Woulda, Shoulda, Coulda? Regrets On Debt Payoff?

As I write this, the Dow Industrial Average is above 16,000. The S&P 500 is over 1,800*.  These are records, people.  Well, not inflation adjusted records, but at least nominally.

We have money in the market in the form of our Roth IRAs and our 401K accounts, so those accounts will probably look a little plump if I sign into mint tonight**. But the thing is we’re just now getting around to setting up more taxable investment accounts since we spent the last year and a half de-leveraging to the tune of $100K.

Yup, long-time readers know that when we started out blogging here about a year and a half ago, our balance sheet looked very different than it does today. In addition to our current mortgage and our revolving credit card balances (that we use to earn rewards), we had:

  • $38K drawn on a fully-extended HELOC on our duplex,
  • $50K that we owed to Mr PoP’s parents since we borrowed it to initially buy the duplex, and
  • $8.6K on a car loan for Mrs PoP’s car.
  • Total: $96.6K in non-mortgage loans.

We’re Clearly Not Anti-Debt

When real estate was cheap around here (and boy did it get insanely cheap in the foreclosure crisis), we took on as much debt as we could to buy as much real estate as we could. That was the bulk of our debt. And the car, well… we were trying to keep as much cash available for investing in real estate as we could, so we took out a loan for the car.

But then real estate prices rebounded. And instead of wanting a lot of cash on hand to make investments in real estate, we figured we’d be better off trying to get some of the debt off the books since those three loans weren’t at particularly low interest rates.

  • Our HELOC is variable, 5.99% during this period,
  • the $50K family loan was at 5%, and
  • the car loan was at 4.99%.

In terms of guaranteed returns, paying down debt to get a guaranteed 5-6% return sounded not horrible, so that was our game plan. And we did it. Every month we took as much as we could and we threw it at whatever loan we were working on at the moment. The HELOC first, then the car loan, and the $50K family loan last.

But was that the perfect decision?


On the Back of the Envelope, Probably Not…

We were paying down loans with interest rates in the neighborhood of 5-6%, so when stock market has climbed with a CAGR of about 21% from June 2013 – July 2013, it’s pretty easy to see that the last year was not the ideal time to pay off debt. But just how much did we lose out on (not gain?) by paying off loans instead of keeping the loans and dropping everything into a taxable account instead.

As with most things in our financial lives, I made a spreadsheet…

Turns out, if we had not accelerated pay-off on any of these loans, and instead had dropped the money at the same rate as the debt payoff in a taxable account filled with shares of VTSAX (that’s Vanguard’s Total Stock Market Index Fund – Admiral Shares), our net worth would be about $11.5K higher right now than it currently is.

We’d still have ~$92.6K in non-mortgage debt on the books ($50K personal loan, $38K HELOC, and the car loan would be down to about $4.6K). But we’d have a taxable account containing ~$104.1K in VTSAX shares. And…

$104.1-$92.6 = $11.5K


But We’ve Got No Regrets

In any investment, hindsight is 20/20. We knew we had the opportunity to get secured gains of 5-6%, so we took them. In this case, we felt the bird in the hand was better than the possibility of a gold-covered bird in the bush. So we’re okay owning that decision and not regretting it in hindsight.

And if faced with the same scenario again, we’d probably take the exact same steps.


* Oops, spoke too soon. Though these quotes were accurate as I started this post on Monday at lunch, they didn’t stick and we weren’t able to get a market close at those prices.

** They didn’t.  The indices ended down for the day.  Ah well.  That’s what I get for looking more than once a month, eh?


What would you have done – pay the debt off or invest the monthly savings?

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