As soon as you make money, you have choices. Since it is your life, the choices you make are good ones, but not all choices are the optimal ones. In order to have the optimal ones, you sacrifice something. Sometimes the trade off is worth it, sometimes the trade off is not so good, but there are always different ways at looking at things.

In our society most of us have debt for our lifestyles and income do not always coincide. If you have no debt – congratulations and as you live your life as long as it is good, that is the best way. For the average person, the optimal choice is to look at what it costs to pay off the debt and what you need to earn if you do not pay off the debt. An example is if you have a loan at 4% and are in the 30% tax bracket, how much do you need to receive before paying off the loan is a good idea?

For every dollar of the loan you pay off is worth the interest cost, technically you earn 4%. If you are in the 30% tax bracket, you will be paying off the loan with after tax dollars or with 70% of your income.  The formula is  4.0 is divided by .7  = 5.7%. or if you can make more than 5.7%, it is technically better to invest. If you are making less than 5.7%, the best economic choice is to pay off the loan. If the loan is 15% then 15 divided by .7 equals 21.4%. Being debt free is a very good thing, but there are choices to be made.

Linking to dividend paying stocks, on a dividend yield basis, most make dividend stocks make less than 5.5 % although the total return can be higher. It is always good to know the ideal optimal answer because life has choices. In the world of financial planning, after you make the basics, there are choices to make and we all have reasons why we do or did something. The formula above is a quick method to show want versus need can be expensive. On the other, perhaps you enjoy life more and as long as you can  maintain it, you made a good decision.

There are more questions than answers, till the next time – to raising questions