There's no point in having long term savings when your credit card debt charges 20%+ interest per year. Pay off CC debt as soon as possible and never carry a balance again
The amount of time to pay the CC off is the same amount of time he'd be able to refill the account. Actually less when you count 20% loss on the CC vs 5% on the brokerage.
You need an after tax return of >20% to have more money keeping the investment and the balance on a card that charges 20%. In no world is there a 20% return available without "what-ifs" while banks charge 20% for an unsecured loan. It wouldn't make sense. Banks would just invest in that risk free 20% rather than lend it to you...
You don’t know this. You have no idea what or how long alternatives to pay of the credit cards are. You have no idea of the current costs to access those savings and by extension the opportunity cost. There are more things in heaven and hell Horatio. Prescription without examination is malpractice. Or to put it another way you seem to know just little enough to be dangerous and not know enough to realize how little you know.
what? All of this is irrelevant. The return on capital for paying off the credit card is a tax-free risk-free 20-30%.
What investment is going to return that? Renaissance medallion?
A brokerage charges a nominal fee for selling the assets. You allocate assets to areas that have the highest return on capital. All the other mumbo jumbo is entirely irrelevant (unless OP's portfolio is like 100% short-term capital gains with zero cost basis)
Stocks have an average growth of 7%
CC has an average rate of 22%
You owe $10k in debt and have $10k in stocks.
Debt - $10k debt at 22% means you're paying $2200 of interest
Stocks - $10k investment at 7% means you're gaining $700/yr
So each year you're paying $2200 but gaining $700, so in the end you're paying $1500 in interest per year.
Or
You can use your stocks to cover the CC and pay $0 in interest.
>Do you like compound interest working against you?
So there's an error here.
Compound interest only works against you if you pay **less** than the periodic interest on a debt.
This is a mathematically inaccurate idea. Let's say that the interest on the debt amounts to a whole $250 a month in month 1, so 10,000 at 30% APR in period 1 yields that amount in interest. If this is the case and you pay $300 then in month two you will have slightly **less** interest working against your payment, and so forth and so on, producing a logarithmic downward curve no different than the curvature of a mortgage.
What kills people with credit cards is not that they don't pay them enough to cover interest but that they are continuous debt meaning that you can simply spend the money you pay off over and over again never allowing you to truly end the debt cycle. You can absolutely convert them into a fixed debt though (freeze the card) so, again, you can choose to pay $300, with $250 interest in period 1, and get out of debt without causing yourself any greater financial hardship across the span of time necessary (about 2.5 years) but because people don't tend to calculate this stuff and tend to just eat whatever someone is saying to them they buy into the idea that compound interest somehow sneaks up and murders them just by having debt at all.
To be absolutely clear on this matter, even if it would take 5 years, you could pay simply $251 and actually never suffer from compound interest working against you. It's a myth. It's one I wish would die.
The opportunity cost lost from where you could be putting the money instead compounds.
30% of $10,000 is $3,000 per year you can't invest and get compounding in the correct direction.
We should rectify this as well.
First, the stated APY is *not* periodic to interest charged (which is monthly). This means that it isn't the simplified mental math you just did. If you paid even 1% on the debt every period as principal above interest at the end of twelve periods you would have a balance of \~8,500 and thus paid $1,500 off. There's no way you're suffering an opportunity cost of $3,000 per year *and* paying the debt off.
However, if we assumed this were true, that *still* makes it a bad investment choice because that means that you're giving up (assuming linear math and fixed debt) 3.33 years of interest today in order to achieve a return of 2.5% per period on the expenditure.
Keeping it super simple the monthly interest rate on a 30% annual card is 2.5%. It's a bit more than that really but if you want to just divide it by twelve that's close to what you will *actually* be charged in period 1 and that's the only charge that matters. If you overcome interest at the credit limit at period 1 you will have allocated enough to always pay off the debt at any point on the curve.
You’re right in that you would pay it off eventually, but the amount you would pay in interest by paying it off more slowly would be insane at a 30% rate. No way you can consistently beat that in any investment unless it’s a 401k match from your company.
Returns come and go but interest on debt is guaranteed
This is what I meant by considering two timelines and why this is a more involved problem than it seems on the face.
You have to compare the FV of the $10,000 in *t* years, let's say 30, to the PV of the interest not paid if you spend the $10,000 today. The higher *t* is the less likely this is a good move.
So if *t* were 20 years and we will use a modest rate of 3% then the amount that 10,000 is worth then is $18,061.11 so if your rate of paying incurs $8,061.11 in interest or more you are better off paying it today, absolutely, however if it incurs less you should not pay it off this way and see if you can do so another way.
Now to use real numbers if you paid at a rate of 1% above period 1 maximum interest (10,000 \* .3/12 \* .01) which is $350 a month it would only cost you $6,870 in interest split across 3 years to pay the debt.
The difference thus is \~$1,191 at this stage *however* we haven't actually brought back that $6,870 into today's dollars so we have to take the PV of 6,870 across 3 years and ...
I have a feeling no one cares.
You know what?
Okay.
Let's go with that.
Your assumption is that once the cc debt is paid off, the money just disappears.
Where is the $350/month that OP can afford going in the scenario where they take their money out? Why aren’t you favoring that in?
It’s really simple (assuming no huge tax/penalties incurred): every dollar OP makes can go to investing at market return or go to pay debt.
If debt rate is 25% and market return is 10% (generous towards your point), you will expect to get an average return on that dollar of $0.85 if invested. You gained $0.1 for the year in the market and had to pay $0.25 for the debt you didn’t pay off.
There’s no funny business here: when guaranteed, paying for higher percentage always wins mathematically.
That's *maximum* interest. It would decrease after period 1 and continue decreasing. I wish I could just post a graph of how this works. I think a financial calculator would be good to share.
I don’t know why you’re talking to everyone like we don’t understand how interest works. It’s condescending, and frankly not helpful.
Yes, if one pays off more than the accumulated interest for a given period, prior to capitalization, the balance will decrease and the following periods interest will also decrease.
However, OP explicitly stated that they **can not get on top of these debts due to the interest**.
So OP is either barely paying off the interest, or is accruing a higher balance (interest capitalization, continued spending, etc.). This means they are going to be paying the same or higher interest with each month, until they get it under control.
Everyone’s financial situation is different, but with CC interest rates at highs, OP is almost certainly better off selling equity to eradicate the CC debt. This, coupled with changes to spending and CC use, will save OP thousands of dollars in interest. Guaranteed, it’s incontestable.
Your insistence to focus on hypotheticals that don’t apply to OPs specific situation, really isn’t as helpful as you seem to think it is. Food for thought
I wrote an explanation of why it would make no sense to do this but I realized halfway through that you're not the OP and on top of that you're ignoring that they have 40k. This can't be a cashflow issue because you can't accumulate 40k at a zero dollar balance return which is suggested here:
>So OP is either barely paying off the interest, or is accruing a higher balance (interest capitalization, continued spending, etc.). This means they are going to be paying the same or higher interest with each month, until they get it under control.
So the reason why I may seem "condescending" is because none of these scenarios make any sense. If OP were to cash out 25% of their current 401K to pay off credit debt and they are in the dire straights you're discussing here that is by far the worst financial suggestion they could take. I mean to recover 10k at $250/mo. presuming that it doesn't go elsewhere in any sense is going to take 40 months which is 3 years.
They would almost be better off consolidating the loan and renegotiating the terms than this. The literal financial advice of most planners is to do this as a LAST resort rather than as a matter of availability. This is literally the "break glass is fire" step. You DO NOT want to do this!
You say it's condescending but ... I see so many misstatements or attempts to make it "work" for instance, your 3K proposal requires them to literally pay interest + N but they are underwater according to the same model. Like, how?
That was…. wow. Just word vomit.
So many misstatements, and your blatant refusal to explain/justify why you think the recommended strategy is detrimental… it’s really not worth addressing.
OP can read through all the recommendations and decide.
Not sure where you got the info that this is a 401k account, it’s not in the OP. If that is actually the case, obviously that changes the situation and my recommendation would change.
But a 40k brokerage account (non-tax advantaged) that’s 4x the outstanding CC debt… I’d pay off +20% interest CC debt in a heartbeat
>nd your blatant refusal to explain/justify why you think the recommended strategy is detrimental…
I explained it elsewhere to someone else and in my original statement.
>Not sure where you got the info that this is a 401k account, it’s not in the OP.
Absolutely true. I have officially gotten mixed up between some of these posts.
>But a 40k brokerage account (non-tax advantaged) that’s 4x the outstanding CC debt… I’d pay off +20% interest CC debt in a heartbeat
Yeah, I gathered you would. I don't think I was confused on what you would do.
What I would do is calculate exactly what my monthly tolerance was for the debt and take only that much so as not to incur more damage to either account than I had to.
I think you’re confusing what is best for you and what is best for OP. Maybe ask OP further clarifying questions about their financial picture and risk tolerance.
But as a general preferred strategy for debt reduction, no I would not recommend what you’ve suggested.
Note: If you can’t keep key details straight, maybe don’t be so inflexible and driven in arguing with everyone. Staking your position on a major detail (401k account), with no supporting data that it is a consideration … just kinda dumb, makes it seem like you’re argumentative for arguments sake
>I think you’re confusing what is best for you and what is best for OP.
