. They are doing the equivalent of investing on margin which is extremely high risk. They could lose a large portion (or even all) of their investment and still be left with the debt.
From a google search:
"Buying on margin is borrowing money from a broker to purchase stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you'd be able to normally."
That's not what I meant, definitely wouldn't borrow to invest so much as decide to invest (if I came into a new chunk of money) money on hand.
I'm not sure where the assumption is that I meant to invest on margin - it feels like I'm missing something.
The person you're replying to wasn't trying to say you meant to invest on margin but that what you are doing is the same as investing on margin.
When you do margin trading you take on debt to allow you to buy more stock. In your case, you aren't actually "taking on" debt technically, but you choose not to pay it off so that you can buy more stock.
After all, the scenarios break down to debt + more stocks or no debt + less stocks.
Obviously there are some differences, but I hope that explanation of the analogy made sense. The point is, by investing money instead of using it to pay off debt you are increasing your risk and reward whereas when you pay off debt you decrease it.
Sure, if you enjoy pedantry, please go ahead and assume that I mean that's the one golden rule and I'm sitting here blindly buying up mutual funds with every spare dollar I have.
General rule of thumb when deciding between eliminating debt or investing is to compare if the debt interest is greater than investment interest (investment rate of return).
If (debt.interest > investment.interest ), pay off debt first. Else, invest.