paying back loans

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 5:18 pm

Bronte wrote:
birdlaw117 wrote:Bronte, wouldn't the tax rate be 15%?

The analysis is still good, but it would make it closer.


Yeah I guess you're right that the capital gains rate would be 15%. Here's the thing: when the risk free rate is between 0.04% and 3.26% before taxes and you have available to you a 7.9% risk free return after taxes, you are making a massive "free return" that is not available anywhere else in the market.

The risk in the stock market is very real. Quakeroats is talking about "there's no risk in the long term" out one side of his mouth and "you need liquidity" out of the other side. Those two statements are completely contradictory. If you end up having an event that requires liquidity (e.g., you get laid off) and the stock market has tanked, you're going to have to sell your liquidity cushion at a major loss. Even in the long term, the stock market is very risky. If a recession or market collapse occurs during your retirement window, there goes all your earnings and maybe even some of your principal.

Exactly. I was just pointing out that little thing. The overall analysis is still sound, it just changes the numbers.

And you bring up a good point that Biglaw jobs have a pretty good correlation with the overall market. So if you lose one you could very easily lose both, which would really fuck you over.

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Tiago Splitter
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Re: paying back loans

Postby Tiago Splitter » Sun Oct 23, 2011 5:20 pm

birdlaw117 wrote:
ToTransferOrNot wrote:Wait, you can take money out of a Roth investment tax/penalty-free for any reason? How quickly do you need to repay the "Roth loan"?

You can always take out the principal amount. There are Roth loans but I don't know how they work and I think it varies.


Yes, you can always take out your principal without tax or penalty. You'll need a triggering event such as separation from service to get at your 401k salary deferrals. You can't borrow against an IRA but you can take a 401k loan of 50% of the account value up to 50K if the plan allows it. You can even charge yourself an extra high interest rate and get even more Roth savings (*not professional advice*)

@Tton--you can put what you take out from the IRA back in with 60 days, but only once every 12 months. If you've already exhausted that 60 day rollover option in the last 12 months or don't get the money back in in time, then you can't ever get it back in.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 5:21 pm

ToTransferOrNot wrote:
birdlaw117 wrote:
ToTransferOrNot wrote:Wait, you can take money out of a Roth investment tax/penalty-free for any reason? How quickly do you need to repay the "Roth loan"?

You can always take out the principal amount. There are Roth loans but I don't know how they work and I think it varies.


So you can take out the principal but not the earnings - if you take it out, then, you can't put it back in?

Yeah, I don't remember the penalties off the top of my head though. I assume once you take out principal you can put it back in only through normal mechanisms that allow you to contribute. I'm not sure about any of that though.

ETA: I see Tiago beat me to it. And more in depth...

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sun Oct 23, 2011 5:24 pm

Heh, at the end of the day the only thing I'm agonizing over is "buy house at end of clerkship or not", and it's a decision I really should make soon, because if I'm not going to pull the trigger when the clerkship bonus comes, I really should aggressively pay down my loans this year (I'd be able to wipe out my one 8.5% gradplus loan the day the clerkship bonus comes down if I pay the loans aggressively this year).

Big thing preventing is that I almost certainly won't be in my market for the right time horizon, so I'd be looking at turning the house into rental property for at least a few years on the back end.

Gah. I'm going to get hit by a truck the day I finally pay my loans off.

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Bronte
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Re: paying back loans

Postby Bronte » Sun Oct 23, 2011 5:27 pm

birdlaw117 wrote:
Bronte wrote:
c3pO4 wrote:
RMstratosphere wrote:
Apologies to the financial wizs in this forum that will rightfully throw up in response to my question.


There are no finance wiz's ITT. Just a bunch of words strung together meaninglessly.


I won't call myself a financial wiz, but I beg to differ. Some people are blabbering meaninglessly. (I won't name names.) Others of us are having a productive discussion, and there's more than just words! There's numbers now too: https://docs.google.com/spreadsheet/ccc ... n_US#gid=0. If you care to refute the fact that your best investment is paying your loans, please do so.

