CONFLICT OF INTEREST, as recently defined in this space: When you’re earning 5% interest in a money market account and paying 18% interest on a credit card.

"Aahhhhh," responds Glenn Doherty, "but what if I’m only paying 8% on my student loan and I can make 15% on the market, should I only pay the minimum on my loan each month, drawing it out while investing that "saved" money? Or is it still better to do what I do now and that’s pay double the required monthly payment in an attempt to finish off the loan early so that the total interest paid is minimized? The obvious answer is to invest it, but then again what if my picks don’t go up 15%? My gut tells me no debt is good debt, though I’ve also read debt is a good instrument for creating wealth and shouldn’t be feared. Still learning the ropes."

Well, the first thing to say is that there is no one right answer. You have a good gut and should enjoy the satisfaction of getting that debt paid off. As we’ve been saying the last couple of days, not having to pay 8% is as good as earning 8% risk-free and (because student loan interest is not deductible) tax-free. Show me a triple-A municipal bond that pays anywhere near 8%.

What’s more, even if you could earn 15% in the market — which on average over long periods very few people consistently do — it would be less than that after taxes.

So long as you’re not cutting it so close to the bone by making those double payments that you risk running up credit card debt, say, at 18% or 20%, I’d say: keep doing what you’re doing. Another exception would be if, by paying more than you need to, you find yourself without the money for some tool or tuition that could prove a great investment in your own job skills or earning power. If you’re a graphic designer who needs some amazing software program to compete, say, you could earn several hundred percent return on the investment in that software, let alone 8% or 18% or 20%. But you don’t need me to tell you that.

One last exception, because you are young: If you do not already have the habit of sending some small chunk of dough every month to a no-load, low-expense mutual fund or two (or to buy shares in a couple of closed-end mutual funds selling at discounts), it’s worth getting into that habit right away — and maintaining that discipline for the next half century (only raising the size of the chunk as your fortunes allow). To my mind, the market is high here, but that’s fine if you’re just getting started: if it goes down at some point, even if it should go down at some point severely, you’ll just be able to get stocks "on sale." Over fifty years of steady investing, you should do very well. So if it means easing up on your student-loan prepayments, even if the numbers don’t necessarily work out to your advantage right away, it’s worth it just to get into the habit. Long after your student loan is history, this habit will be worth a fortune to you.


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