Pay Off Debt or Invest? Think About Your Rate of Return
Andrew writes in:
My girlfriend and I bought a home last year and qualify for the First Time Homebuyer Credit. When you include my share of this, I will be getting back around $4500 in my tax refund. This is a lot of money to me and I’m trying to decide what to do with it. About half will go toward an engagement ring, but I’m torn between investing the other half or paying off my $2,000 in credit card debt. I currently have a very low APR on the credit card and can pay more than the minimum each month. As a licensed broker, I am very involved with the markets and believe I can make 10-15% a year. If I can get a higher percentage return on the investments than the APR I pay on the card, doesn’t it make more sense to invest?
In essence, Andrew is comparing two rates of return here.
First, there’s his credit card. An investment in paying off a credit card has a guaranteed rate of return – the interest rate on the card.
On the other hand, there’s the stock market. An investment in the stock market might have a higher hypothetical payoff, but it’s not guaranteed at all.
Regardless of whether the year was 2008 or 2010, paying off a 9.9% credit card will net you a 9.9% annual return on your money. Alternately, if you were able to get a 10% return on your stock investments in 2008, you were an absolute magician.
The reason that the standard advice is to pay off your high interest debts before you invest is because paying off high-interest debts is a far better investment than the stock market. Why? That rate of return is guaranteed – no stock market investment is ever guaranteed.
Here, Andrew might argue that he can invest in the stock market and return a bit better than average. That may or may not be true – we won’t argue that point here.
Even if Andrew can beat the market by 2% at any given time, his investment is still tied to the ups and downs of the stock market as a whole. In 2008, when many indexes lost 40% of their value, Andrew would have lost “just” 38%, for example.
Obviously, then, the investment Andrew is talking about is a long term investment, one that will likely pay off with a profit over a long stretch of time. If he can actually beat the market a bit, it’ll earn him a tidy return.
But that’s still not a good reason to throw money in in the short term.
Here’s what I propose, Andrew. Pay off that credit card debt, then cut up the credit cards until you can use them without accruing a balance. Then head down to your local bank and set up an automatic withdrawal from your checking account equal to the amount you were paying on the credit card debt. Channel all that money into your stock picking expertise.
If this is truly a long-term investment – and that’s when most people should invest in stocks unless they’re actively day trading – then it doesn’t matter exactly when you get into the stock market. Putting in a bunch of money now versus putting it in slowly over the next year makes little difference when you look at a fifteen year timeframe with unknown ups and downs.
Good luck.
Continue reading Pay Off Debt or Invest? Think About Your Rate of Return …
From The Simple Dollar.
Use your tax refund to save money in the long run
(This is an update of a post I made in 2009).
In an ideal world, a family has a pretty good idea no later than March 1 what its income and taxable situation will be for the fiscal year.
Therefore the working bees can tell their human resources departments how many deductions to take off the payroll, or the accountant how much money to set aside from the business income, and the final tax bill would pretty much equal the taxes actually paid during the year.
Here’s the reality:
- Tax laws are constantly changing with this or that deduction or tax credit added to the mix. New twist for this year: You can deduct off your 2009 taxes any eligible donations for the Jan. 12, 2010, Haiti earthquake relief efforts.
- Family circumstances do change and sometimes on short notice. You may know in the spring about a baby on the way or the upcoming marriage – but death and divorce are not so neat on the timing.
- And especially for my Michigan readers where layoffs, furloughs and pay cuts have been rampant: Sometimes you have no clue what your household income will be by the end of the year. The estimate I did for our family’s income in February 2009 had to be revamped six months later.
Is it any wonder that families who live paycheck to paycheck would prefer to err on the side of a refund – than on the side of paying taxes in the spring?
Now, there are circumstances in which the better solution is to update your payroll deductions. There really is no reason to get back thousands of dollars every the spring from Uncle Sam when you are chasing bills every paycheck. I did some tinkering with payroll myself after I saw my refunds get too high during the early 1990s.
But let’s assume you are happy with how your tax refund situation works out.