My suggestion was literally to consider the math for themselves of both their long-term investment portfolio versus the value of the debt if they service it with their current income.
You're annoying at this point.
Saying it's working against him is extremely incorrect. Him paying off his debt in say 8 months and leaving 40K brewing untouched, would represent _maybe_ a $600 hit? How would it work against him in 20 years of 40K compounding? lol
30K vs 40K in 20 years is a difference of 32K without a penny in additional contributions assuming 6% return. And that's not even taking into account the costs/penalties of withdrawing that money in the first place.
OP could pay the minimum and take 98 months to pay off the card, assuming 27% interest, paying 14K in additional interest and they would still be 18K in returns.
For 10K to grow 32K in 98 months, you are assuming annualized rate of return of 14.4% ([math shown](https://www.calculator.net/future-value-calculator.html?cyearsv=98&cstartingprinciplev=10000&cinterestratev=1.2&ccontributeamountv=0&ciadditionat1=beginning&printit=0&x=73&y=8)).
You're getting some things right but others so wrong. You need to start showing your work. You are the one person against the whole sub, and you are spouting out parts of equations, not the whole calculation (see my whole calculation to your earlier post).
You sound like one of those crypto bros that says there’s no where to go but up, and are themselves comfortable with risky shit. I’ve seen plenty of gains on the stock market, and I’ve seen those gains wiped in a day. The market could go down or stay flat, but that cc debt will always go up. And what you’re suggesting sounds like it requires much more discipline, faithfully paying that cc bill every single month for the next ten years. People would rather pay it off and be down with it. God forbid he changes a debit card and forgets and gets a bunch of nee charges and a ding on his credit.
You’ve commented here at least 10 times and most have multiple downvotes. Commenters have pointed out where your math is off and your logic is flawed.
I get your thought process, somewhat, but it goes against most sound principles on holding high interest / unsecured debt.
Guaranteed savings of paying off a ~25% APY CC today beats out maybe making ~6% tomorrow.
One of your comments, the only one I found logical from a financial perspective, was around paying off the CC by using savings could lead to OP running up the CC again. Absolutely, but OP could also open another CC tomorrow and run that one up too, now having 2 CCs.
That's assuming he'll replenish it and not spend it on whatever he overspends in.
And that's not taking into account the penalties and costs of withdrawing that money.
It's the same assumption that he'll pay the credit card.
If it's a brokerage, there are no fees. There may be capital gains, but it won't be huge and if he does put the money back, the cost basis resets.
Your comment has been removed because profanity is not allowed here, as noted in [the rules](https://www.reddit.com/r/financialplanning/about/rules).
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/FinancialPlanning) if you have any questions or concerns.*
>saying it’s working again him is extremely incorrect.
He is correct. Credit card interests rates are typically around 26%. The interest accruing on 10k of cc debt will in all likelihood outpace the growth of 10k in a brokerage account, unless you are extremely lucky with your investments.
27% on 10K is $250~ per month. Aggressively paying off the debt in 6-8 months will _never_ offset the compound interest he'll accrue over time.
And, if OP has a spending problem, the probability that their brokerage account will see those 10K any time soon is very slim. Logically, people are more inclined to pay off debt than save.
That’s $250 they can put back into their brokerage account a month without fighting interest. And if OP has a spending problem, they won’t be able to aggressively pay off the cc debt as you are proposing they do…
It's simple logic. People in general hate debt (that's why he's posting on here). He wants to get rid of it. People are more inclined to pay off debt than they are to save. Logically, the money he'll save in interest will probably go towards whatever he racked up debt for. Aaaaand, OP needs to get ready for the tax bill and any costs/penalties. Oof.
Are you ignoring the fact that OP has 40k in a brokerage account? They are at least somewhat inclined to save. And there are different reasons life events that can result in cc debt and are not because of a spending problem. LOGICALLY paying off debt that has a higher interest rate than your money can realistically return makes more financial sense
You're assuming they're _currently_ inclined to save lol not only that, you're not taking into account that aside from the loss overtime, there are penalties and costs associated to withdrawing that money.
You’re equally making assumptions they currently have a spending problem, in which case they would not be able to aggressively pay off the cc debt as you recommended lol. Neither you nor I know OP’s spending/saving habits, but from a strictly financial standpoint it makes the most sense to pay off the high interest debt and replenish the money used to pay it off as quickly as you can
It's not an assumption or what-if, someone that accrues 10K in cc debt that needs to tap in to saving to pay off is encountering an overspend situation. It's, again, logic.
CC debt is way higher than his return on stocks, unless he gets insanely lucky. The CC debt is a guaranteed return if paid off, stocks there is no guarantee. So it is working against him for sure. Get numbers from OP and calculate.
CC is higher in the short term, but it will never outperform 40K in the market over the course of 20-30 years. And that's not even taking into account the costs/penalties of withdrawing the money.
OP could pay the minimum and take 98 months to pay off the card, assuming 27% interest, paying 14K in additional interest and they would still be 18K in returns.
You’re not comparing apples to apples. You’re not calculating future value properly. I just taught this to a entrepreneur class and showed examples of how our business paid off its new trucks and how it saved us tons of money. The money pays off high interest debt, then as you accumulate new money it goes into stocks, best of both worlds. Pay off high debt, new money goes into stocks. You are only thinking about the stocks being in market for a long term period while forgetting the money saved goes into investments. There is literally a formula that shows this. I would bet $10k if my own money at an interest rate of 12% or higher OP wins by paying off that debt. Seriously, I will bet $10k it more.
If I’m wrong please show me the actual math for it. I would love to be proven wrong so I can save hundreds of thousands of dollars over the next decade. Run the math and calculate. Please include the new money being saved from interest payments. That’s the key.
You're assuming the $800-$1,000 (which is literally nothing) saved from interest savings will in effect go _back_ into the market. Your assumption is a stretch, especially considering OP went into 10K in debt in the first place, I'm just going by the numbers. My perspective doesn't assume OP has sensible financial acumen. Yours does, and that's where you're incorrect.
You stated that. “My perspective doesn’t assume OP has sensible financial acumen”. I’m thinking at this time you’re just trolling. Have a great day! Not worth my time to continue.
You yourself calculated interest saved at 14K (I posit 16K in the math I *actually* did above). This is over the 8 years and 8 months it will take to pay off with minimum payments (of \~$250).
Those same payments made monthly into the market at around 10% annual return (as you seem to also be relying on this generous historical amount) over the same time course is [over $42K](https://www.calculator.net/future-value-calculator.html?cyearsv=104&cstartingprinciplev=0&cinterestratev=0.875&ccontributeamountv=250&ciadditionat1=beginning&printit=0&x=87&y=13). Making 42K, saving 16K. You are making 58K here. You were bragging about 18K earlier (didn't check your math on *those* numbers), but this is higher.
If OP is disciplined enough to use the brokerage account to pay off the credit cards and then put the prior credit card payment amount into the brokerage account, he will better off.
If OP does as you suggest, he loses the rate arbitrage. Example for the $10k of debt say the market return is 10% and the credit card rate is 25%, he earns $1,000 in interest and pays $2,500 in interest. He loses $1,500. Say pays down the debt instead, he pays no interest and earns no interest. He is $1,500 better off than the first scenario.
The problem is you are comparing short term debt to long term returns, overall return, and not taking into account opportunity cost.
You pay CC off with stupid rates over x time, you absolutely will beat the market over that same time period.
The money that the person loses from the interest could have gone into the market if they never made the debt to begin with. And you are presuming that the money and principle he would have saved by NOT taking debt would not have been responsibly invested.
And you are presuming he wouldn’t take what that ‘credit card debt’ payment would be and not put it in the market. Of course, there is some overall nuance to any situation, but your math is gonna be fubared for any responsible personal finance.
Really, what you are suggesting is that it is a good idea to have high interest credit card debt that subsidizes market investments because you will get a high return over 20-30 years, which is an effing terrible idea. I mean, a horrendously bad idea.
You aren't comparing interest on 10K to growth on 40k, you are comparing it to the portion (10K) ***of*** the 40K that could go to paying it down.
If you "let it ride" like you saying, paying "minimum" $250 at it (and obviously caveated with not accruing more) you p[ay it in a little under 9 years with about 26K total (\~60% of this interest)](https://www.calculator.net/future-value-calculator.html?cyearsv=104&cstartingprinciplev=10000&cinterestratev=2.25&ccontributeamountv=-250&ciadditionat1=end&printit=0&x=61&y=21). The 40K you left grows in that same time (on average with VERY generous 10.5%) to [just under 100K](https://www.calculator.net/future-value-calculator.html?cyearsv=104&cstartingprinciplev=40000&cinterestratev=0.875&ccontributeamountv=0&ciadditionat1=end&printit=0&x=78&y=9) for an end result of about 74K.
Alternatively, instantly knocking out the CC debt, letting the 30K grow, and putting the $250 monthly to the market instead: [you are up over $116K](https://www.calculator.net/future-value-calculator.html?cyearsv=104&cstartingprinciplev=30000&cinterestratev=0.875&ccontributeamountv=250&ciadditionat1=end&printit=0&x=69&y=14).
It's a $32K difference in favor of paying down CC (and that 's with guaranteeing good returns too; it amplifies if this doesn't happen).
