If I borrow $600 at 18% (about 1.5% per month)

Scenario 1
I pay $509. Next month I’ll owe $101.50 I invest $100.

Scenario 2
I pay $609 but borrow $100 that same day to invest it. Next month I’ll owe $101.50

Where’s the difference? Either way you just borrowed that $100 at 18% whether its on an old loan or new loan.

All you’ve done is obfuscated it by taking the loan into the long term.

You ARE suggesting borrowing at 18% in order to invest. At the very least don’t lie or pretend that it’s any different.

Lastly -
“There could be many excuses of not to invest as early as possible and paying debt is just one of them that I could imagine.”

There are also many excuses for not getting a free $4 smoothie before the promotion runs out such as not taking a $6 cab ride.

It’s not an excuse sir – it’s a smart choice of action.

Simply put:
Borrowing at 18% to invest at 10% is an obvious mistake.

PAY OFF YOUR CREDIT CARD DEBT – THEN INVEST

Please do everyone a favor and take this post down. I wouldn’t want anyone believing you.

You can feel what you want but that doesn’t make it fiscally sound. Pay off your high interest debt, then catch up on the investments made. Compare your short term actions as they actually affect the long term without mixing the returns up.

“In fact, my only suggestion is investing shouldn’t be delayed, even when one is going through some times (like paying credit card debt). If this is wrong, then maybe I am wrong from the beginning.”

Exactly.
“Paying off debt with 18% rate could be urgent, but does the same level of urgency always apply to investing? I don’t know.”

That should be the advice. To use that same sense of urgency to repay yourself – not to waste money on high interest rate loans

“While it makes a lot of sense to target the debt that charges some 18% interest rate first, I feel that investing should never be delayed even when one is deep in debt. For the long term, even $50 invested today will make a big difference 30 or 40 years later. So why don’t spare $50 and invest it while battling the debt?”

This is my main assumption. My example may not be a very good one, but I still put paying off debt the highest priority. Otherwise, I could use your numbers ($150 for debt and $850 for investment). That’s not true. You can take it to all the extremes, but that’s not what I suggested. In fact, my only suggestion is investing shouldn’t be delayed, even when one is going through some times (like paying credit card debt). If this is wrong, then maybe I am wrong from the beginning.

To me as I said my previous response, it’s hard to imagine why a person who can put $1000 in debt payment can’t save and invest the same amount after the debt is gone. However, again, circumstances change and people’s priorities and desires change. Paying off debt with 18% rate could be urgent, but does the same level of urgency always apply to investing? I don’t know.

And “that money is well spent because they’d have been investing the rest of the $1000 each month at 10% and so would have racked up over a million dollars.” You are paying $44K to get a million. You are paying $44K to get $10K! The one million you get has nothing to do with how much you pay for the $10K debt!

I could also say, Susie has 10 dollars. How would she be better off financially should she buy a hamburger or invest it at 10% compounded monthly for 30 years?

Or rather, since we’re just making up numbers and increasing time on one side of the equation to support our pre-determined cause, why not take it to the extreme?

Pay 150.71/mo for 360 months, and you only pay, in the grand scheme, a pittance in interest — $44,255.07
But just think, you’ve invested $849.29/mo for 360 months at 10% annually, racking up $1,919,949.03.

By paying off your debt, you’re giving up the opportunity to be millionaire!!

If you are suggesting people day trade or swing trade with that $100 that’s a whole other issue but you (and Kilpinger’s) are suggesting someone consistently invest $100 per month and over the long term they’ll get a return of 10.4%

In fact the Kiplinger’s article you use to get the 10.4% number (http://www.kiplinger.com/magazine/archives/2007/05/triple.html) says:
“Assuming annual investment gains of 10.4% — the average return of U.S. stocks since 1926 — you’ll earn 200% in just 11 years.”

They came up with the triple your money article number by taking an overall gain – 1.104^11 = 2.969 meaning for $100 now you’ll have $296.90 (196% gain).
If you get the simple rate of return with 11 years (just divide by 11) that’s 17.8%.

Looks nice doesn’t it? That’s the actual point you’re trying to make – at 30 years you make more than 18% by comparing 1 year vs 30 years.

That’s a maor fallacy – let’s just compare the investment balances at the end of 13 months (since afterwards the loan is no longer in place.) In scenario 1 you have $1300 saved up plus $75 in interest earned minus an extra $106 in interest spent. You’ve just LOST money over the short term even though this $1269 will end up being about $30k in 30 years because you’ve invested $1300 but are now only compounding on $1269 for the next 29 years.

Consider the same dollars saved – at a later point in time (in months 12 and 13). Rather than dumping $100 x 13 months you back track by putting in the $1300 in missed savings (and possibly the $106 you saved on loan interest payments). In this scenario not only is the $1300 put in after a year of inflation (cheaper money) but it will earn you more than the effective $1269.

Oops – the reader that invests the $100 per month from the beginning just made $700 less over the long term than the guy that paid off the loan and then played a quick catch up.

If you are comparing someone “starting investing” meaning taking that $100 and only doing that with starts and stops – sure… point taken. Psychologically, you could be right. Financially and practically, it’s bunk.