If you will get a refund this year, here’s what I want you to do with it:
Do at least one thing with that money that will help your family save money in the long run. And then follow up with those plans.
Do you need ideas?
- Purchase the office supplies you need to get on a grocery savings routine. My Grocery Shopping on a Budget 8 Week Plan explains how you can cut the grocery bill no matter where you decide to grocery shop or what newspaper you subscribe to.
- Pay off or pay down a credit card or a debt. If getting out of debt will require a long-term effort, read about the concept of debt snowballs.
- Buy the spray bottles, cleaning rags, dusting rags and other supplies you need to incorporate eco-friendly cleaning techniques into your home. You can still finish up the cleaning chemicals you have on hand while you try out alternative methods and see which ones work for you.
- Buy a slow-cooker, electric griddle, beginner’s cookbook, coffee pot, a new set of pots and pans or whatever you need in the kitchen to make it possible to cook more real food at home.
- Buy some edible plants for your garden or landscape. One of the best articles I read about the $600 economic stimulus checks from a couple of years ago was by a blogger who said she would use the money to buy fruit trees for her property.
- Take a DIY class. When you learn skills such as home canning, sewing, gardening, furniture repair, computer diagnostics, lawn maintenance and bookkeeping, you no longer have to pay someone else to provide those services for you.
- Buy a financial software package for your computer or a personal finance app for your mobile phone. You’ll make better long-range plans with your money when you track on a routine basis what you are spending.
- Review and inventory your disaster plans and supplies. If you live in Michigan or Ohio, you know the chances are good each year for at least one power outage because of weather circumstances. Do you need to buy hand-crank radio, a bigger ice chest or a generator to make sure you can get through such a situation with your wallet intact?
Continue reading Use your tax refund to save money in the long run …
From Monroe on a Budget.
How Low Can I Go?
My husband is going to school to be a pastor. He is a gifted preacher and has done a lot of pulpit supply for churches in need, but he is seeking a pastorate. There is a need for pastors in our state, however, most of the openings don’t pay well. They don’t pay as well as his Walmart job, as they are small churches in rural areas. In an old post, I mentioned that $500 per month was a realistic salary to expect from one of these pastorates, but it is certainly not set in stone that that is what we will get. I also mentioned that it was my goal that eventually, he would not have to work a second job. Is that possible, especially where we want a large family?
First, let’s look at our current monthly expenses breakdown:
Rent: $600.00
Phone: $6.09
Internet: $19.99
Auto Insurance: $31.22
Electric: $27.00
Satellite Radio: $12.95
Food: Estimated $140 average
Gas: $30-$90, depending on Dan’s classes
Auto: average $40 per month for oil changes and any maintenance or repairs
Average Total: $937.25
Rent:
The largest expense is obviously our rent. We are looking at building our own home, a small home. We like living in a small space, and it is a personal choice as well as a frugal one. Buying the building materials, as much used and discounted as possible, and building the home ourselves would cost around $20,000. After Dan is done with school, we will have his $4000 tuition money, that we get from our tax refund, to put toward this. So, if everything goes according to plan, which it often doesn’t, we could have a home in five years after graduation.
Where do I get these numbers, that building a home would cost $20,000? I get it from the Tumbleweed Tiny House website, which is where we will be getting our building plans from. We shaved a little off their estimated cost, as their estimates are from all new materials.
As our family grows, we are thinking we will be building a second Tumbleweed and putting them back to back as one home. This is something that could be done over several years. A second Tumbleweed would be less expensive than the first; it won’t need a kitchen, but would just be living space and loft. If you have questions about the Tumbleweed homes, they have their own website, full of information, and a search function at the bottom of the page.
There are portable houses from Tumbleweed, and that is what we really want. Their largest is 130 square feet, but we would customize the loft, which isn’t included in that measurement, doubling the floor space. The loft would be for sleeping and clothes storage and downstairs would be our living area. We don’t feel that we would ever need a home larger than our current apartment. Two Tumbleweeds, back to back, both with a full loft gives us 520 square feet.
There is the possibility that Dan will land a pastorate with a parsonage. These are rare in our area, as the churches are struggling financially, so we are not resting on this possibility.