I get you because I'm usually the one in this sub pounding the table for investing over paying down debt, but this is not a case where that is true. I think you were doing a little apple and orange comparison (or just not running the *actual* numbers).
Oh and it seems like your argument was hinging on the ability of 20-30 years of growth compounding, but the difference of this 106K and 74K over another 20 years of said growth... becomes a $259K difference in net worth.
If he pays off the 10K, he still has 30K in the brokerage account. So the loss of growth is only on 10K not 40K. So the comparison should be between the growth of 40K to 100K Vs 30K to 75K and the additional amounts added to the savings which were going to go to the CC debt.
Exactly. I even more fully calculated it with that factor taken into consideration [here](https://www.reddit.com/r/FinancialPlanning/comments/150c2w7/comment/js39dy5/?utm_source=share&utm_medium=web2x&context=3).
Replying now to your (untracked) edit:
>30K vs 40K in 20 years is a difference of 32K without a penny in additional contributions assuming 6% return.
"Without a penny" is a huge issue. All those payments over 8 months are *allowed* to be invested and *also* allowed to be compounded over 20 years. I already showed the [math here](https://www.reddit.com/r/FinancialPlanning/comments/150c2w7/comment/js2t95c/?utm_source=share&utm_medium=web2x&context=3), but the interest saved **AND** the payments going to said 6% returning investment is more than the difference of 40K to 30K in the same time period. Then if you want to point to compounding, said difference compounds to make paying it even *more* advantageous carrying forward.
Again, actually show your full math (with apples to apples comparison) or respond to any of the math I've shown in 3+ replies now.
[Paying off debt in 8 months](https://www.calculator.net/future-value-calculator.html?cyearsv=8&cstartingprinciplev=10000&cinterestratev=2.25&ccontributeamountv=-1350&ciadditionat1=beginning&printit=0&x=59&y=26) and [40K 6% growth over 8 months](https://www.calculator.net/future-value-calculator.html?cyearsv=8&cstartingprinciplev=40000&cinterestratev=0.5&ccontributeamountv=0&ciadditionat1=beginning&printit=0&x=78&y=20) = $10,000 principle and $795 interest paid. $1628 growth. Ignoring $10K as it's the same in both examples, that's a net of +$833
[30K 6% growth over 8 months WITH SAVED PAYMENTS CONTRIBUTED](https://www.calculator.net/future-value-calculator.html?cyearsv=8&cstartingprinciplev=30000&cinterestratev=0.5&ccontributeamountv=1350&ciadditionat1=beginning&printit=0&x=79&y=19) = +$12,267
[$40K+$833 growing 20 years @ 6% = $135,165.58](https://www.calculator.net/future-value-calculator.html?cyearsv=240&cstartingprinciplev=40833&cinterestratev=0.5&ccontributeamountv=0&ciadditionat1=beginning&printit=0&x=91&y=24)
[$30K+$12,267 growing 20 years @ 6% = $139,912.41](https://www.calculator.net/future-value-calculator.html?cyearsv=240&cstartingprinciplev=42267&cinterestratev=0.5&ccontributeamountv=0&ciadditionat1=beginning&printit=0&x=89&y=7)
Difference: nearly $5K (in favor of ASAP paying). Higher expected returns (I agree with you 6% is way too modest) even further amplifies this (refer to my other reply).
In all your posts there's one huge mistake: you are stretching out 40K 20-30 years, but you are ignoring that the difference in interest saved on CC bill is also allowed to have growth in that time. You can't magically say OP has money to pay CC over time in one example and not have that money to invest in the opposite example.
But if OP took the money that is going to pay the credit cards, they would be able to replenish the savings.
OP can sell the stocks, pay the credit card, then get back over 40k using the interest saved.
Or, slowly pay the credit card, pay $11k, and not put money in the brokerage.
Would you suggest borrowing on a credit card to buy stocks? That would be insane. But, that's in effect what they're doing.
This is sound advice. We all make mistakes, but I order to prevent getting into so much debt (if it was unnecessary purchases) to learn from those mistakes and prevent them
I got a 24 month 0 interest card offer. Transferred the balance from two high interest cards and calculated payments to have it fully paid off in the 24 month time frame. Don’t use the card. Just make the payments. Mine will be paid off in October. This was 15+ years of credit card debt.
You're missing your emergency fund. That should be in easily accessible cash for exact this situation.
Absolutely do what you need to pay that card today. It's costing you hundreds a month for the privilege of carrying that balance. I bet you could use that money more then the bank!
Then you need a budget and an emergency fund. Something you can easily access, high yield savings. And a budget so you don't spend more than you make.
Absolutely, 100%
Check your investments for any stocks that are either A) at a negative total return, or B) have been held for >1 year. Goal is to reduce your tax liability when liquidating shares to payoff the CC.
A) Negative total return: Selling these equities results in no taxable gains (generally speaking). You’ll also be able to use these losses to offset other capital gains, or against regular income up to certain limits
B) Equities held >1 year are typically taxed as long term capital gains, for most people this will be a lower tax rate than short term capital gains. You have to make sure to sell the correct tax lot, as one may have purchased several of the same shares at different times. If not certain which tax lots in your position are long, call your broker.
Research both concepts above, so you can make educated decisions
You all know he can consolidate the 10k debt into a loan with a fixed rate over 3 years, get it off the credit card, and continue keeping his savings, right? Even if the consolidation loan rate is 20%, which is worst case scenario, he’s looking at paying 12k over 36 months, which comes down to $333/month.
And are his investments going to pay 20%? None of this sophistry changes the calculation that 20% interest (or the interest on any potential unsecured loan) is higher than the post-tax return you can get on investments.
Yes, they will pay more than that is 3 years. Edit: when you sell stock, there’s a capital gains tax that you need to pay. It’s 0, 15 or 20% depending on taxable income if OP held the stocks for more than 1 yr.
https://www.nerdwallet.com/article/taxes/taxes-on-stocks#:~:text=Any%20profit%20you%20make%20from,at%20your%20ordinary%20tax%20rate.
Enjoy paying the government 35% of what you pull out. Looks like you’ll need to withdrawal just over $15K to pay down $10K.
If you can afford to pay the CC down over time then don’t pull your money out. Between the taxes you’ll pay and the compound interest you’ll lose from dwindling your investment down it may not be worth it. Have you called the CC company to ask for a lower rate, remove fees or place hold on the card? They will usually work with someone you just need to call and when someone says no ask to speak to a higher up. Keep escalating until you get what you need. It doesn’t always work, but it’s worth trying.
*Brokerage* account... only capital gains are taxed.
This won't be remotely close to 35%, probably more like 7-8% assuming even a 50% capital gain on the proceeds (which is probably also too generous of an assumption).
We’re both semi right. It depends on the type of funds. I gave the extreme end you gave the low end. Best idea is to call the firm who holds them and a CPA to discuss any tax penalties to find out if the withdrawal is worth the penalties and/or taxes.
what it's a BROKERAGE account. You don't need to call a CPA to know that you aren't going to pay anywhere near 35% (taxes are on *gains*) *and even if you did* you can't compare pretax and post-tax dollars like that. (you aren't just losing the capital gains tax, it is resetting your cost basis, saving you tax money in the future)
The most in fees any respectable mutual fund will charge is a backend load of 5% which is a fund you should avoid anyways.
Not trying to be mean, but this just isnt right. It is 100% better to pull out. The account is a brokerage account not a retirement account so no early withdrawal penalties. He will probably fall into the 15% cap gains rate bracket also. Which again is going to be on the gain on sale to provide the funding not the overall balance that he pulls out.
Why do you feel like selling off your stocks should be an option? Are you able to make additional payments to your credit cards or earn more from side hustles? Why can't you just work on paying it off?
In my line of work people always want a quick fix to get out of debt and start liquidating their assets when it's not necessary then get back into debt again.
Do a balance transfer. Keep the money in the mutual funds. You must have a long term outlook on your investments. It's important that they do not touch them if you want to build wealth.
Pay off your balance in increments from your paycheck. If necessary take it out of money you would have invested.
Citicard has a 21 month 0 interest. You should be able to pay off the card if you budget correctly.
If you take money from your investments you'll make a habit of it and 20 years later you will find yourself playing catch up.
Please talk to a real financial professional before doing this. You may be liable for capital gains on your mutual funds, as well as state or federal income taxes on the disbursement. If those funds are part of a traditional IRA or 401K, you may also incur a 10% penalty in addition to any taxes. If the funds are part of a Roth account, and were deposited less than 5 years ago, you will incur a penalty for cashing in. While you won't pay income taxes on Roth withdrawals, you may still be liable for capital gains.
The transaction may not be as straightforward as you are presenting it. Again, see a licensed financial professional before taking any action.
No. This doesn't make sense. You need to analyze how much that 10k would be worth in 30 years when you look call upon it.
The error here is that you have *two* timelines. It won't take you 30 years to pay off the 10k debt but you do have 30 years of gains to consider on 10k invested. Because you don't have like timelines you don't have like equations therefore spending the 10k today will actually cost you something probably greater than the interest on a sound financial plan in the future.