Since this is the most recent link to your spreadsheet, I'll add my question on to this.

Would the compounding interest make a difference for the point when both investors have paid off their loans? Meaning, would the account balances be the same at the time when neither has any debt anymore. That's the point in time I'm most concerned about. Actually, I'm most concerned about retirement, but everything is equal from that point on. I'm not sure if the compounding interest would be the same or if it would be on different amounts over that time. Feel free to update or ignore.


Okay, so I think the result is the same: https://docs.google.com/spreadsheet/ccc ... n_US#gid=0.

In this case, Investor 1 does a ten year repayment plan and Investor 2 does a three year repayment plan. Investor 2 ends up with more money at the end.

(Regarding the comment about the tax rate, any frustration you sensed in my response was not directed toward your correction. The correction was correct.)

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 5:38 pm

Bronte wrote:Okay, so I think the result is the same: https://docs.google.com/spreadsheet/ccc ... n_US#gid=0.

In this case, Investor 1 does a ten year repayment plan and Investor 2 does a three year repayment plan. Investor 2 ends up with more money at the end.

(Regarding the comment about the tax rate, any frustration you sensed in my response was not directed toward your correction. The correction was correct.)

Awesome! (and I didn't think you were frustrated or whatever, I was just adding on to it)

I played around the sheet and with different amounts of $$ available, etc. everything stayed consistent. Thanks for this!

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quakeroats
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Re: paying back loans

Postby quakeroats » Sun Oct 23, 2011 5:46 pm

Bronte wrote:
You can't just say "10-12% is the realistic figure." That's called "making shit up." The return on the S&P 500 from 1950 to 2007 (excluding your once in a lifetime event now) was 9.07%, which is 6.34% after taxes. Even your preposterous 12.00% is only 8.40% after taxes! And that's ignoring the fact that it's an infinitely riskier investment than paying down your loans.


1. The S&P 500 didn't exist in 1950.
2. You don't seem to be including dividends.

As to your liquidity argument, of course you should build a liquidity cushion. I conceded that pages ago. You build up a reasonable liquidity cushion, which is leave in cash equivalent assets, and you put the rest in the best investment available: your loan payments.


Why have a small one when you can have a large one for--taking what you say for granted--a few hundred basis points?

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Bronte
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Re: paying back loans

Postby Bronte » Sun Oct 23, 2011 6:04 pm

quakeroats wrote:
Bronte wrote:
You can't just say "10-12% is the realistic figure." That's called "making shit up." The return on the S&P 500 from 1950 to 2007 (excluding your once in a lifetime event now) was 9.07%, which is 6.34% after taxes. Even your preposterous 12.00% is only 8.40% after taxes! And that's ignoring the fact that it's an infinitely riskier investment than paying down your loans.


1. The S&P 500 didn't exist in 1950.
2. You don't seem to be including dividends.

As to your liquidity argument, of course you should build a liquidity cushion. I conceded that pages ago. You build up a reasonable liquidity cushion, which is leave in cash equivalent assets, and you put the rest in the best investment available: your loan payments.


Why have a small one when you can have a large one for--taking what you say for granted--a few hundred basis points?


1. This is a red herring. The S&P 500 is a broad market index. There's good data on broad market returns going back to the 1920s. Yahoo! Finance goes back to 1950, so I used that. The results will be the same with any reasonable dataset.

2. I am including dividends. The "Adj. Close" column in Yahoo! Finance includes dividends. That's what "Adj." means.

3. Why have a small liquidity cushion when you can have a large one? Because you earn more on the money elsewhere, namely, paying down your loans. That's what I'm trying, in vain, to explain to you.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 6:08 pm

Bronte wrote:
quakeroats wrote:
Bronte wrote:
You can't just say "10-12% is the realistic figure." That's called "making shit up." The return on the S&P 500 from 1950 to 2007 (excluding your once in a lifetime event now) was 9.07%, which is 6.34% after taxes. Even your preposterous 12.00% is only 8.40% after taxes! And that's ignoring the fact that it's an infinitely riskier investment than paying down your loans.