Land:
With a house on wheels, you can park it temporarily in a trailer park, renting a lot. I’ve heard of people parking it on a friend’s lawn. But we would eventually want to buy our own piece of land. In Maine, land is plentiful. Once we are only paying lot rent of some sort, we could be saving much faster.
Food:
The next largest expense is food. I had a small garden this year, and am looking to enlarge it next year, more and more every year. This expense will increase with more children, but will decrease when we have land. We can be growing a large portion of our food and we are looking forward to eventually keeping chickens and a dairy cow. I imagine a $600 food budget will be possible to feed our family at it’s largest. Consider also that we won’t have all of our children at the same time. I think ten kids is a fair estimate, as we don’t use birth control, but at no time will we be feeding ten teenage boys. (The birth control issue will be it’s own post at some point.)
Energy and Heat:
Solar panels ar
e getting more and more affordable. I imagine that by the time we are ready to buy, we can get them for $4000, one year’s tax refund. Not to mention, you can make your own solar panels. I would investigate making my own pretty thoroughly before investing anything into it, though. There is solar heat, which I’ve found for under $3000. We would want that to be backed up with propane. Propane would be what we start with, as the cost is included in the estimate of building the home.
The Rest of our Current Expenses:
Phone, internet, and auto expenses are hard to determine at this point. We don’t know where government regulations and the market will lead these prices, nor what our needs will be, such as how far we live from the church where Dan pastors.
Taxes:
When we have a home on our own land, we will be paying land taxes. This may change the order of purchases more than anything else. It may be wise to not buy our own land until we have a solar panels and solar heat, so that our tax refund can be going to the land taxes.
Clothes:
Our kids’ clothes come from yard sales and from relatives’ hand-me-downs. I 
also sew girls’ clothing, mostly because I like to design it. Clothes are and will continue to be handed down from one kid to another. Taking care of the clothes allows them to last a long time and homeschooling will relieve my kids of the pressure of only having name brand and trendy clothes. We really only need to buy two full wardrobes, with some replacements over time. There is one wardrobe for boys, and one wardrobe for girls. There won’t be two kids the same size at the same time, unless we have twins. Regardless, I don’t consider clothes to be a large expense, as we are very frugal about our clothes choices.
Our goal is sustainability and partial financial independence. I want my husband to be able to devote everything to the work he cares so much about, being a pastor. We don’t know when we will reach this goal completely, or if it is something we won’t reach until most of our kids have grown. In the meantime, if he has to work outside of his pastorate, he can go from full time to part time, and at some point rest on a few days of independent contract jobs per month to make up any additional income. It is a step by step process, and each step brings us closer to financial independence.
Yes, there are a few overlooked expenses, such as trash pick-up and water, not listed. This is meant to be a general overview of our goals, not a total breakdown of every anticipated expense.
Continue reading How Low Can I Go? …
From Under $1000 Per Month.
How Low Can I Go?
My husband is going to school to be a pastor. He is a gifted preacher and has done a lot of pulpit supply for churches in need, but he is seeking a pastorate. There is a need for pastors in our state, however, most of the openings don’t pay well. They don’t pay as well as his Walmart job, as they are small churches in rural areas. In an old post, I mentioned that $500 per month was a realistic salary to expect from one of these pastorates, but it is certainly not set in stone that that is what we will get. I also mentioned that it was my goal that eventually, he would not have to work a second job. Is that possible, especially where we want a large family?
First, let’s look at our current monthly expenses breakdown:
Rent: $600.00
Phone: $6.09
Internet: $19.99
Auto Insurance: $31.22
Electric: $27.00
Satellite Radio: $12.95
Food: Estimated $140 average
Gas: $30-$90, depending on Dan’s classes
Auto: average $40 per month for oil changes and any maintenance or repairs
Average Total: $937.25
Rent:
The largest expense is obviously our rent. We are looking at building our own home, a small home. We like living in a small space, and it is a personal choice as well as a frugal one. Buying the building materials, as much used and discounted as possible, and building the home ourselves would cost around $20,000. After Dan is done with school, we will have his $4000 tuition money, that we get from our tax refund, to put toward this. So, if everything goes according to plan, which it often doesn’t, we could have a home in five years after graduation.