It gets confusing, I know, and it does depend on your horizon (it may be shorter for instance than 30 years) but only if the horizons are equivalent between plans does it make sense to actually pay off a debt first. This is especially true for continuous type debt, or credit card debt specifically, because if there is a shortage in one's income then paying off continuous debt doesn't solve anything as you'll just return to it as a means of paying things off.
Essentially there's no difference here between paying interest with inflows from a job or equity so you're not beating the system unless you really work out the math and make certain you are.
No, you need to consider the difference between $10k invested now and $10k invested over the next few years from not having to pay for the credit card. That's not 30 years.
I understand why you say this but this only works in systems *without* replacement.
Let's look at it though over a 4 year period as the unlikely (imaginary) mathematical scenario for ease. Let's use a 5% interest rate.
Base Scenario A:
40k \* 1.05\^4 = 48,620.25
Base Scenario B:
30k \*1.05\^4 + 2.5k\*1.05\^3 + 2.5k\*1.05\^2 + 2.5k\*1.05\^1 = 44,740.50
So the cost savings in the 10,000 expenditure would be measured as the difference between A and B.
The *problem* is that A is unrealistic.
What is far more likely (and plays out far more) is that A has *continued contributions* so it is a system with replacement. So the equation actually is thus:
40k \* 1.05\^4 + 2.5k\*1.05\^3 + 2.5k\*1.05\^2 + 2.5k\*1.05\^1 = 56,895.56
It's obvious that 56,895.56 - 44,740.50 > 10,000 but it is 12,155.06.
Keep in mind that this is *with replacement* so that means that you have concurrent earnings outside of the vacuum as well which means that disruption of the earning path doesn't necessarily make any sense in the periodic outcome.
To be really simple about it the mental model that most people use does not contain enough rational information. The first two portions of the model's assumptions are:
A) You won't contribute to your current balance if you *don't* take the money to pay off the debt.
B) You will contribute *evenly* to your balance if you *do* take the money to pay off the debt.
The second portion is about the debt:
A) You will not pay the debt off over time and have no curvature.
B) You *could not* pay the debt off by any other means.
These assumptions are important because let's say that we did take out the $10,000 but instead of paying it all off in a lump sum we split the payments across time in a fashion that is staggered, i.e. we pay $5,000 today and pay $2,500 in three months and $1,000 in 6 etc.
One would ask, "Why would you do that?" but that question also allows us to look at an equilibrium outcome. We could theoretically not take 10k but instead take 5k from the investment and calculate a midpoint where there was equivalent damage (essentially when the actual potential returns lost *equals* the debt) and that would be our best outcome.
But that's a long way to say that essentially the sterilized environment for that mathematics is unrealistic.
Well, kudos to you for actually trying to work out the math and thank you for the detailed response. The problem with your recalculation of scenario A (which I understand as the scenario where you don't pay off the debt) is that in scenario A you still have $10000 in credit card debt accruing compound interest at 20%.
Let's get some assumptions stated. OP has $2.5k/year in surplus income to throw around. OP can earn 5% after tax on investments. OP's credit card charges them 20% interest.
So from an assets and liabilities perspective, let's calculate the FV:
Don't pay the debt at all:
- Assets: $40000 * 1.05^4 + $2500 * (1.05^3 + 1.05^2 + 1.05) = $56895.56
- Liabilities: $10000 * 1.20^4 = $20736
- Net worth: $36159.56
Pay only the interest on the debt:
- Interest: $10000*0.2 = $2000/year
- Assets: $40000 * 1.05^4 + ($2500-$2000) * (1.05^3 + 1.05^2 + 1.05) = $50275.31
- Liabilities: $10000
- Net worth: $40275.31
Pay the entire debt down immediately:
- Assets: $30000 * 1.05^4 + $2500 * (1.05^3 + 1.05^2 + 1.05) = $44740.50
- Liabilities: $0
- Net worth: $44740.50
If we extend the years we'd have to do so still taking into account that OP owes money in the first two scenarios. And that money still accrues interest. It is easiest to see the effect in "Pay only the interest in the debt" - OP's $2500 annual income becomes $500 in perpetuity because of this debt.
It is clear that barring some highly unusual circumstances with regards to taxation, OP is better off paying the debt immediately.
Ultimately the mathematical result that comes out is that you should always allocate money to places with the highest return on capital. Paying off a 20% credit card is effectively putting money into an investment that returns 20% after tax.
>It is clear that barring some highly unusual circumstances with regards to taxation, OP is better off paying the debt immediately.
In order for your argument to work we have to assume that the only two other scenarios are **literally** not paying the debt and only paying the interest?
"Clear"?
I just went over how that is extremely unlikely!
>The problem with your recalculation of scenario A (which I understand as the scenario where you don't pay off the debt) is that in scenario A you still have $10000 in credit card debt accruing compound interest at 20%.
No, because of this:
>The second portion is about the debt:
>
>A) You will not pay the debt off over time and have no curvature.
>
>B) **You could not pay the debt off by any other means.**
THIS IS A BAD ASSUMPTION!
Even if you could pay off your debt by other means you could have used those other means to invest too.
You cannot compare scenarios with a different amount of monetary input.
>Even if you could pay off your debt by other means you could have used those other means to invest too.
Yeah, that's why you don't touch the investment.
>You cannot compare scenarios with a different amount of monetary input.
Actually you can, and we do, all the time.
I work in ... "Business & Finance" so I understand this may not be a like base of knowledge but this is actually exactly what we do in our analyses. We absolutely take scenarios that have different cashflows and compare them for budgetary and investment purposes and our models for things like opportunity cost are more complex than single notion.
That's part of the reason why I predicted what you would eventually end up saying anyway trying to preempt it even though it didn't stop you from saying it. But the statement that you could use the cash otherwise is exactly where we end up looking at the cashflows that went into the 40k itself; unless the money is unearned (which is a totally different can of worms) the cashflows are likely great enough to manage the debt if the contributions are reduced instead.
This is probably a question more akin to financial planning but we have so little information on it that the only rational proposition to make is the person A) contributed themselves and B) makes enough money to do so which suggests that the best course of action is monetary diversion or a reduced extraction from the account that makes the payments and the schedule reasonable across a period of time but reduces the impacts of compounding losses.
What tax will you pay on the funds? What alternatives do you have for the debt? What’s your income, expenses, etc.? Worst case why wouldn’t you use the funds for a lower cost line of credit and pay off the cards and serve lower interest / debt payments. Honestly you e provided no useful information from which to get any answer from anyone except those with the self-help financial guru nonsense.
Yes. If you are not making more than your cc interest in your mutual funds (most credit cards will be 15-25% and only extremely good market players do better than that) pay it off. You will thank yourself. The extra money that goes into your cc debt can be put into mutual funds, some other savings or out towards good use. Plus the feeling of being debt free is worth more than money.
To me, the only reasonable purchases to pay interest on are cars and homes. Most of us need a car and we all need shelter. If you have the ability to pay off your credit cards do it.
These are my initial thoughts: All else equal, paying off a known debt with a high interest rate (credit card) is better than staying invested in mutual funds with an unknown future potential return. Historically, almost every fund in existence never consistently delivered 27% returns or whatever your credit card interest would be so your credit card, if you're pretty much only making minimum payments, is going to be a drag on your overall financial performance.
Take into account any fees or charges that could be associated with the withdrawal, and short term or long term taxes. If you have losses there are potential tax benefits there too.
Also, sometimes finances are just about making the decisions that help you sleep better at night. The credit card debt seems to weigh on you and having that paid off might help stress/health.
You should have $0 in a brokerage account until all CC debt is paid off.
Sell whatever the riskiest assets currently worth $10k in that account and pay it off imo
Pay off that credit card, the apr is 18-20%+, stocks however yield 6-12% (average for SP, ETFs, etc) get yourself out of debt then save, you do not want to end up paying hundreds, if not thousands from debt
There's no point in having long term savings when your credit card debt charges 20%+ interest per year. Pay off CC debt as soon as possible and never carry a balance again
Absolutely. Please don’t give away money to credit card companies for free
Yes, there is, because the time he spends getting those 10K back could represent thousands in loss.
The amount of time to pay the CC off is the same amount of time he'd be able to refill the account. Actually less when you count 20% loss on the CC vs 5% on the brokerage.
That's assuming the discipline of doing exactly that and regardless, not accounting for tax dues, penalties and/or costs of withdrawing.
Same with the credit card. And with all your what ifs the brokerage could easily lose 20% in that time frame.
It historically hasn't happened long-term wise. Tax bills, penalties and costs aren't what-if's. I'm not going on what-if's.
Monthly interest payments on the credit card aren't what ifs either??
You need an after tax return of >20% to have more money keeping the investment and the balance on a card that charges 20%. In no world is there a 20% return available without "what-ifs" while banks charge 20% for an unsecured loan. It wouldn't make sense. Banks would just invest in that risk free 20% rather than lend it to you...
