Periodically, we take up the question of using spare cash to pay down debt versus putting that same money in the market. See, for example, the March 2, 1999, column in the archive.

I thought this story from Doug Schneller might resonate with some of you as it did with me. Doug writes:

“I graduated from law school (don’t hold it against me) in 1992 with over $78,000 in debt. Being risk-averse, I decided that it was more important to me to be debt-free (especially with no tax deduction on educational loans) than almost anything else. Thus, I began an odyssey (almost finished) of substantially prepaying these loans. In order to get some periodic satisfaction, I tended to try to pay off the smaller loans first (especially when the interest rate was greater), and then move on to the next smallest. I also started to invest in money market and mutual funds (as well as IRA’s and 401(k)’s), but debt reduction has been my biggest concern.

“Had I been investing more in the market and paying down less, I no doubt would have enjoyed greater paper increases in my assets (on a dollar basis, and especially given the tremendous gains since 1993), but I would have had the tremendous psychological burden and uncertainty of debt. I know, in hindsight, that economically I might have been ‘better off’ if I had invested more, especially because I feel I know much more about personal finance. But I don’t think I would change a thing if I had to do it all over again (especially if I didn’t know how good the stock market would be) — psychologically I would rather ‘owe less’ than ‘have more.’ Happily, I have become a disciplined, and regular, saver, so maybe, someday, I will nonetheless ‘have more.'”

Tomorrow: Another reason mortgage prepayments may make sense, even at these low interest rates.


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