Now, the other question. What I wanted to say with this post is that even a small amount of investment every month could make a big difference over a long period of time. I chose to use $100 or $50 instead of $1000 is just to show accumulating long term wealth is not difficult, even for people in debt. Saving $1000 a month is one story and saving $100 or $50 is another. The latter is much easier to do than the former. For a person who can afford to make $1000 debt payment every month, I can’t see why he/she can’t invest $1000 a month. However, as circumstances change (from in-debt to debt-free), people’s priorities and desires will change. It could happen that part of the $1000 will be used to do other things that are not related to growing wealth (buying a nice car or eating out more often for instance). Where does that $900 go? I have no idea. You, and others, are making an assumption that the entire $1000 will be invested after the debt is paid off. That could be the case in reality for a person determined to save and invest. It could also be another case that $500 of the $1000 is used to buy other stuff every month and only $500 is invested instead. I, on the other hand, assume a different situation: invest a small amount, but be consistent. Is it psychological? It may well be in my opinion.

If we only look at the numbers, everybody, including me, can see what’s the best approach, which I never dispute.

Again, the reason why I don’t think your argument is sound is because the debtor CAN’T AFFORD to invest BECAUSE of the high monthly obligation.

This is a mathematical error
Looking at the link under the 10% number, you are investing in stocks or index funds so regardless of whether you reverse compound the 10% per year and then compound it or do a simple interest rate, you’ll still end up with 10% at the end of the year. Once again – these are stocks with a calculation of annual return NOT a compounding interest rate

To simplify this example, lets use a $100 stock that has a 12% annual return. The stock price going up 10% – so $100 x 1.10= $110 right? You’ve just made $10. That’s all it means. If you bought every month There is a chance that the stock fluctuates up and down so you could make a higher return with market timing or that it is not flat line growth but we are talking about long term which makes this irrelevant.

In the short term it would be possible to make more but this evens out.
As an example lets take a look at possible stock pricing:
Scenario 1 Scenario 2 Month
$100 $100.00 1
$101 $100.83 2
$99 $101.67 3
$103 $102.50 4
$105 $103.33 5
$107 $104.17 6
$104 $105.00 7
$106 $105.83 8
$108 $106.67 9
$110 $107.50 10
$111 $108.33 11
$112 $109.17 12
$110 $110.00 (end of month 12 plus 1 day or exactly 1 year later)

There’s your 10% – if you had invested every month you would make more money in some months and would even lose some in others. The point is that it’s irrelevant over the long term but there is no way you can pretend to have monthly compounding effects without decreasing the monthly rate of return to compensate thus making it the same.

You simply can not change the rules.

That is what the Kiplinger’s article is talking about. You can play with the formula trickery all you want but they are saying the stock indexes will go up 10.4% over the course of the ENTIRE year.

Now the other part you obfuscate is the psychological barrier. You say that someone in debt will decide to invest $100 but is willing to repay $900. Investing at a cost of $106 to make $75 doesn’t make sense.

What does make sense and what my advice would be is – to pay yourself back (with interest) at the end of your savings freeze. You can borrow your own savings at 10% or borrow from the credit card at 18%. The mistake you are highlighting is that people don’t think of borrowing from their investing/savings as a loan.

If you stop investing the $100 per month to pay off a debt faster then pay yourself back the $1375 you would have invested. You still make more $30 more this way and are better off in the long run

If you have to add to your debt at any time in the future, then the whole plan is negated.

I suggest you calculate your Net Worth and work from there. Debt payment increases Net Worth @ 18%, Investing increases Net Worth at 10%

I agree that TFB and Brad’s arguments make perfect sense as in my previous response. However, I do feel that their arguments, as well as yours, represents one of many scenarios, i.e., the whole $1000 is used to either pay off debt first and invest entirely after the debt is gone, or a portion of it is used to pay off debt and invest the rest. My case is slightly different. What I considered is a person puts off investing simply before there are debts needed to be paid off. In this case, the person may say “Well, since I have a debt, I need to pay it off first, so I can afford to invest $100 a month. I will start investing $100 after my debt is gone.” In this case, the person is not investing the whole $1000 used to be used to pay debt and chooses to invest only $100 and use the rest of the $900 for other purposes. We couldn’t rule out this case, could we? If you agree that this indeed could happen, then my argument is valid: investing should never be delayed. You can’t always expect people to invest all the debt-payment money once they are debt free. They could well use part of the money for other things they were not be able to do when they were in debt. You use one assumption ($1000) and I used another ($100).

I am not suggesting people should go ahead investing no matter what the debt situation is. That’s not true.

Now you argue that the magic of compounding fixes this – because you got your money in early.

Brad and TFB are 100% correct. Your whopping difference comes from changing from $1000 in financial transactions to $100 as soon as debt is paid off. Therefore case 1 only saves $200 in months 1-13 while case 2 saves up $1375 from deposits plus interest. What did the case 1 do with the extra $900 he/she had for months 12 and 13?

Now – tell me who’s going to have more money in the end of 13 months of $1000 per month going into debt or investing. Is it the guy depositing $100/month who has $1375 at the end to compound over 29 years or the guy that has $2000 to compound over 29 years?

It’s very alluring to tell people that they should be investing while in debt because it makes them feel better. Perhaps a finance text book would be a better place to start…

If you let me borrow from you at 1%, I’ll be glad to do so!