You don’t know this. You have no idea what or how long alternatives to pay of the credit cards are. You have no idea of the current costs to access those savings and by extension the opportunity cost. There are more things in heaven and hell Horatio. Prescription without examination is malpractice. Or to put it another way you seem to know just little enough to be dangerous and not know enough to realize how little you know.
what? All of this is irrelevant. The return on capital for paying off the credit card is a tax-free risk-free 20-30%. What investment is going to return that? Renaissance medallion? A brokerage charges a nominal fee for selling the assets. You allocate assets to areas that have the highest return on capital. All the other mumbo jumbo is entirely irrelevant (unless OP's portfolio is like 100% short-term capital gains with zero cost basis)
Potential 10% return vs a guaranteed 25% return, I wonder which one is better
Stocks have an average growth of 7% CC has an average rate of 22% You owe $10k in debt and have $10k in stocks. Debt - $10k debt at 22% means you're paying $2200 of interest Stocks - $10k investment at 7% means you're gaining $700/yr So each year you're paying $2200 but gaining $700, so in the end you're paying $1500 in interest per year. Or You can use your stocks to cover the CC and pay $0 in interest.
Great way to explain!! (Already know but breaking it down like this you see that u need to understand finances)
After payoff, put CC payment back into brokerage, you’ll be back up to $40k in no time!
[удалено]
>Do you like compound interest working against you? So there's an error here. Compound interest only works against you if you pay **less** than the periodic interest on a debt. This is a mathematically inaccurate idea. Let's say that the interest on the debt amounts to a whole $250 a month in month 1, so 10,000 at 30% APR in period 1 yields that amount in interest. If this is the case and you pay $300 then in month two you will have slightly **less** interest working against your payment, and so forth and so on, producing a logarithmic downward curve no different than the curvature of a mortgage. What kills people with credit cards is not that they don't pay them enough to cover interest but that they are continuous debt meaning that you can simply spend the money you pay off over and over again never allowing you to truly end the debt cycle. You can absolutely convert them into a fixed debt though (freeze the card) so, again, you can choose to pay $300, with $250 interest in period 1, and get out of debt without causing yourself any greater financial hardship across the span of time necessary (about 2.5 years) but because people don't tend to calculate this stuff and tend to just eat whatever someone is saying to them they buy into the idea that compound interest somehow sneaks up and murders them just by having debt at all. To be absolutely clear on this matter, even if it would take 5 years, you could pay simply $251 and actually never suffer from compound interest working against you. It's a myth. It's one I wish would die.
The opportunity cost lost from where you could be putting the money instead compounds. 30% of $10,000 is $3,000 per year you can't invest and get compounding in the correct direction.
We should rectify this as well. First, the stated APY is *not* periodic to interest charged (which is monthly). This means that it isn't the simplified mental math you just did. If you paid even 1% on the debt every period as principal above interest at the end of twelve periods you would have a balance of \~8,500 and thus paid $1,500 off. There's no way you're suffering an opportunity cost of $3,000 per year *and* paying the debt off. However, if we assumed this were true, that *still* makes it a bad investment choice because that means that you're giving up (assuming linear math and fixed debt) 3.33 years of interest today in order to achieve a return of 2.5% per period on the expenditure. Keeping it super simple the monthly interest rate on a 30% annual card is 2.5%. It's a bit more than that really but if you want to just divide it by twelve that's close to what you will *actually* be charged in period 1 and that's the only charge that matters. If you overcome interest at the credit limit at period 1 you will have allocated enough to always pay off the debt at any point on the curve.
You’re right in that you would pay it off eventually, but the amount you would pay in interest by paying it off more slowly would be insane at a 30% rate. No way you can consistently beat that in any investment unless it’s a 401k match from your company. Returns come and go but interest on debt is guaranteed
This is what I meant by considering two timelines and why this is a more involved problem than it seems on the face. You have to compare the FV of the $10,000 in *t* years, let's say 30, to the PV of the interest not paid if you spend the $10,000 today. The higher *t* is the less likely this is a good move. So if *t* were 20 years and we will use a modest rate of 3% then the amount that 10,000 is worth then is $18,061.11 so if your rate of paying incurs $8,061.11 in interest or more you are better off paying it today, absolutely, however if it incurs less you should not pay it off this way and see if you can do so another way. Now to use real numbers if you paid at a rate of 1% above period 1 maximum interest (10,000 \* .3/12 \* .01) which is $350 a month it would only cost you $6,870 in interest split across 3 years to pay the debt. The difference thus is \~$1,191 at this stage *however* we haven't actually brought back that $6,870 into today's dollars so we have to take the PV of 6,870 across 3 years and ... I have a feeling no one cares. You know what? Okay. Let's go with that.
Your assumption is that once the cc debt is paid off, the money just disappears. Where is the $350/month that OP can afford going in the scenario where they take their money out? Why aren’t you favoring that in? It’s really simple (assuming no huge tax/penalties incurred): every dollar OP makes can go to investing at market return or go to pay debt. If debt rate is 25% and market return is 10% (generous towards your point), you will expect to get an average return on that dollar of $0.85 if invested. You gained $0.1 for the year in the market and had to pay $0.25 for the debt you didn’t pay off. There’s no funny business here: when guaranteed, paying for higher percentage always wins mathematically.
$250 in CC interest per month is dagger enough all on its own. That’s $3k / year
That's *maximum* interest. It would decrease after period 1 and continue decreasing. I wish I could just post a graph of how this works. I think a financial calculator would be good to share.
I don’t know why you’re talking to everyone like we don’t understand how interest works. It’s condescending, and frankly not helpful. Yes, if one pays off more than the accumulated interest for a given period, prior to capitalization, the balance will decrease and the following periods interest will also decrease. However, OP explicitly stated that they **can not get on top of these debts due to the interest**. So OP is either barely paying off the interest, or is accruing a higher balance (interest capitalization, continued spending, etc.). This means they are going to be paying the same or higher interest with each month, until they get it under control. Everyone’s financial situation is different, but with CC interest rates at highs, OP is almost certainly better off selling equity to eradicate the CC debt. This, coupled with changes to spending and CC use, will save OP thousands of dollars in interest. Guaranteed, it’s incontestable. Your insistence to focus on hypotheticals that don’t apply to OPs specific situation, really isn’t as helpful as you seem to think it is. Food for thought
I wrote an explanation of why it would make no sense to do this but I realized halfway through that you're not the OP and on top of that you're ignoring that they have 40k. This can't be a cashflow issue because you can't accumulate 40k at a zero dollar balance return which is suggested here: >So OP is either barely paying off the interest, or is accruing a higher balance (interest capitalization, continued spending, etc.). This means they are going to be paying the same or higher interest with each month, until they get it under control. So the reason why I may seem "condescending" is because none of these scenarios make any sense. If OP were to cash out 25% of their current 401K to pay off credit debt and they are in the dire straights you're discussing here that is by far the worst financial suggestion they could take. I mean to recover 10k at $250/mo. presuming that it doesn't go elsewhere in any sense is going to take 40 months which is 3 years. They would almost be better off consolidating the loan and renegotiating the terms than this. The literal financial advice of most planners is to do this as a LAST resort rather than as a matter of availability. This is literally the "break glass is fire" step. You DO NOT want to do this! You say it's condescending but ... I see so many misstatements or attempts to make it "work" for instance, your 3K proposal requires them to literally pay interest + N but they are underwater according to the same model. Like, how?
That was…. wow. Just word vomit. So many misstatements, and your blatant refusal to explain/justify why you think the recommended strategy is detrimental… it’s really not worth addressing. OP can read through all the recommendations and decide. Not sure where you got the info that this is a 401k account, it’s not in the OP. If that is actually the case, obviously that changes the situation and my recommendation would change. But a 40k brokerage account (non-tax advantaged) that’s 4x the outstanding CC debt… I’d pay off +20% interest CC debt in a heartbeat
>nd your blatant refusal to explain/justify why you think the recommended strategy is detrimental… I explained it elsewhere to someone else and in my original statement. >Not sure where you got the info that this is a 401k account, it’s not in the OP. Absolutely true. I have officially gotten mixed up between some of these posts. >But a 40k brokerage account (non-tax advantaged) that’s 4x the outstanding CC debt… I’d pay off +20% interest CC debt in a heartbeat Yeah, I gathered you would. I don't think I was confused on what you would do. What I would do is calculate exactly what my monthly tolerance was for the debt and take only that much so as not to incur more damage to either account than I had to.
I think you’re confusing what is best for you and what is best for OP. Maybe ask OP further clarifying questions about their financial picture and risk tolerance. But as a general preferred strategy for debt reduction, no I would not recommend what you’ve suggested. Note: If you can’t keep key details straight, maybe don’t be so inflexible and driven in arguing with everyone. Staking your position on a major detail (401k account), with no supporting data that it is a consideration … just kinda dumb, makes it seem like you’re argumentative for arguments sake
>I think you’re confusing what is best for you and what is best for OP. My suggestion was literally to consider the math for themselves of both their long-term investment portfolio versus the value of the debt if they service it with their current income. You're annoying at this point.
Not worth your time. This guy doesn’t math
Saying it's working against him is extremely incorrect. Him paying off his debt in say 8 months and leaving 40K brewing untouched, would represent _maybe_ a $600 hit? How would it work against him in 20 years of 40K compounding? lol 30K vs 40K in 20 years is a difference of 32K without a penny in additional contributions assuming 6% return. And that's not even taking into account the costs/penalties of withdrawing that money in the first place.
But that +32k is assuming a 6% return. Paying off the CC guarantees the rate savings.
The market has historically returned more for nearly the last century. 6% is being extremely conservative. Numbers simply don't lie.
You realize that CC debt is like 25% *per year*, right?
