I didn’t know that this thread was the final say on “practical advice”. From the original OP, “Why are so many people woefully ignorant of financial matters?”
I gave my opinion, in a IMHO thread no less. I admit it was kind of “conspiracy” like. It’s quite obvious that banks don’t have a direct link to the educational system to count on late fees through financial ignorance. I suppose what I was saying was that it is not in the best interest of business and banks to get people educated on financial matters. They profit well from those that don’t know about these things, and I’m sure they prefer it this way. IMO again, considering ther “real-world” consquences of financial ignorance, schools need to make financial education a requirement, more so then the other requirements they have.
See, I read this and do not understand. At all. Is it English? If I really think about it hard I can understand what it means, but I don’t know that I’d actually be capable of sitting down and “factoring stuff in”.
I think I’ll start understanding things better if I can somehow figure out how to do my own income taxes. Maybe. But really, my brain shuts down when I start looking at this sort of thing. Not quite a panic attack but I feel uncomfortable on a physical level and I want to stop.
I’ll take a valium and talk to a financial advisor one of these days.
The original question was “Should I pay back my student loans”. Iamthewalrus said "It depends upon three things:
“Are you getting a tax deduction for interest?”
In the US, you may be able to deduct interest paid on student loans from your gross income in figuring out your income taxes. A simple example: Assume you have an income of $10k every year, while paying $1k in student loan interest per year. You are allowed to subtract (“deduct”) the $1,000 from the $10,000 in earnings and compute taxes based on an income of $9,000.
If you are taxed at a 15% rate, that’s $150 in tax savings that you receive every year. Therefore, if you pay off the loan, your yearly tax bill will rise.
“How does the rate compare to what you could make in a safe investment?”
Suppose you get $10 grand. Do you pay off your 6% student loan?
Not if you can find a safe investment that earns you more. If you pay off your student loan while passing up an investment earning 8%, you made the “wrong” decision*. Maybe…
“Make sure to factor in the taxes that you’d pay on the investment earnings.”
That 8% investment I talked about in point two? It’s gonna be taxed. How much? 20%. That makes it an investment that earns only 6.4% (8-(8*.2)).
6.4% compared to 6%. With that little of a swing, I’d just pay off the student loan and take the tax hit.
*I put wrong in quotes because there really is no wrong decision in regards to a question like this. One of the things that many people new to investing tend to forget is that we’re not in some race here to beat the market or even the guy next door: The purpose of investing is to meet the financial and psychological goals of the investor. If it makes you sleep better at night not having that student debt… pay the bloody thing off.
No. In the U.S., mortgage interest on the home in which you reside and other debt are like apples and oranges. Cars depreciate and aren’t investments. Houses (generally) appreciate and are investments. As I stated, interest on home loans are a tax deduction against ordinary income which makes it unique.
Personal debt on a car and especially a credit card are bad things and are to be avoided unless absolutely necessary. Real estate over the long term has historically been the best investment you can make.
You’re the one suggesting a conspiracy of silence on the part of business and government to keep people financially ignorant. I’m just debunking your foolishness by citing the hundreds of thousands, millions of books and web pages provided by government and businesses.
You owe $1000 on a student loan at 6% interest. The interest on the student loan is tax deductable (we assume, it may or may not be because IRS regs byzantine).
You have $1000 in a savings account at 4% interest.
You are in the 29% tax bracket.
Should you withdraw the $1000 in the savings account and pay off the student loan.
Well, next year you’ll pay $60 on the student loan. You’ll only earn $40 in interest on the money in the bank. So you “make” $20 paying off the loan…
But wait…
But if you keep the student loan, you’ll save $17.40 on your taxes ($60 at 29%) - so you’ll really only pay $42.60.
And if you keep the investment, you don’t really earn $40, you earn $28.40. ($4 - the 29% tax hit).
So you are still better off paying off the loan, but its a $14.20 difference, not the $20 difference you thought it was.
Taxability can make a big difference, as can the interest rate differential. What if the $1000 in in a municipal bond (you don’t pay federal income tax on municiple bonds)? What if you were paying 5% on the student loan. What if the student loan was 8%.
