Use saved cash to pay small debt or invest more?

Question

I feel like the obvious answer to this question is to get rid of the debt, right? but the $7000 to pay off the vehicle will only save me about $600 in interest whereas investing that 7k into another home or renovations, like adding a new bathroom to my current 3bed 1bath home, would yield way more than the money saved. Considering that I'm going for most return I feel like I should use that money elsewhere. It would be nice to get rid of the $200 a month charge but at the end the numbers don't change much on total spent.

Alecia Loveless · Answer

@Lane Mcdonald Adding an extra bathroom in my area wouldn’t change the value that much or make it rent for more than about $75 more per month.

I don’t like debt. I’d pay off the debt then do the bathroom once you’ve saved some more.

Wes Casey · Answer

My two cents, with the economy the way it is right now and prices rising I would rather have lower monthly overhead and you would save that 600.   In the long run adding the bathroom will add to the value of the house for sure.  What's the layout of the other houses is the  neighborhood.  Is it rental or fix and flip project.  If its a hold house could be a good investment for the long run.  Ultimately it depends on what you feel is right for your circumstances right now.   Make a decision, gut decision and go with it and don't look back.

Benjamin Weinhart · Answer

Partially depends on 2 factors in my opinion. The first is the interest rate, my guess from the information you gave is that the loan is about 6% which isn't all that bad, but high enough to consider paying it off versus investing in some S&P 500 etf (depending on your marginal tax rate).

It sounds like the bathroom would be added to your primary residence so it partially depends on when you would look to sell the home or start otherwise renting it out. There is a component of doing a cash-out refinance, but it seems the thought would just be trading one loan for another in that case for an extra ~$5k of leverage.

Of course, if the bathroom adds on extra convenience to your life or is more of a discretionary spend, that's your call. However, I think from a financial perspective, it's likely a better idea to pay off the debt or add the money either to a taxable brokerage account or a retirement vehicle like an IRA.

Greg Scott · Answer

Lane, Lane, Lane, this is not Dave Ramsey world where the goal is to eliminate every and all debt. Seems like you are starting to question the conventional wisdom.  Good.  Millionaires know how to make their money work hard for them so they do not have to work hard for money.  Paying off debt does not make you rich.

You did not give enough information to assess whether adding a bath is the right choice, but let's assume you are correct.  Let's say your $7K spend adds $15K in value.  As soon as it makes sense, look at doing a cash-out refi or getting a HELOC so you can tap into that value and go invest in other things that give you a positive ROI.

Good luck!