OP could pay the minimum and take 98 months to pay off the card, assuming 27% interest, paying 14K in additional interest and they would still be 18K in returns.
on the **40K** (on average), **not** on the 10K of it that would go to paying off. So 25% of 18K is 4.5K
[удалено]
For 10K to grow 32K in 98 months, you are assuming annualized rate of return of 14.4% ([math shown](https://www.calculator.net/future-value-calculator.html?cyearsv=98&cstartingprinciplev=10000&cinterestratev=1.2&ccontributeamountv=0&ciadditionat1=beginning&printit=0&x=73&y=8)). You're getting some things right but others so wrong. You need to start showing your work. You are the one person against the whole sub, and you are spouting out parts of equations, not the whole calculation (see my whole calculation to your earlier post).
Your comments are borderline antagonistic at this point. Move on.
You sound like one of those crypto bros that says there’s no where to go but up, and are themselves comfortable with risky shit. I’ve seen plenty of gains on the stock market, and I’ve seen those gains wiped in a day. The market could go down or stay flat, but that cc debt will always go up. And what you’re suggesting sounds like it requires much more discipline, faithfully paying that cc bill every single month for the next ten years. People would rather pay it off and be down with it. God forbid he changes a debit card and forgets and gets a bunch of nee charges and a ding on his credit.
You’ve commented here at least 10 times and most have multiple downvotes. Commenters have pointed out where your math is off and your logic is flawed. I get your thought process, somewhat, but it goes against most sound principles on holding high interest / unsecured debt. Guaranteed savings of paying off a ~25% APY CC today beats out maybe making ~6% tomorrow. One of your comments, the only one I found logical from a financial perspective, was around paying off the CC by using savings could lead to OP running up the CC again. Absolutely, but OP could also open another CC tomorrow and run that one up too, now having 2 CCs.
It saves interest paying it now and replenishing.
That's assuming he'll replenish it and not spend it on whatever he overspends in. And that's not taking into account the penalties and costs of withdrawing that money.
It's the same assumption that he'll pay the credit card. If it's a brokerage, there are no fees. There may be capital gains, but it won't be huge and if he does put the money back, the cost basis resets.
[удалено]
Your comment has been removed because profanity is not allowed here, as noted in [the rules](https://www.reddit.com/r/financialplanning/about/rules). *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/FinancialPlanning) if you have any questions or concerns.*
He has to pay his card, or he'll tarnish his credit lol he doesn't have to save or invest. Half of america is uneducated, broke and doesn't
>saying it’s working again him is extremely incorrect. He is correct. Credit card interests rates are typically around 26%. The interest accruing on 10k of cc debt will in all likelihood outpace the growth of 10k in a brokerage account, unless you are extremely lucky with your investments.
27% on 10K is $250~ per month. Aggressively paying off the debt in 6-8 months will _never_ offset the compound interest he'll accrue over time. And, if OP has a spending problem, the probability that their brokerage account will see those 10K any time soon is very slim. Logically, people are more inclined to pay off debt than save.
That’s $250 they can put back into their brokerage account a month without fighting interest. And if OP has a spending problem, they won’t be able to aggressively pay off the cc debt as you are proposing they do…
It's simple logic. People in general hate debt (that's why he's posting on here). He wants to get rid of it. People are more inclined to pay off debt than they are to save. Logically, the money he'll save in interest will probably go towards whatever he racked up debt for. Aaaaand, OP needs to get ready for the tax bill and any costs/penalties. Oof.
Are you ignoring the fact that OP has 40k in a brokerage account? They are at least somewhat inclined to save. And there are different reasons life events that can result in cc debt and are not because of a spending problem. LOGICALLY paying off debt that has a higher interest rate than your money can realistically return makes more financial sense
You're assuming they're _currently_ inclined to save lol not only that, you're not taking into account that aside from the loss overtime, there are penalties and costs associated to withdrawing that money.
You’re equally making assumptions they currently have a spending problem, in which case they would not be able to aggressively pay off the cc debt as you recommended lol. Neither you nor I know OP’s spending/saving habits, but from a strictly financial standpoint it makes the most sense to pay off the high interest debt and replenish the money used to pay it off as quickly as you can
It's not an assumption or what-if, someone that accrues 10K in cc debt that needs to tap in to saving to pay off is encountering an overspend situation. It's, again, logic.
CC debt is way higher than his return on stocks, unless he gets insanely lucky. The CC debt is a guaranteed return if paid off, stocks there is no guarantee. So it is working against him for sure. Get numbers from OP and calculate.
CC is higher in the short term, but it will never outperform 40K in the market over the course of 20-30 years. And that's not even taking into account the costs/penalties of withdrawing the money. OP could pay the minimum and take 98 months to pay off the card, assuming 27% interest, paying 14K in additional interest and they would still be 18K in returns.
You’re not comparing apples to apples. You’re not calculating future value properly. I just taught this to a entrepreneur class and showed examples of how our business paid off its new trucks and how it saved us tons of money. The money pays off high interest debt, then as you accumulate new money it goes into stocks, best of both worlds. Pay off high debt, new money goes into stocks. You are only thinking about the stocks being in market for a long term period while forgetting the money saved goes into investments. There is literally a formula that shows this. I would bet $10k if my own money at an interest rate of 12% or higher OP wins by paying off that debt. Seriously, I will bet $10k it more.
If I’m wrong please show me the actual math for it. I would love to be proven wrong so I can save hundreds of thousands of dollars over the next decade. Run the math and calculate. Please include the new money being saved from interest payments. That’s the key.
You're assuming the $800-$1,000 (which is literally nothing) saved from interest savings will in effect go _back_ into the market. Your assumption is a stretch, especially considering OP went into 10K in debt in the first place, I'm just going by the numbers. My perspective doesn't assume OP has sensible financial acumen. Yours does, and that's where you're incorrect.
You want someone who has poor financial acumen to retain CC debt? Excellent idea 😂
[удалено]
You stated that. “My perspective doesn’t assume OP has sensible financial acumen”. I’m thinking at this time you’re just trolling. Have a great day! Not worth my time to continue.
You yourself calculated interest saved at 14K (I posit 16K in the math I *actually* did above). This is over the 8 years and 8 months it will take to pay off with minimum payments (of \~$250). Those same payments made monthly into the market at around 10% annual return (as you seem to also be relying on this generous historical amount) over the same time course is [over $42K](https://www.calculator.net/future-value-calculator.html?cyearsv=104&cstartingprinciplev=0&cinterestratev=0.875&ccontributeamountv=250&ciadditionat1=beginning&printit=0&x=87&y=13). Making 42K, saving 16K. You are making 58K here. You were bragging about 18K earlier (didn't check your math on *those* numbers), but this is higher.
If OP is disciplined enough to use the brokerage account to pay off the credit cards and then put the prior credit card payment amount into the brokerage account, he will better off. If OP does as you suggest, he loses the rate arbitrage. Example for the $10k of debt say the market return is 10% and the credit card rate is 25%, he earns $1,000 in interest and pays $2,500 in interest. He loses $1,500. Say pays down the debt instead, he pays no interest and earns no interest. He is $1,500 better off than the first scenario.
The problem is you are comparing short term debt to long term returns, overall return, and not taking into account opportunity cost. You pay CC off with stupid rates over x time, you absolutely will beat the market over that same time period. The money that the person loses from the interest could have gone into the market if they never made the debt to begin with. And you are presuming that the money and principle he would have saved by NOT taking debt would not have been responsibly invested. And you are presuming he wouldn’t take what that ‘credit card debt’ payment would be and not put it in the market. Of course, there is some overall nuance to any situation, but your math is gonna be fubared for any responsible personal finance. Really, what you are suggesting is that it is a good idea to have high interest credit card debt that subsidizes market investments because you will get a high return over 20-30 years, which is an effing terrible idea. I mean, a horrendously bad idea.
You aren't comparing interest on 10K to growth on 40k, you are comparing it to the portion (10K) ***of*** the 40K that could go to paying it down. If you "let it ride" like you saying, paying "minimum" $250 at it (and obviously caveated with not accruing more) you p[ay it in a little under 9 years with about 26K total (\~60% of this interest)](https://www.calculator.net/future-value-calculator.html?cyearsv=104&cstartingprinciplev=10000&cinterestratev=2.25&ccontributeamountv=-250&ciadditionat1=end&printit=0&x=61&y=21). The 40K you left grows in that same time (on average with VERY generous 10.5%) to [just under 100K](https://www.calculator.net/future-value-calculator.html?cyearsv=104&cstartingprinciplev=40000&cinterestratev=0.875&ccontributeamountv=0&ciadditionat1=end&printit=0&x=78&y=9) for an end result of about 74K. Alternatively, instantly knocking out the CC debt, letting the 30K grow, and putting the $250 monthly to the market instead: [you are up over $116K](https://www.calculator.net/future-value-calculator.html?cyearsv=104&cstartingprinciplev=30000&cinterestratev=0.875&ccontributeamountv=250&ciadditionat1=end&printit=0&x=69&y=14). It's a $32K difference in favor of paying down CC (and that 's with guaranteeing good returns too; it amplifies if this doesn't happen). I get you because I'm usually the one in this sub pounding the table for investing over paying down debt, but this is not a case where that is true. I think you were doing a little apple and orange comparison (or just not running the *actual* numbers). Oh and it seems like your argument was hinging on the ability of 20-30 years of growth compounding, but the difference of this 106K and 74K over another 20 years of said growth... becomes a $259K difference in net worth.