The thing about debt repayment vs. investing is that debt repayment is a very safe “investment” - you know exactly the return you are going to get. Things like Treasury Bonds and CDs are also safe investments. You can often get a better return on your investment, but better returns carry more risk. Which explains why I don’t have a mortgage. A small return on my investment that was a sure thing was worth more TO ME than a larger return that was less predictible (and had a risk of being a smaller return than my mortgage).
I’d add to this, keep track of interest rates. If rates are below what your rate is, it makes sense to refinance - but don’t take money out of it unless you are paying off higher interest rate debts.
I think a lot of people in the US have lost all their equity by getting home equity loans and buying crap with it. There are some cases where it makes sense, but my feeling is that a lot of people have screwed up their wealth by doing this and assuming home prices will increase forever.
I would certainly think it was a hgiher priority that teaching home-ec or how to build a lamp in shop. One problem is who do you get to teach it? Most people formally trained to be financial advisors tend to not want to earn a teachers salary.
I went to high school before the common use of credit cards, or any of this stuff, and they still didn’t teach it. Everyone had economics, but that had nothing to do with life skills.
My wife used to teach a life skills class at a nanny school, since few of the young ladies ever balanced a checkbook, wrote a letter of complaint, etc. Like I said - mony and sex. Too scary for school, too scary for home.
Allow me to expand on this. My mortgage is at 5.5% interest but since I get to write off that interest I get around one third of that back in the form of a tax deduction which makes the interest rate effectively around 3%.
Instead I can put the money in a 401k. If I use that money to pay down my mortgage, I save 3%. If I put it into a 401k, I make 30% right off the bat in tax savings plus whatever I make in the investment. Last year I made 14% in an index fund (including dividends.)
Another reason parents might not be passing this on to their kids–both of my parents worked jobs with pensions. They never talked about how much they were saving or putting away for retirement; they’d both just say that if they worked x years, they’d get y dollars per month as a retirement pension.
That seems a lot less common these days, or maybe it’s just far less common for someone to stay in the same job for that long.
Others have already explained the specifics of the quoted example, so I’ll talk in general.
Doing your own taxes is a good step. After you’ve done them for a few years, you’ll start to have a good idea about what your income costs in taxes and what kind of tax exemptions you might be able to claim. A common way the government helps make something “more affordable” is to make the interest paid on loans for that thing be tax deductable. So loans for that are effectively cheaper than the rate alone would suggest.
If you don’t know what it means to calculate the effective yield of an investment after tax, or how tax deductions are calculated, get the tax forms and play around with some figures. Unfortunately, tax laws can be very complicated, and they don’t stay exactly the same from year to year, but they only ever require basic math, and that math is useful for finance in general.
If you have more specific questions, I’ve found the Dope to be a very effective resource. While you should always be wary of advice from internet strangers, there is lots of information and knowledge that you can easily verify. You don’t have to take our word for it.
Not unique. Student loan interest is deductable (subject to some caveats). Home equity interest is “mortgage like” and is deductable. You can deduct the interest on one second home, but not two (as I recall, I’m not a CPA or a tax professional). If you run a small business, I’m pretty sure that interest is deductable.
But credit card interest hasn’t been deductable since the Carter administration.
Car interest can get fuzzy, since a lot of people will buy cars on a HELOC (Home Equity Line of Credit) or a Home Equity Loan - making their “car loan” tax deductible. People use HELOCs for all sorts of credit, blurring the line of deductability.
Real Estate is a little like the stock market. Pick the right property at the right time and it will appreciate like crazy. Pick the wrong property and it can languish. Pick a property that takes work (like rental property) and your profits can turn into a headache of renters and repairs. Real Estate Funds are more interesting.
That might explain just as much as prevailing probusiness attitudes in government. It really might.
In 3 generations of my family, money has been a topic fraught with confusion, frustration, and outright aggression. Only in well-set retirement, with the help of conscientious investment advisors, have my parents begun to escape the cycle of skinflint-or-spendthrift behavior that typifies most people’s approaches to personal finance.
This is what we plan on doing when our current ride bites it. We also did it for a big furniture purchase. We also made sure we had enough cash to pay it off in case (dum dum duuuuuuuuum!) we became unemployed or otherwise strapped. We just couldn’t see losing our house over a couch and matching end tables.
