Getting Closer to Being Debt Free

Posted by 25 August, 2008
My wife and I just sold a house. Now, what to do with the funds? We could go out and buy a new car. Hmmm. That doesn’t sound very appealing, especially since we are trying to SAVE money. Maybe we should invest it? That sounds very tempting. With the stock market down, now seems like the time to buy, in my humble opinion. Currently, we have student loans and one car payment. Paying these off sound like the practical, good thing to do, but that certainly is not the “cool” or exciting thing to do. So, investing and paying down debt are the more sensible actions to take. Let’s investigate which one seems to yield a “better bang for the buck”.
Assumptions: Money: $12,000
Rate of Return: 12% (optimistic)
Debt: $10,600
Total Monthly Payment on Debt: $657.15
Monthly Payments Broken Down:
Student Loan #1: $154.00
Student Loan #2: $63.15
Extra Payments going toward Student Loan #1: $150.00
Car Note: $290.00
Investing Scenario: This scenario assumes that we would invest a lump sum of $12,000 and no other monthly or annual investment would be performed.
Investment Balance by Year


Year
Annual
investment


Taxes


Net Return


Total
0
$0.00
$0.00
$0.00
$12,000.00
1
$0.00
$0.00
$1,440.00
$13,440.00
2
$0.00
$0.00
$1,612.80
$15,052.80
3
$0.00
$0.00
$1,806.34
$16,859.14
4
$0.00
$0.00
$2,023.10
$18,882.23
5
$0.00
$0.00
$2,265.87
$21,148.10
The following scenario is assuming we pay off our debts and invest that monthly expenditure that was used for student loans and our car payment. I should note that as we continued paying off our student loan and car payments that it would not take exactly five years, but it is interesting to see how quickly $657.15 per month caught up to a lump sum of $12,000 with no additional money placed into investing.
Investment Balance by Year


Year
Annual
investment


Taxes


Net Return


Total
0
$0.00
$0.00
$0.00
$0.00
1
$7,886.00
$0.00
$946.32
$8,832.32
2
$7,886.00
$0.00
$2,006.20
$18,724.52
3
$7,886.00
$0.00
$3,193.26
$29,803.78
4
$7,886.00
$0.00
$4,522.77
$42,212.55
5
$7,886.00
$0.00
$6,011.83
$56,110.38
In the end, my wife and I chose to pay off our student loans. We not only liked seeing that it probably made the most sense financially, but the other huge factor is that we have a peace of mind knowing we are that much closer to being debt free. Woohoo!

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Comments
August 25, 2008

Great Blog post. I am going to bookmark and read more often. I love the Blog template

Posted by Mike Harmon
November 10, 2008

Interesting analysis. I’m glad you decided to pay off the debt.

One situation never accounted for in investment situations is — what if the market plummets?

This has happened recently, and I’m sure it’s totally thrown off people’s assumptions about how their money will grow. It’s not as linear as spreadsheets make it appear.

December 27, 2010

Thank you so much, this was extremely informative and will be quite useful to me.

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