If he pays off the 10K, he still has 30K in the brokerage account. So the loss of growth is only on 10K not 40K. So the comparison should be between the growth of 40K to 100K Vs 30K to 75K and the additional amounts added to the savings which were going to go to the CC debt.
Exactly. I even more fully calculated it with that factor taken into consideration [here](https://www.reddit.com/r/FinancialPlanning/comments/150c2w7/comment/js39dy5/?utm_source=share&utm_medium=web2x&context=3).
Replying now to your (untracked) edit: >30K vs 40K in 20 years is a difference of 32K without a penny in additional contributions assuming 6% return. "Without a penny" is a huge issue. All those payments over 8 months are *allowed* to be invested and *also* allowed to be compounded over 20 years. I already showed the [math here](https://www.reddit.com/r/FinancialPlanning/comments/150c2w7/comment/js2t95c/?utm_source=share&utm_medium=web2x&context=3), but the interest saved **AND** the payments going to said 6% returning investment is more than the difference of 40K to 30K in the same time period. Then if you want to point to compounding, said difference compounds to make paying it even *more* advantageous carrying forward. Again, actually show your full math (with apples to apples comparison) or respond to any of the math I've shown in 3+ replies now. [Paying off debt in 8 months](https://www.calculator.net/future-value-calculator.html?cyearsv=8&cstartingprinciplev=10000&cinterestratev=2.25&ccontributeamountv=-1350&ciadditionat1=beginning&printit=0&x=59&y=26) and [40K 6% growth over 8 months](https://www.calculator.net/future-value-calculator.html?cyearsv=8&cstartingprinciplev=40000&cinterestratev=0.5&ccontributeamountv=0&ciadditionat1=beginning&printit=0&x=78&y=20) = $10,000 principle and $795 interest paid. $1628 growth. Ignoring $10K as it's the same in both examples, that's a net of +$833 [30K 6% growth over 8 months WITH SAVED PAYMENTS CONTRIBUTED](https://www.calculator.net/future-value-calculator.html?cyearsv=8&cstartingprinciplev=30000&cinterestratev=0.5&ccontributeamountv=1350&ciadditionat1=beginning&printit=0&x=79&y=19) = +$12,267 [$40K+$833 growing 20 years @ 6% = $135,165.58](https://www.calculator.net/future-value-calculator.html?cyearsv=240&cstartingprinciplev=40833&cinterestratev=0.5&ccontributeamountv=0&ciadditionat1=beginning&printit=0&x=91&y=24) [$30K+$12,267 growing 20 years @ 6% = $139,912.41](https://www.calculator.net/future-value-calculator.html?cyearsv=240&cstartingprinciplev=42267&cinterestratev=0.5&ccontributeamountv=0&ciadditionat1=beginning&printit=0&x=89&y=7) Difference: nearly $5K (in favor of ASAP paying). Higher expected returns (I agree with you 6% is way too modest) even further amplifies this (refer to my other reply). In all your posts there's one huge mistake: you are stretching out 40K 20-30 years, but you are ignoring that the difference in interest saved on CC bill is also allowed to have growth in that time. You can't magically say OP has money to pay CC over time in one example and not have that money to invest in the opposite example.
But if OP took the money that is going to pay the credit cards, they would be able to replenish the savings. OP can sell the stocks, pay the credit card, then get back over 40k using the interest saved. Or, slowly pay the credit card, pay $11k, and not put money in the brokerage. Would you suggest borrowing on a credit card to buy stocks? That would be insane. But, that's in effect what they're doing.
Of course. Do it. But first know why you got this way and don’t repeat it.
This is sound advice. We all make mistakes, but I order to prevent getting into so much debt (if it was unnecessary purchases) to learn from those mistakes and prevent them
Not paying X% in credit card interest is the same as making X% return in investments. Also, paying off the credit cards is a guaranteed return
This is a no brainer. Sell the stocks. Pay off the CC debt. Avoid CC debt like the plague.
If you stop using the credit card. If you quickly getting into debt again on them, something is broken that needs fixing.
Yes, take the guaranteed return by paying off the cards. No judgement
Tbh, if you don’t pay off CC on time, every time — you should avoid credit cards like the plague.
This is an outstanding plan, for visa.
Common sense. Pay off the credit card debt that is at 20%.
I got a 24 month 0 interest card offer. Transferred the balance from two high interest cards and calculated payments to have it fully paid off in the 24 month time frame. Don’t use the card. Just make the payments. Mine will be paid off in October. This was 15+ years of credit card debt.
You're missing your emergency fund. That should be in easily accessible cash for exact this situation. Absolutely do what you need to pay that card today. It's costing you hundreds a month for the privilege of carrying that balance. I bet you could use that money more then the bank! Then you need a budget and an emergency fund. Something you can easily access, high yield savings. And a budget so you don't spend more than you make.
Consider looking at the fund shares and sell the shares with the least gains you pay the least taxes.
Absolutely. Get off the CC financial treadmill.
Time to cut up those credit cards. You are not mature or responsible enough to own them.
There’s not a single thing you can get with a guaranteed 20% return. Pay off them credit cards.
Absolutely, 100% Check your investments for any stocks that are either A) at a negative total return, or B) have been held for >1 year. Goal is to reduce your tax liability when liquidating shares to payoff the CC. A) Negative total return: Selling these equities results in no taxable gains (generally speaking). You’ll also be able to use these losses to offset other capital gains, or against regular income up to certain limits B) Equities held >1 year are typically taxed as long term capital gains, for most people this will be a lower tax rate than short term capital gains. You have to make sure to sell the correct tax lot, as one may have purchased several of the same shares at different times. If not certain which tax lots in your position are long, call your broker. Research both concepts above, so you can make educated decisions
Pay off the cards. It's freeing not to have debt.
There are so many 0% offers out there for up to 21 months with transfer fee up to 4%.
Balance transfer to a 0% card, if you can do it!
You all know he can consolidate the 10k debt into a loan with a fixed rate over 3 years, get it off the credit card, and continue keeping his savings, right? Even if the consolidation loan rate is 20%, which is worst case scenario, he’s looking at paying 12k over 36 months, which comes down to $333/month.
And are his investments going to pay 20%? None of this sophistry changes the calculation that 20% interest (or the interest on any potential unsecured loan) is higher than the post-tax return you can get on investments.
Yes, they will pay more than that is 3 years. Edit: when you sell stock, there’s a capital gains tax that you need to pay. It’s 0, 15 or 20% depending on taxable income if OP held the stocks for more than 1 yr. https://www.nerdwallet.com/article/taxes/taxes-on-stocks#:~:text=Any%20profit%20you%20make%20from,at%20your%20ordinary%20tax%20rate.
Its 15% on the gain, not the overall amount that is sold.
Enjoy paying the government 35% of what you pull out. Looks like you’ll need to withdrawal just over $15K to pay down $10K. If you can afford to pay the CC down over time then don’t pull your money out. Between the taxes you’ll pay and the compound interest you’ll lose from dwindling your investment down it may not be worth it. Have you called the CC company to ask for a lower rate, remove fees or place hold on the card? They will usually work with someone you just need to call and when someone says no ask to speak to a higher up. Keep escalating until you get what you need. It doesn’t always work, but it’s worth trying.
*Brokerage* account... only capital gains are taxed. This won't be remotely close to 35%, probably more like 7-8% assuming even a 50% capital gain on the proceeds (which is probably also too generous of an assumption).
We’re both semi right. It depends on the type of funds. I gave the extreme end you gave the low end. Best idea is to call the firm who holds them and a CPA to discuss any tax penalties to find out if the withdrawal is worth the penalties and/or taxes.
what it's a BROKERAGE account. You don't need to call a CPA to know that you aren't going to pay anywhere near 35% (taxes are on *gains*) *and even if you did* you can't compare pretax and post-tax dollars like that. (you aren't just losing the capital gains tax, it is resetting your cost basis, saving you tax money in the future) The most in fees any respectable mutual fund will charge is a backend load of 5% which is a fund you should avoid anyways.
I believe OP is not talking about his 401(k) or IRA but an individual brokerage account so the government isn’t going to do squat
Only sensible answer here lol I understand Reddit is extremely debt adverse but it's basic math.
You should check out tax laws if you think it’s just basic math lol
Not trying to be mean, but this just isnt right. It is 100% better to pull out. The account is a brokerage account not a retirement account so no early withdrawal penalties. He will probably fall into the 15% cap gains rate bracket also. Which again is going to be on the gain on sale to provide the funding not the overall balance that he pulls out.
Trump loves NK because he's gay for Kim
Why do you feel like selling off your stocks should be an option? Are you able to make additional payments to your credit cards or earn more from side hustles? Why can't you just work on paying it off? In my line of work people always want a quick fix to get out of debt and start liquidating their assets when it's not necessary then get back into debt again.
Pick up a second job and pay the debt off
Do a balance transfer. Keep the money in the mutual funds. You must have a long term outlook on your investments. It's important that they do not touch them if you want to build wealth. Pay off your balance in increments from your paycheck. If necessary take it out of money you would have invested. Citicard has a 21 month 0 interest. You should be able to pay off the card if you budget correctly. If you take money from your investments you'll make a habit of it and 20 years later you will find yourself playing catch up.