1. The S&P 500 didn't exist in 1950.
2. You don't seem to be including dividends.

As to your liquidity argument, of course you should build a liquidity cushion. I conceded that pages ago. You build up a reasonable liquidity cushion, which is leave in cash equivalent assets, and you put the rest in the best investment available: your loan payments.


Why have a small one when you can have a large one for--taking what you say for granted--a few hundred basis points?


1. This is a red herring. The S&P 500 is a broad market index. There's good data on broad market returns going back to the 1920s. Yahoo! Finance goes back to 1950, so I used that. The results will be the same with any reasonable dataset.

2. I am including dividends. The "Adj. Close" column in Yahoo! Finance includes dividends. That's what "Adj." means.

3. Why have a small liquidity cushion when you can have a large one? Because you earn more on the money elsewhere, namely, paying down your loans. That's what I'm trying, in vain, to explain to you.

So many lulz. I love this exchange, but Bronte, I feel like you're wasting your time and effort here.

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Bronte
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Re: paying back loans

Postby Bronte » Sun Oct 23, 2011 6:22 pm

birdlaw117 wrote:So many lulz. I love this exchange, but Bronte, I feel like you're wasting your time and effort here.


You have to take it to the bitter end with Quakeroats. It's almost a tradition.

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quakeroats
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Re: paying back loans

Postby quakeroats » Sun Oct 23, 2011 6:29 pm

Bronte wrote:
quakeroats wrote:
Bronte wrote:
You can't just say "10-12% is the realistic figure." That's called "making shit up." The return on the S&P 500 from 1950 to 2007 (excluding your once in a lifetime event now) was 9.07%, which is 6.34% after taxes. Even your preposterous 12.00% is only 8.40% after taxes! And that's ignoring the fact that it's an infinitely riskier investment than paying down your loans.


1. The S&P 500 didn't exist in 1950.
2. You don't seem to be including dividends.

As to your liquidity argument, of course you should build a liquidity cushion. I conceded that pages ago. You build up a reasonable liquidity cushion, which is leave in cash equivalent assets, and you put the rest in the best investment available: your loan payments.


Why have a small one when you can have a large one for--taking what you say for granted--a few hundred basis points?


1. This is a red herring. The S&P 500 is a broad market index. There's good data on broad market returns going back to the 1920s. Yahoo! Finance goes back to 1950, so I used that. The results will be the same with any reasonable dataset.


S&P started indexing then, but I wouldn't consider it reliable. Ditto you tax calculations.

2. I am including dividends. The "Adj. Close" column in Yahoo! Finance includes dividends. That's what "Adj." means.

3. Why have a small liquidity cushion when you can have a large one? Because you earn more on the money elsewhere, namely, paying down your loans. That's what I'm trying, in vain, to explain to you.


That isn't actually what it means. What you're looking for is total return. http://politicalcalculations.blogspot.c ... rtips.html

Return with dividend reinvestment from 1/1950-1/2008: 11.65%

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sun Oct 23, 2011 6:31 pm

You are off your rocker if you think the US will replicate the 1950-2008 growth cycle within our lifetime.

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IrwinM.Fletcher
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Re: paying back loans

Postby IrwinM.Fletcher » Sun Oct 23, 2011 6:34 pm

ToTransferOrNot wrote:You are off your rocker if you think the US will replicate the 1950-2008 growth cycle within our lifetime.


Fixed.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 6:38 pm

quakeroats wrote:
2. I am including dividends. The "Adj. Close" column in Yahoo! Finance includes dividends. That's what "Adj." means.

3. Why have a small liquidity cushion when you can have a large one? Because you earn more on the money elsewhere, namely, paying down your loans. That's what I'm trying, in vain, to explain to you.


