Pay off debt or invest?

6084 Views 10 Replies 11 Participants Last post by Robillard, May 8, 2009

MGL

Discussion Starter · May 7, 2009

I've got a scenario on which I'd appreciate some PF blogger input:
I posted this question to another forum but then realized that this might be an even better place to get a response!

I've currently about $72,000 in debt, roughly $20,000 in student loans and $52,000 mortgage debt. Interest rates are low and debt is being paid down aggressively. I've also got total assets of roughly $300k, and a small business that I've been playing around with for several years just sold (literally closed today!) with net proceeds of $90k.

My initial plan was to take the sale proceeds and eliminate all debt- I've long said that being debt free and truly financially independent is a goal, and this is a great opportunity to accomplish this. At the same time, my business was a great source of side income and it would be nice to replace one income producing asset with another.

I'd like to hear opinions on whether I should use this cash to eliminate debt or invest it. I'm not saying that I'm going to listen, but I'd still like to hear your thoughts!

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stephenheath

· #2 · May 7, 2009

Why not pay off the debt (assuming the student loan is higher interest than you will get in a high interest savings account, and the mortgage penalty is not significant), and then if you do find a good business, tap into a HELOC? While a HELOC might be a bit more interest than a mortgage, since you're using it for income purposes it should be tax deductible, which should put more money in your pocket, especially if rates go up.

Just brainstorming with you though, there's still too many unknowns to really say that's a good or bad idea, like how long you expect it to take you to find a new business.

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mfd

· #3 · May 7, 2009

stephenheath said:
Why not pay off the debt (assuming the student loan is higher interest than you will get in a high interest savings account, and the mortgage penalty is not significant), and then if you do find a good business, tap into a HELOC? While a HELOC might be a bit more interest than a mortgage, since you're using it for income purposes it should be tax deductible, which should put more money in your pocket, especially if rates go up.

Just brainstorming with you though, there's still too many unknowns to really say that's a good or bad idea, like how long you expect it to take you to find a new business.

I totally agree. Idle cash is evil and I'm assuming it would have to sit there for a bit while you decide on what invest it. Go with what you know and pay of your debt. Use the cash that you free up to start purchasing your income producing asset.

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Rickson9

· #4 · May 7, 2009

MGL said:
I've got a scenario on which I'd appreciate some PF blogger input:
I posted this question to another forum but then realized that this might be an even better place to get a response!

I've currently about $72,000 in debt, roughly $20,000 in student loans and $52,000 mortgage debt. Interest rates are low and debt is being paid down aggressively. I've also got total assets of roughly $300k, and a small business that I've been playing around with for several years just sold (literally closed today!) with net proceeds of $90k.

I'd like to hear opinions on whether I should use this cash to eliminate debt or invest it. I'm not saying that I'm going to listen, but I'd still like to hear your thoughts!

Couldn't you do both?

Liquidate invested assets of $72K to pay off student loan + mortgage.

Borrow $72K against your total assets of $228K ($300K - $72K).

Reinvest in the same $72K of assets. Now the interest on the 'new' $72k debt is tax deductable and you still have $300K worth of assets and no student loan and no mortgage?

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CanadianCapitalist

· #5 · May 7, 2009

There are some unknown variables here. For instance, what interest are you paying on the mortgage? If I were paying 5% on my mortgage, I'd pay it down. If instead, I have one of those prime minus 0.75% mortgage, I'd be tempted to allocate the assets towards stocks and plan to pay down the mortgage out of savings over the remaining term.

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MoneyGal

· #6 · May 7, 2009

The other caveat is that student loan debt is not like other debt. The interest paid gives rise to a tax credit giving (in Ontario at least) tax relief of about 1.25% on the interest rate paid.

The other thing is that student loans are deferrable (you can put them on hold if you go back to school) and there are also interest-rate-relief programs for SL debt.

I know your SL debt is relatively small. But you should run the numbers including the after-tax (after-tax-credit) IR on the student loan so you are comparing after-tax rates. Make sense?

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FrugalTrader

· #7 · May 7, 2009

MGL said:
I've got a scenario on which I'd appreciate some PF blogger input:
I posted this question to another forum but then realized that this might be an even better place to get a response!

I've currently about $72,000 in debt, roughly $20,000 in student loans and $52,000 mortgage debt. Interest rates are low and debt is being paid down aggressively. I've also got total assets of roughly $300k, and a small business that I've been playing around with for several years just sold (literally closed today!) with net proceeds of $90k.

My initial plan was to take the sale proceeds and eliminate all debt- I've long said that being debt free and truly financially independent is a goal, and this is a great opportunity to accomplish this. At the same time, my business was a great source of side income and it would be nice to replace one income producing asset with another.

I'd like to hear opinions on whether I should use this cash to eliminate debt or invest it. I'm not saying that I'm going to listen, but I'd still like to hear your thoughts!

Congrats on the sale of your business! Personally, if you have an open mortgage, i'd take the works and pay down all debt. If you're set on keeping debt to invest the windfall, then i'd do what the others suggest and invest with a HELOC after paying everything off.

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The Happy Wanderer

· #8 · May 7, 2009

First off, I would like to say congratulations! That is fantastic. It seems as if you are in a very good position.

I would probably just pay off all my outstanding debt completely. However, considering you have assets in the 300k range, and room to play with...it would be tempting to invest in other income producing assets.

Tough call.

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Mockingbird

· #9 · May 7, 2009

Congrats on selling your business.
Personally, I would pay down the debt. As Rickson9 said, you can always borrow against the asset if need to be. This would make it tax deductible.

Whatever you decide to do, just make sure the tax owing on the sale of business is accounted for.

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lb71

· #10 · May 7, 2009

I would also pay down debt and borrow to invest. Make sure the investment earns income. An investment for capital gains only is not deductible.

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Robillard

· #11 · May 8, 2009

Depending on what you would be investing in, and what sort of risk characteristics it has (expected return, time frame, variance of returns, etc.) I would be generally inclined to pay off debt unless the investment offers better risk-adjusted after-tax returns.

For example, if your mortgage has five year remaining and carries interest at an effective annual rate of 5%, and your alternative is a five-year corporate bond with the same effective annual rate of return, you are better off paying off the mortgage because the cash flow you free up from paying off your mortgage is riskless and tax free, whereas the bond issuer could potentially default, and there are taxes to be paid on the interest (if held in a non-registered account).

As long as you have debt, paying it down is a riskless alternative to any investment (unless you actually think you will need the cash for something more immediate).

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