5 ms·

You're forgetting opportunity cost. The $10k is not stuffed in your mattress, you can do stuff with it. You can buy CDs that return over 5% APY right now (givin

You're forgetting opportunity cost. The $10k is not stuffed in your mattress, you can do stuff with it. You can buy CDs that return over 5% APY right now (giving you a $500/year budget without even touching your principal). Let alone investing in stock ETFs.

d1sxeyes 3y ago
Yes but you can recoup the entirety of what you put in when you sell your house (normally with a healthy margin).
mlyle 3y ago
> You can buy CDs that return over 5% APY right now (giving you a $500/year budget without even touching your principal) Not really, because your principal loses value because of inflation. If you buy that $10k CD, you get $500 out per year; you pay a couple hundred bucks of that in taxes, leaving $300. If inflation sticks around 3.2%, you'll be losing $20/year before you spend anything.
- lukas099 3y ago
  You wouldn't withdraw $500 per year, you would leave it invested and spend $500 that you already have liquid from elsewhere. But it's beside the point. The point is that opportunity costs must be accounted for.
  - mlyle 3y ago
    > You wouldn't withdraw $500 per year, You still generally owe taxes as the interest is accrued. So, the situation doesn't change-- that CD loses money unless your tax rate is low. Even with compounded interest not subject to taxation until withdrawal, it's not much better. Even in a ridiculous case with 30 years, 10000 * (1.05^30) = $43220 ; minus .4 * 33220 = $29932; 29932 / (1.032^30) = $11401-- or about .4% real return per year. Opportunity costs beyond inflation make the picture even more ridiculous.
    - NavinF 3y ago
      Interesting, I used different numbers (10 years and 33% tax) in my comment but got the same result of 0.4% real returns. Check my math
      - mlyle 3y ago
        (10000 * (1.05^10) - 10000) * .67 = 4213. 14213/(1.032^10) = 10372; or about a .36% return. Not surprising that a lower tax rate gets to the same number sooner through compounding. BUt the bigger issue is that you have to pay tax on interest as it is accrued, not all at the end. So in your case there's a 3.35% return vs. 3.2% inflation or a .15% net return.
        NavinF 3y ago
        Thanks, makes sense
  - NavinF 3y ago
    It doesn't matter when you withdraw the money, the taxes will be the same. $10k earning 5% compounded monthly will be $16,470 in 10 years. After paying 1/3 of the gains in taxes, you'll be left with $14,313 which has a present value of $10,446 at 3.2% inflation. So yeah opportunity costs must be accounted for, but in your scenario the opportunity cost is negligible. We're talking 0.4% per year. Investing in a CD is like pissing in the ocean
aembleton 3y ago
You could invest it in real estate as that has historically had a great return.
- xyzzyz 3y ago
  Yeah, for example, you could invest it in an extra room in your house.

d1sxeyes 3y ago

Yes but you can recoup the entirety of what you put in when you sell your house (normally with a healthy margin).

mlyle 3y ago

> You can buy CDs that return over 5% APY right now (giving you a $500/year budget without even touching your principal) Not really, because your principal loses value because of inflation. If you buy that $10k CD, you get $500 out per year; you pay a couple hundred bucks of that in taxes, leaving $300. If inflation sticks around 3.2%, you'll be losing $20/year before you spend anything.

lukas099 3y ago
You wouldn't withdraw $500 per year, you would leave it invested and spend $500 that you already have liquid from elsewhere. But it's beside the point. The point is that opportunity costs must be accounted for.
- mlyle 3y ago
  > You wouldn't withdraw $500 per year, You still generally owe taxes as the interest is accrued. So, the situation doesn't change-- that CD loses money unless your tax rate is low. Even with compounded interest not subject to taxation until withdrawal, it's not much better. Even in a ridiculous case with 30 years, 10000 * (1.05^30) = $43220 ; minus .4 * 33220 = $29932; 29932 / (1.032^30) = $11401-- or about .4% real return per year. Opportunity costs beyond inflation make the picture even more ridiculous.
  - NavinF 3y ago
    Interesting, I used different numbers (10 years and 33% tax) in my comment but got the same result of 0.4% real returns. Check my math
    - mlyle 3y ago
      (10000 * (1.05^10) - 10000) * .67 = 4213. 14213/(1.032^10) = 10372; or about a .36% return. Not surprising that a lower tax rate gets to the same number sooner through compounding. BUt the bigger issue is that you have to pay tax on interest as it is accrued, not all at the end. So in your case there's a 3.35% return vs. 3.2% inflation or a .15% net return.
      - NavinF 3y ago
        Thanks, makes sense
- NavinF 3y ago
  It doesn't matter when you withdraw the money, the taxes will be the same. $10k earning 5% compounded monthly will be $16,470 in 10 years. After paying 1/3 of the gains in taxes, you'll be left with $14,313 which has a present value of $10,446 at 3.2% inflation. So yeah opportunity costs must be accounted for, but in your scenario the opportunity cost is negligible. We're talking 0.4% per year. Investing in a CD is like pissing in the ocean

aembleton 3y ago

You could invest it in real estate as that has historically had a great return.

xyzzyz 3y ago
Yeah, for example, you could invest it in an extra room in your house.