My wife and I are getting ready to pay off a piece of land with some money that we inherited. We've already made that decision, so that isn't the question. The discussion between us on whether to sell the underlying assets and pay off the land or stay invested/invest what wasn't invested was an interesting one. I'm curious to hear others' ideas.
I personally use risk-free rates in determining whether to pay something off that has accruing interest versus staying invested with that money. Sometimes it comes down to cash flow, but usually, it is long-term planning. I've seen this posed as "Paying off a 19% credit card is an immediate 19% return," or similar.
In our case, do we pay off a piece of land borrowed at 5% (guaranteed immediate 5% return) or do we invest the money and need to make at least 7% (to pay taxes on the gain) to break even. Anything above 7 or 7.5% will be extra. Is it worth the risk over the next 5 years to gain a little extra money? The payoff is about $100,000. We're choosing to pay off the land. We'll sleep better. (In the end, it is shifting assets. We're going to be keeping the land until we die and it isn't valueless and while it won't appreciate like stocks over the next 50 years, it will still appreciate some.)
I'm interested in other people's take. The credit card is an easy one. 19% is way better than you're likely to get in the market without significant risk, but what about a 2% difference over 5 years? I look it as mitigating the downside risk at the loss of some of the upside potential. I'd rather lock in 5% than have any possibility of -40% to +20%.
What is your risk-free rate?
*The 5-year Treasury is running about 4% (long-term average about 5.56%) and the 20-year T-bill is running around 3.94% (long-term average around 4.36%).
Submitted February 17, 2023 at 01:25AM by seriousallthetime https://ift.tt/CT4LSed
