XxSpyKEx wrote:
rayiner wrote:
There is a big liquidity advantage to having $75k in the bank versus having paid it off in loans.
A reasonable person doesn't leave $75k sitting in a bank (unless you're filthy rich and need that much money at a moment's notice because you're blowing something like $75k /month). Short-term investments, on the other hand, are risky, especially when you're talking about 2-3 year investments, like we are here (i.e. the cost of 2-3 year of interest in repaying student loans vs. the potential gain of investing the money for those 2-3 years). Personally, I would rather be debt-free than take risks with hopes of making an extra 2% interest (relative to gains if the money went towards repaying the loans) on that $75k. It'd be a different story if the economy was booming right now, and people were seeing something like 20% returns on large cap stocks.
Just to be clear, I'm not saying it's reasonable to not save anything. But $75k is a lot of money to just sit on when the economy is shitty like it is right now (especially if you live somewhere cheap like Texas), where you can't very easily make returns exceeding your student loan interest rates.
It's not about making a return on that money. It's about having short-term assets that you can liquidate relatively quickly just in case. What if you're presented with an unexpected opportunity? It could be a business opportunity or even just finding a great deal on a house.
Say you owe $200k. Your payments are $2,400 per month. You put an extra $1,100 per month into your loans, for a total of $3,500. Now, say your take-home is roughly $8,500 (you live in NJ). Allowing for $2,500 rent and $1,000 other expenses, you've got $1,500 left over each month. What to do with it?
If you don't put it towards loans, your total loan interest over the life of the loan will be $50,000. If you do put it towards your loans, you'll save $20,00 in interest. But, in the first scenario, even with a weak rate of return of 5%, you'll have earned $17,500 in interest, $15,000 after capital gains. So you're only down $5,000. What is the value to you of being able to take advantage of an opportunity by having a relatively large liquid savings?
This post brought the Simpsons episode where the town buys the monorail to mind. WHAT IF THERE'S A BIG AMAZING INVESTMENT OPPORTUNITY??? THE MONORAIL WILL MAKE YA RICH I TELLS YA!!
I want to get rid of my debt ASAP and will live in a shitty apartment and buy nothing for two years to handle a huge chunk of it. You don't know when the biglaw train is going to boot you off, and you don't want to be stuck with a pile of loans when that happens.
Posted: Tue Aug 02, 2011 6:03 pm 
