@@martinguldner3990 and again the interest is paid to me so I’m really not that worried about this.

@@martinguldner3990 I do! But this wasn’t such an emergency. It was smarter for me to do this than to dip into my savings. I have a fairly healthy 401k for my age and decent savings.

@@OtakuTiki too many people have to dip into their 401K because they don’t have an emergency fund you should have your money in emergency fund first

If I had $1 million invested for 30 years at 6% rate of return, it would turn into 5.7 million. But I took that $200k out, and keep that $800k invested, it will turn into 4.6 million.

So over your lifetime (30 years), that $200k cost you over a million dollars.

So with scenario 1, the cost isn’t the tax paid (it’s negligible). The cost is “what that $200k would have become 30-40 years from now).

Whereas if you went with scenario 2, borrowed $200k at simple interest rate of 15% and take your sweet time, say 30 years to pay it off, it only cost you $900k.

It doesn’t seem like a big difference (1.1 million in scenario 1, vs 900k in scenario 2), but I have exaggerated things here.

If you are rich and have decent source of income, In scenario 2, you probably will pay off that $200k off in 10 years, costing you only $300k of interest.

So it’s really about never breaking the compounding. Manage your stuff with simple interest loans. Compounding will beat simple interest in long run. So your opportunity cost better be in simple interest …. hence the need to go with scenario 2.

Now that I have managed to make scenario 1 look costly, let’s play devils advocate and add another layer to it.

I said that in scenario 1, the cost is “what that $200k would have become if it was kept invested for 30 years”. Well, not really. You don’t lose that $200k forever. Because with scenario 1, I no longer have to worry about paying a loan from my existing income (something that I would have to do in scenario 2). So I can use my existing income to build that $200k back in, say 10 years.

So now the opportunity cost in scenario 1 becomes “what would that 200k become in 10 years had it been invested at 6%” (instead of “what would that 200k become in 30 years”)….. which is roughly $358k.

And now it is almost same as cost of scenario 2 (which was $300k).

Scenario 1 is still a costlier affair than scenario 2 (although not by much), so going with scenario 2 is would still be the chosen route.

So basic principle/question is still the same – do you want to interrupt compounding for a specific period of time? Or would you rather keep compounding going and move your debt to simple interest for a specific period of time.

Precise math will need to be done where the “specific period of time”, simple interest rate etc and other variables will decide what comes ahead. Most of the times compounding will come ahead than simple interest over longer periods of time. So you would want your debt in simple interest.

It is really strategy for people with decent net worth.

There are versions of it (velocity banking) that use HELOCS instead of SBLOCS to pay down mortgages quickly. That strategy maybe good for middle class family people.

I don’t think tax is the real cost with scenario 1. Real cost is loss of future compounding on that $200k, which can be a LOT if you keep that money invested for 20-30 years (or even more, some people just don’t sell stocks ever, they pass it down to next generation after death at step up cost basis)

If I had $1 million invested for 30 years at 6% rate of return, it would turn into 5.7 million. But I took that $200k out, and keep that $800k invested, it will turn into 4.6 million.

So over your lifetime (30 years), that $200k cost you over a million dollars.

Whereas if you went with scenario 2, borrowed $200k at simple interest rate of 15% and take your sweet time, say 30 years to pay it off, it only cost you $900k.

It doesn’t seem like a big difference (1.1 million in scenario 1, vs 900k in scenario 2), but I have exaggerated things here.

If you are rich and have decent source of income, In scenario 2, you probably will pay off that $200k off in 10 years, costing you only $300k of interest.

So it’s really about never breaking the compounding. Manage your stuff with simple interest loans. Compounding will beat simple interest in long run. So your opportunity cost better be in simple interest …. hence the need to go with scenario 2.

It is really strategy for people with decent net worth.

There are versions of it (velocity banking) that use HELOCS instead of SBLOCS to pay down mortgages quickly. That strategy maybe good for middle class family people.