Which financial route is best?

Question

Is it smarter to put $1000.00 a month extra to the principal of a $50,000.00 loan or put $1000 dollars a month into a Mutal Fund or Money Market Fund until you generate the payoff of the loan? This is a 30 fixed rate loan with a payment of $500 and an intrest of 8%.

Answer 1

A bird in the hand is worth two in the bush. Therefore an 8% certain return is worth a 16% maybe return. Actually, I must disagree with Frank Castle on this one. 16% return is not too common with mutual funds. There are some that have generated a 16% return historically, but that is no guarantee that they will generate that in the future. In fact the return of the S&P 500 over the last 6%. Over the last 10 years 8%. And 70% of mutual funds have not done so well.

My advice. Go for the 8% assured return. And another thing that 8% is tax free.

Answer 2

All you need to do is compare interest rates. For the loan, use the "apr" (annual percentage rate) which represents the actual rate over the life of the loan. For the mutual fund (or any other investment) use the "annual yield" which is the true rate of return for the investment.

Mutual funds can't give you a future rate, though, they can only give you what they've achieved in the past, and you get to guess whether they'll continue to perform.

If it were me, I would pay off the loan because I despise credit and the idea of paying anyone else interest from my hard earned money.

I would also apply the money to the loan because there's no guarantee of earning 8% anywhere. The highest "guaranteed" rate in the US is usually in Treasury Bonds at 5 to 6%. (This is called the "risk free rate", the highest available risk free.)

I would also apply the money to the loan in order to build some security in my personal finances. Equity in your home is a very nice source of money for emergencies, but if you have no equity built up, you can't use it.

I would also apply the money to the loan because having a home paid off cuts your retirement savings needs in half.

(According to the amounts you gave, you have just under 14 years left on the loan. If you make $1500 payments each month, you'll pay the loan off in 38 months.)

Answer 3

8% a high to scale after taxes so should pay it down. Money Market Fund not an option at all. No where near 8% even before taxes. If you have no 401k or IRA then need to get some retirement money put away but that is secondary to your question. Addition: 16% a crazy number though the logic followed in the post pointing that out is not 1 I would endorse.

Answer 4

I would put the money toward the mortgage. It will guarantee you 8%. You can't be sure the market will generate that. When you sell your house it will probably be tax free gain which will more than make up for any additional return you might get in the stock market.

Answer 5

No one knows the right answer. It depends on how much you could earn on your investment. If you could earn more than 8% per year on the $1000 and on the interest earned (IE compounded at more than 8%) then that would be the smart thing to do. However, I would suggest being conservative and paying off the debt.

Answer 6

$1000 dollars a month into a high yielding MMA.

Sounds like you have a plan.

Good Luck

Answer 7

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Answer 8

Any Decent Mutual Fund will make at least 16% for you.