That isn't actually what it means. What you're looking for is total return. http://politicalcalculations.blogspot.c ... rtips.html

Return with dividend reinvestment from 1/1950-1/2008: 11.65%


It's misrepresenting how the investments as a whole are working to include dividend reinvestment like that. When you're talking about all investments, you can't just add them back in and include the growth from beforehand. Reinvesting dividends is purchasing more shares, it isn't simply adding on to a principal in a savings account. You're mixing up two levels of money supply and treating them as one in that calculation.

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quakeroats
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Re: paying back loans

Postby quakeroats » Sun Oct 23, 2011 6:43 pm

birdlaw117 wrote:
quakeroats wrote:
2. I am including dividends. The "Adj. Close" column in Yahoo! Finance includes dividends. That's what "Adj." means.

3. Why have a small liquidity cushion when you can have a large one? Because you earn more on the money elsewhere, namely, paying down your loans. That's what I'm trying, in vain, to explain to you.


That isn't actually what it means. What you're looking for is total return. http://politicalcalculations.blogspot.c ... rtips.html

Return with dividend reinvestment from 1/1950-1/2008: 11.65%


It's misrepresenting how the investments as a whole are working to include dividend reinvestment like that.


Um, no it isn't. Find me a serious economist, banker, or fund manager who thinks so.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 6:47 pm

quakeroats wrote:
birdlaw117 wrote:
quakeroats wrote:
2. I am including dividends. The "Adj. Close" column in Yahoo! Finance includes dividends. That's what "Adj." means.

3. Why have a small liquidity cushion when you can have a large one? Because you earn more on the money elsewhere, namely, paying down your loans. That's what I'm trying, in vain, to explain to you.


That isn't actually what it means. What you're looking for is total return. http://politicalcalculations.blogspot.c ... rtips.html

Return with dividend reinvestment from 1/1950-1/2008: 11.65%


It's misrepresenting how the investments as a whole are working to include dividend reinvestment like that.


Um, no it isn't. Find me a serious economist, banker, or fund manager who thinks so.

I'm not saying it isn't a useful metric. I'm saying you're misusing it.

Brassica7
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Re: paying back loans

Postby Brassica7 » Sun Oct 23, 2011 6:51 pm

ToTransferOrNot wrote:You are off your rocker if you think the US will replicate the 1950-2008 growth cycle within our lifetime.


I have to agree with this. None of us can predict the future with certainty, but I think from a long-term historical perspective, the past 60 years of stock growth have been unusual, and we cannot expect them over the next 60.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 6:54 pm

Brassica7 wrote:
ToTransferOrNot wrote:You are off your rocker if you think the US will replicate the 1950-2008 growth cycle within our lifetime.


I have to agree with this. None of us can predict the future with certainty, but I think from a long-term historical perspective, the past 60 years of stock growth have been unusual, and we cannot expect them over the next 60.

Yeah, this is definitely truth.

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Bronte
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Re: paying back loans

Postby Bronte » Sun Oct 23, 2011 6:55 pm

quakeroats wrote:
birdlaw117 wrote:
quakeroats wrote:
2. I am including dividends. The "Adj. Close" column in Yahoo! Finance includes dividends. That's what "Adj." means.

3. Why have a small liquidity cushion when you can have a large one? Because you earn more on the money elsewhere, namely, paying down your loans. That's what I'm trying, in vain, to explain to you.


That isn't actually what it means. What you're looking for is total return. http://politicalcalculations.blogspot.c ... rtips.html

Return with dividend reinvestment from 1/1950-1/2008: 11.65%


It's misrepresenting how the investments as a whole are working to include dividend reinvestment like that.


Um, no it isn't. Find me a serious economist, banker, or fund manager who thinks so.


Let's use these figures: 11.10% (1961-2011) and 3.54% (2001-2011). http://w4.stern.nyu.edu/~adamodar/New_H ... stret.html. After tax (15% this time), we get a range of 2.96% to 9.35%. So you're choosing between a guaranteed risk free investment of 7.9% and a high risk equity investment that has yielded 3.00% on average over the past decade and 9.35% on average over the past half century.

