3 ms·

I second the recommendation of the /r/personalfinance wiki. In particular, their FAQ answer to "I have $X, what do I do with it?" is a concise, simple-to-follow

I second the recommendation of the /r/personalfinance wiki. In particular, their FAQ answer to "I have $X, what do I do with it?" is a concise, simple-to-follow basic blueprint for handling money that should work well for most people: https://www.reddit.com/r/personalfinance/wiki/commontopics https://www.reddit.com/r/personalfinance/wiki/commontopics

Ozzie_osman 5y ago
The flowchart version of that "what do I do with it?" is pretty awesome https://m.imgur.com/lSoUQr2 https://m.imgur.com/lSoUQr2
hirvi74 5y ago
The only major point of the flowchart that I disagree with is the part about paying off mid to low interest debt. I suppose that is where the "personal" part of personal finance comes into to play. For example, a person will post something like, "Should I pay off my $50k student loans at 4%-6% as fast as possible, or should invest more?" Common responses include: 1. "Would you take out a $50k loan at 4%-6% to invest?" 2. "Paying off your loans is a guaranteed 4%-6% return." The problem I have with this advice is that in the case of response #1, that is somewhat of a false equivalence. Also, I am not sure outside of a HELOC where one could even get a $50k loan for 4%-6%. Even in this environment currently, I see banks advertising their low interest loans which clock in around 8%-12%. (I'm not counting margin loan rates in this example). As for #2, I feel like this advice is okay at face value, but tends to fall apart once one takes more factors into account. One such factor people often miss is that one must use post-tax income to pay off student loans. Thus, in the US, assuming the person asking for advice has any income at all, then he or she must pay 10% <= x <= 37% in taxes to pay a 4%-6% loan, thus it's a guaranteed loss of 10% to 37% to get a guaranteed return of 4%-6%. I'm not trying to downplay the powerful psychological aspect of paying off debt, but I do think more people should consider the mathematically optimal option as well (making the minimum payments on debt while maxing out tax advantaged savings before making additional payments on debt). After all, time is the most important factor in the compounding returns/interest formula, and one can make more money but not more time. Plus, inflation slowly chips away at loans just as much as savings.
- quickthrowman 5y ago
  IKBR will lend to you at 2.5ish% on margin https://www.interactivebrokers.com/en/index.php?f=46376 https://www.interactivebrokers.com/en/index.php?f=46376
  - hirvi74 5y ago
    I see that thrown around a lot, but I can't bring myself to do it. I believe that using margin loans properly requires a lot of knowledge and some strokes of luck. I've seen people get burned and some people do well with margin. It's one of those things to me where it makes sense to use margin loans, but only if I have a high enough balance to support it. But if I have a high enough balance to survive a margin call, then I probably wouldn't need the margin in the first place, except if I were trying to invest the margin on top of what I already have, which I wouldn't be doing in most cases.

Ozzie_osman 5y ago

The flowchart version of that "what do I do with it?" is pretty awesome https://m.imgur.com/lSoUQr2 https://m.imgur.com/lSoUQr2

hirvi74 5y ago

The only major point of the flowchart that I disagree with is the part about paying off mid to low interest debt. I suppose that is where the "personal" part of personal finance comes into to play. For example, a person will post something like, "Should I pay off my $50k student loans at 4%-6% as fast as possible, or should invest more?" Common responses include: 1. "Would you take out a $50k loan at 4%-6% to invest?" 2. "Paying off your loans is a guaranteed 4%-6% return." The problem I have with this advice is that in the case of response #1, that is somewhat of a false equivalence. Also, I am not sure outside of a HELOC where one could even get a $50k loan for 4%-6%. Even in this environment currently, I see banks advertising their low interest loans which clock in around 8%-12%. (I'm not counting margin loan rates in this example). As for #2, I feel like this advice is okay at face value, but tends to fall apart once one takes more factors into account. One such factor people often miss is that one must use post-tax income to pay off student loans. Thus, in the US, assuming the person asking for advice has any income at all, then he or she must pay 10% <= x <= 37% in taxes to pay a 4%-6% loan, thus it's a guaranteed loss of 10% to 37% to get a guaranteed return of 4%-6%. I'm not trying to downplay the powerful psychological aspect of paying off debt, but I do think more people should consider the mathematically optimal option as well (making the minimum payments on debt while maxing out tax advantaged savings before making additional payments on debt). After all, time is the most important factor in the compounding returns/interest formula, and one can make more money but not more time. Plus, inflation slowly chips away at loans just as much as savings.

quickthrowman 5y ago
IKBR will lend to you at 2.5ish% on margin https://www.interactivebrokers.com/en/index.php?f=46376 https://www.interactivebrokers.com/en/index.php?f=46376
- hirvi74 5y ago
  I see that thrown around a lot, but I can't bring myself to do it. I believe that using margin loans properly requires a lot of knowledge and some strokes of luck. I've seen people get burned and some people do well with margin. It's one of those things to me where it makes sense to use margin loans, but only if I have a high enough balance to support it. But if I have a high enough balance to survive a margin call, then I probably wouldn't need the margin in the first place, except if I were trying to invest the margin on top of what I already have, which I wouldn't be doing in most cases.