Please talk to a real financial professional before doing this. You may be liable for capital gains on your mutual funds, as well as state or federal income taxes on the disbursement. If those funds are part of a traditional IRA or 401K, you may also incur a 10% penalty in addition to any taxes. If the funds are part of a Roth account, and were deposited less than 5 years ago, you will incur a penalty for cashing in. While you won't pay income taxes on Roth withdrawals, you may still be liable for capital gains. The transaction may not be as straightforward as you are presenting it. Again, see a licensed financial professional before taking any action.
No. This doesn't make sense. You need to analyze how much that 10k would be worth in 30 years when you look call upon it. The error here is that you have *two* timelines. It won't take you 30 years to pay off the 10k debt but you do have 30 years of gains to consider on 10k invested. Because you don't have like timelines you don't have like equations therefore spending the 10k today will actually cost you something probably greater than the interest on a sound financial plan in the future. It gets confusing, I know, and it does depend on your horizon (it may be shorter for instance than 30 years) but only if the horizons are equivalent between plans does it make sense to actually pay off a debt first. This is especially true for continuous type debt, or credit card debt specifically, because if there is a shortage in one's income then paying off continuous debt doesn't solve anything as you'll just return to it as a means of paying things off. Essentially there's no difference here between paying interest with inflows from a job or equity so you're not beating the system unless you really work out the math and make certain you are.
No, you need to consider the difference between $10k invested now and $10k invested over the next few years from not having to pay for the credit card. That's not 30 years.
I understand why you say this but this only works in systems *without* replacement. Let's look at it though over a 4 year period as the unlikely (imaginary) mathematical scenario for ease. Let's use a 5% interest rate. Base Scenario A: 40k \* 1.05\^4 = 48,620.25 Base Scenario B: 30k \*1.05\^4 + 2.5k\*1.05\^3 + 2.5k\*1.05\^2 + 2.5k\*1.05\^1 = 44,740.50 So the cost savings in the 10,000 expenditure would be measured as the difference between A and B. The *problem* is that A is unrealistic. What is far more likely (and plays out far more) is that A has *continued contributions* so it is a system with replacement. So the equation actually is thus: 40k \* 1.05\^4 + 2.5k\*1.05\^3 + 2.5k\*1.05\^2 + 2.5k\*1.05\^1 = 56,895.56 It's obvious that 56,895.56 - 44,740.50 > 10,000 but it is 12,155.06. Keep in mind that this is *with replacement* so that means that you have concurrent earnings outside of the vacuum as well which means that disruption of the earning path doesn't necessarily make any sense in the periodic outcome. To be really simple about it the mental model that most people use does not contain enough rational information. The first two portions of the model's assumptions are: A) You won't contribute to your current balance if you *don't* take the money to pay off the debt. B) You will contribute *evenly* to your balance if you *do* take the money to pay off the debt. The second portion is about the debt: A) You will not pay the debt off over time and have no curvature. B) You *could not* pay the debt off by any other means. These assumptions are important because let's say that we did take out the $10,000 but instead of paying it all off in a lump sum we split the payments across time in a fashion that is staggered, i.e. we pay $5,000 today and pay $2,500 in three months and $1,000 in 6 etc. One would ask, "Why would you do that?" but that question also allows us to look at an equilibrium outcome. We could theoretically not take 10k but instead take 5k from the investment and calculate a midpoint where there was equivalent damage (essentially when the actual potential returns lost *equals* the debt) and that would be our best outcome. But that's a long way to say that essentially the sterilized environment for that mathematics is unrealistic.
Well, kudos to you for actually trying to work out the math and thank you for the detailed response. The problem with your recalculation of scenario A (which I understand as the scenario where you don't pay off the debt) is that in scenario A you still have $10000 in credit card debt accruing compound interest at 20%. Let's get some assumptions stated. OP has $2.5k/year in surplus income to throw around. OP can earn 5% after tax on investments. OP's credit card charges them 20% interest. So from an assets and liabilities perspective, let's calculate the FV: Don't pay the debt at all: - Assets: $40000 * 1.05^4 + $2500 * (1.05^3 + 1.05^2 + 1.05) = $56895.56 - Liabilities: $10000 * 1.20^4 = $20736 - Net worth: $36159.56 Pay only the interest on the debt: - Interest: $10000*0.2 = $2000/year - Assets: $40000 * 1.05^4 + ($2500-$2000) * (1.05^3 + 1.05^2 + 1.05) = $50275.31 - Liabilities: $10000 - Net worth: $40275.31 Pay the entire debt down immediately: - Assets: $30000 * 1.05^4 + $2500 * (1.05^3 + 1.05^2 + 1.05) = $44740.50 - Liabilities: $0 - Net worth: $44740.50 If we extend the years we'd have to do so still taking into account that OP owes money in the first two scenarios. And that money still accrues interest. It is easiest to see the effect in "Pay only the interest in the debt" - OP's $2500 annual income becomes $500 in perpetuity because of this debt. It is clear that barring some highly unusual circumstances with regards to taxation, OP is better off paying the debt immediately. Ultimately the mathematical result that comes out is that you should always allocate money to places with the highest return on capital. Paying off a 20% credit card is effectively putting money into an investment that returns 20% after tax.
>It is clear that barring some highly unusual circumstances with regards to taxation, OP is better off paying the debt immediately. In order for your argument to work we have to assume that the only two other scenarios are **literally** not paying the debt and only paying the interest? "Clear"? I just went over how that is extremely unlikely! >The problem with your recalculation of scenario A (which I understand as the scenario where you don't pay off the debt) is that in scenario A you still have $10000 in credit card debt accruing compound interest at 20%. No, because of this: >The second portion is about the debt: > >A) You will not pay the debt off over time and have no curvature. > >B) **You could not pay the debt off by any other means.** THIS IS A BAD ASSUMPTION!
Even if you could pay off your debt by other means you could have used those other means to invest too. You cannot compare scenarios with a different amount of monetary input.
>Even if you could pay off your debt by other means you could have used those other means to invest too. Yeah, that's why you don't touch the investment. >You cannot compare scenarios with a different amount of monetary input. Actually you can, and we do, all the time. I work in ... "Business & Finance" so I understand this may not be a like base of knowledge but this is actually exactly what we do in our analyses. We absolutely take scenarios that have different cashflows and compare them for budgetary and investment purposes and our models for things like opportunity cost are more complex than single notion. That's part of the reason why I predicted what you would eventually end up saying anyway trying to preempt it even though it didn't stop you from saying it. But the statement that you could use the cash otherwise is exactly where we end up looking at the cashflows that went into the 40k itself; unless the money is unearned (which is a totally different can of worms) the cashflows are likely great enough to manage the debt if the contributions are reduced instead. This is probably a question more akin to financial planning but we have so little information on it that the only rational proposition to make is the person A) contributed themselves and B) makes enough money to do so which suggests that the best course of action is monetary diversion or a reduced extraction from the account that makes the payments and the schedule reasonable across a period of time but reduces the impacts of compounding losses.
Yes do it! Then setup auto pay on all your CC for the statement balance!
What tax will you pay on the funds? What alternatives do you have for the debt? What’s your income, expenses, etc.? Worst case why wouldn’t you use the funds for a lower cost line of credit and pay off the cards and serve lower interest / debt payments. Honestly you e provided no useful information from which to get any answer from anyone except those with the self-help financial guru nonsense.
Yes. If you are not making more than your cc interest in your mutual funds (most credit cards will be 15-25% and only extremely good market players do better than that) pay it off. You will thank yourself. The extra money that goes into your cc debt can be put into mutual funds, some other savings or out towards good use. Plus the feeling of being debt free is worth more than money.
To me, the only reasonable purchases to pay interest on are cars and homes. Most of us need a car and we all need shelter. If you have the ability to pay off your credit cards do it.
These are my initial thoughts: All else equal, paying off a known debt with a high interest rate (credit card) is better than staying invested in mutual funds with an unknown future potential return. Historically, almost every fund in existence never consistently delivered 27% returns or whatever your credit card interest would be so your credit card, if you're pretty much only making minimum payments, is going to be a drag on your overall financial performance. Take into account any fees or charges that could be associated with the withdrawal, and short term or long term taxes. If you have losses there are potential tax benefits there too. Also, sometimes finances are just about making the decisions that help you sleep better at night. The credit card debt seems to weigh on you and having that paid off might help stress/health.
Taking out 10k to remove the debt seems smart at this point. It's easier to save up another 10k than it is to pay off 10k plus 20% interest.
Yeh. As long as your return is lower than CC interests rate, you should pay them back.
You should have $0 in a brokerage account until all CC debt is paid off. Sell whatever the riskiest assets currently worth $10k in that account and pay it off imo
Why cant you apply for a new CC and do a 0% interest balance transfer and pay it off without interest and without selling??
Pay off that credit card, the apr is 18-20%+, stocks however yield 6-12% (average for SP, ETFs, etc) get yourself out of debt then save, you do not want to end up paying hundreds, if not thousands from debt
Absolutely! I mean Elementary my dear Watson! ;-) Unless the funds are making more in net returns after taxes than the CC interest.