Anonymous User
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Re: paying back loans

Postby Anonymous User » Sun Oct 23, 2011 9:39 pm

Hide as much money as you can from big brother's eyes.

In this economic climate, and with our current elected officials, your savings are not secure in traditional institutions. There very well may be a point where your $$$ is confiscated for the betterment of the collective. The housing/financial markets will continue to falter (Europe is on fire right now and we are not far behind).

Save, save, save, and stay out of the market.

mrloblaw
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Re: paying back loans

Postby mrloblaw » Sun Oct 23, 2011 9:49 pm

Anonymous User wrote:Hide as much money as you can from big brother's eyes.

In this economic climate, and with our current elected officials, your savings are not secure in traditional institutions. There very well may be a point where your $$$ is confiscated for the betterment of the collective. The housing/financial markets will continue to falter (Europe is on fire right now and we are not far behind).

Save, save, save, and stay out of the market.


While the economy sucks, I'm not sure we're in burying-money-in-mason-jars land.

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sun Oct 23, 2011 9:50 pm

Anonymous User wrote:Hide as much money as you can from big brother's eyes.

In this economic climate, and with our current elected officials, your savings are not secure in traditional institutions. There very well may be a point where your $$$ is confiscated for the betterment of the collective. The housing/financial markets will continue to falter (Europe is on fire right now and we are not far behind).

Save, save, save, and stay out of the market.


/tinfoilhat.jpg

Anonymous User
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Re: paying back loans

Postby Anonymous User » Sun Oct 23, 2011 9:57 pm

mrloblaw wrote:
Anonymous User wrote:Hide as much money as you can from big brother's eyes.

In this economic climate, and with our current elected officials, your savings are not secure in traditional institutions. There very well may be a point where your $$$ is confiscated for the betterment of the collective. The housing/financial markets will continue to falter (Europe is on fire right now and we are not far behind).

Save, save, save, and stay out of the market.


While the economy sucks, I'm not sure we're in burying-money-in-mason-jars land.


That is what people in 1929 said right before they lost their savings.

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Bronte
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Re: paying back loans

Postby Bronte » Sun Oct 23, 2011 10:02 pm

We have one poster who thinks he's gonna earn Bernie Madoff returns in the stock market and another who thinks the governments going to seize his assets. We gotta find middle ground people.

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quakeroats
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Re: paying back loans

Postby quakeroats » Sun Oct 23, 2011 10:04 pm

Bronte wrote:
quakeroats wrote:
birdlaw117 wrote:
2. I am including dividends. The "Adj. Close" column in Yahoo! Finance includes dividends. That's what "Adj." means.

3. Why have a small liquidity cushion when you can have a large one? Because you earn more on the money elsewhere, namely, paying down your loans. That's what I'm trying, in vain, to explain to you.

That isn't actually what it means. What you're looking for is total return. http://politicalcalculations.blogspot.c ... rtips.html

Return with dividend reinvestment from 1/1950-1/2008: 11.65%


It's misrepresenting how the investments as a whole are working to include dividend reinvestment like that.


Um, no it isn't. Find me a serious economist, banker, or fund manager who thinks so.


Let's use these figures: 11.10% (1961-2011) and 3.54% (2001-2011). http://w4.stern.nyu.edu/~adamodar/New_H ... stret.html. After tax (15% this time), we get a range of 2.96% to 9.35%. So you're choosing between a guaranteed risk free investment of 7.9% and a high risk equity investment that has yielded 3.00% on average over the past decade and 9.35% on average over the past half century.


It isn't risk free. There's political risk (perhaps Congress does something about student loans over the next 10 years that would benefit people with active balances) and risk from fewer liquid assets. Also, some of that money is going to be sheltered from taxation (some type of retirement account), and for the assets in a taxable account, you don't pay taxes until you have a taxable event (dividend/cap gain/etc.).




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