Where do I get these numbers, that building a home would cost $20,000? I get it from the Tumbleweed Tiny House website, which is where we will be getting our building plans from. We shaved a little off their estimated cost, as their estimates are from all new materials.
As our family grows, we are thinking we will be building a second Tumbleweed and putting them back to back as one home. This is something that could be done over several years. A second Tumbleweed would be less expensive than the first; it won’t need a kitchen, but would just be living space and loft. If you have questions about the Tumbleweed homes, they have their own website, full of information, and a search function at the bottom of the page.
There are portable houses from Tumbleweed, and that is what we really want. Their largest is 130 square feet, but we would customize the loft, which isn’t included in that measurement, doubling the floor space. The loft would be for sleeping and clothes storage and downstairs would be our living area. We don’t feel that we would ever need a home larger than our current apartment. Two Tumbleweeds, back to back, both with a full loft gives us 520 square feet.
There is the possibility that Dan will land a pastorate with a parsonage. These are rare in our area, as the churches are struggling financially, so we are not resting on this possibility.
Land:
With a house on wheels, you can park it temporarily in a trailer park, renting a lot. I’ve heard of people parking it on a friend’s lawn. But we would eventually want to buy our own piece of land. In Maine, land is plentiful. Once we are only paying lot rent of some sort, we could be saving much faster.
Food:
The next largest expense is food. I had a small garden this year, and am looking to enlarge it next year, more and more every year. This expense will increase with more children, but will decrease when we have land. We can be growing a large portion of our food and we are looking forward to eventually keeping chickens and a dairy cow. I imagine a $600 food budget will be possible to feed our family at it’s largest. Consider also that we won’t have all of our children at the same time. I think ten kids is a fair estimate, as we don’t use birth control, but at no time will we be feeding ten teenage boys. (The birth control issue will be it’s own post at some point.)
Energy and Heat:
Solar panels are getting more and more affordable. I imagine that by the time we are ready to buy, we can get them for $4000, one year’s tax refund. Not to mention, you can make your own solar panels. I would investigate making my own pretty thoroughly before investing anything into it, though. There is solar heat, which I’ve found for under $3000. We would want that to be backed up with propane. Propane would be what we start with, as the cost is included in the estimate of building the home.
The Rest of our Current Expenses:
Phone, internet, and auto expenses are hard to determine at this point. We don’t know where government regulations and the market will lead these prices, nor what our needs will be, such as how far we live from the church where Dan pastors.
Taxes:
When we have a home on our own land, we will be paying land taxes. This may change the order of purchases more than anything else. It may be wise to not buy our own land until we have a solar panels and solar heat, so that our tax refund can be going to the land taxes.
Clothes:
Our kids’ clothes come from yard sales and from relatives’ hand-me-downs. I also sew girls’ clothing, mostly because I like to design it. Clothes are and will continue to be handed down from one kid to another. Taking care of the clothes allows them to last a long time and homeschooling will relieve my kids of the pressure of only having name brand and trendy clothes. We really only need to buy two full wardrobes, with some replacements over time. There is one wardrobe for boys, and one wardrobe for girls. There won’t be two kids the same size at the same time, unless we have twins. Regardless, I don’t consider clothes to be a large expense, as we are very frugal about our clothes choices.
Our goal is sustainability and partial financial independence. I want my husband to be able to devote everything to the work he cares so much about, being a pastor. We don’t know when we will reach this goal completely, or if it is something we won’t reach until most of our kids have grown. In the meantime, if he has to work outside of his pastorate, he can go from full time to part time, and at some point rest on a few days of independent contract jobs per month to make up any additional income. It is a step by step process, and each step brings us closer to financial independence.
Yes, there are a few overlooked expenses, such as trash pick-up and water, not listed. This is meant to be a general overview of our goals, not a total breakdown of every anticipated expense.
Continue reading How Low Can I Go? …
From Under $1000 Per Month.