3 personal liabilities – the mortgage on my condo, payments formy car and student loans of some undisclosed amount.
This scenario describes 3 personal liabilities – the mortgage on my condo, payments formy car and student loans of some undisclosed amount. Presumably I am able to meet these debt obligations with my current income and would not be financially insolvent without the $5000 bonus. In this scenario, inflation is likely to remain low which means that even if the loans are a variable rate, the payments will remain fairly consistent however it also means that money invested in a savings account will not grow either.
The first thing to understand is how much money a $5000 bonus actually is in real terms after the applicable taxes have been deducted. Bonuses are taxed by the federal government at 22%, plus 6.2% for social security, 1.45% for Medicare (Bell, 2020), and if like me you live in North Carolina, 5.25% for state income tax
(NCDOR: Tax Rate for Tax Year 2019, 2019)
. This makes a total of 34.9% in taxes or $1,745 that I never get to see. The remaining $3,255 is mine to use as I see fit which is where the time value of money becomes important.
The earlier you start investing, the more money is likely to be available for you in retirement and the question I would have to answer is whether paying down the debts that I have right now creates more wealth in the long term than investing the money now and paying my debts over time. Perhaps the simplest way to look at investing is toes chew individual companies and look to something like the S&P 500 that has been around for a while. Since the S&P 500 started in 1929, its value has increased 10% per year on average albeit with highs and lows during this time
(Maverick, 2020)
. Assuming the S&P continues to perform at historical rates and I invest $3,255 as a 22year old fresh college grad, this money will be worth $196,081 by the time I retire in2063. Naturally the dollar will be worth less in the future than it is right now, but this is where time continues to be important and should be considered. For example, if I used the $3,255 to pay down debts now and put that money in the S&P 500 when I turned30, the end value at my retirement would only be $91,473, less than half the potential value for a mere 8 years of time.
My assumption in this scenario is that I am not financially under water with my current income and debt load, so while the benefit of investing the bonus money is delayed to future years, I would definitely invest rather than pay off current debt.
2-1-Discussion_-Time-Value-of-Money-Application-FIN-250-X2641-Personal-Financial-Planning-20EW2
Answer preview to 3 personal liabilities – the mortgage on my condo, payments formy car and student loans of some undisclosed amount.
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