Comment Loans, Interest (expense and revenue), and Taxes (Score 1) 740
Finance is quite interesting, since you can leverage loans to the point that you can make money on borrowed money. Although a number of comments say that any existing loans should be paid down over keeping the money in the bank, careful consideration should be placed on three factors: access to cash, interest rate variability, and tax impact on earnings. Do a cost/benefit analyis to see if it would make more sense to hang on to the cash.
* Access to Cash - Taking out a loan of any type and dumping the proceeds into a short-term savings account gives access to cash on a short notice. If the interest revenue on the deposit matches (taking into account taxes) or is close to the interest expense for the loan, then you can use this deposit to assure that cash will be available when needed without the worry of securing a loan in more-stressful situations (e.g., between part-time jobs). Having a loan balance can also help establish a credit history.
* Interest Rate Variability - Loans and investments can have fixed or variable rate interest. You want to acquire variable rate loans and fixed rate investments when you expect market interest rates to go down, while fixed rate loans and variable rate investments are better when market interest rates are likely to go up. For example, those who acquired variable rate mortgages three years ago are paying much more in interest now than those who acquired fixed rate (and at the time more expensive) loans.
* Impact of Taxes - Remember that you have to pay taxes at your marginal tax rate (e.g. 15% or 25%) for any interest or unqualified dividends you earn. One who pays income taxes at the 25% rate will only net 3% on a 4% yield investment. Likewise, only some types of loans will give you a tax break on interest you pay. A student loan at 6% only costs you 4.5% when you factor in the tax break, but 6% credit card interest costs you a full 6%.
I recommend Vanguard's Prime Money Market Fund. It currently yields 5.04%, you virtually can't lose money since the share price is fixed at $1, and you can write checks out of the account for immediate access to the funds. You'll earn higher rates than in a bank, but you need a $3000 minimum deposit.
http://flagship2.vanguard.com/VGApp/hnw/FundsSnaps hot?FundId=0030&FundIntExt=INT
* Access to Cash - Taking out a loan of any type and dumping the proceeds into a short-term savings account gives access to cash on a short notice. If the interest revenue on the deposit matches (taking into account taxes) or is close to the interest expense for the loan, then you can use this deposit to assure that cash will be available when needed without the worry of securing a loan in more-stressful situations (e.g., between part-time jobs). Having a loan balance can also help establish a credit history.
* Interest Rate Variability - Loans and investments can have fixed or variable rate interest. You want to acquire variable rate loans and fixed rate investments when you expect market interest rates to go down, while fixed rate loans and variable rate investments are better when market interest rates are likely to go up. For example, those who acquired variable rate mortgages three years ago are paying much more in interest now than those who acquired fixed rate (and at the time more expensive) loans.
* Impact of Taxes - Remember that you have to pay taxes at your marginal tax rate (e.g. 15% or 25%) for any interest or unqualified dividends you earn. One who pays income taxes at the 25% rate will only net 3% on a 4% yield investment. Likewise, only some types of loans will give you a tax break on interest you pay. A student loan at 6% only costs you 4.5% when you factor in the tax break, but 6% credit card interest costs you a full 6%.
I recommend Vanguard's Prime Money Market Fund. It currently yields 5.04%, you virtually can't lose money since the share price is fixed at $1, and you can write checks out of the account for immediate access to the funds. You'll earn higher rates than in a bank, but you need a $3000 minimum deposit.
http://flagship2.vanguard.com/VGApp/hnw/FundsSnap
