I have 25 years left on my bond. It makes zero sense to pay it off.
35,000 balance
To pay off the $35,000 now, I would lose 3500 a year in stock investment earnings of $87,500 over 25 years (avg 10% a year).
Payments made on the bond $187 over 25 years at 4% interest is $56,200
Total cost over 25 years $56,200, Gain over 25 years of retained stock market investment earnings over those 25 years $87,500, gives a net gain of $31,200 over 25 years.
By paying off the bond, I would be flushing down the toilet $31,300 that I would have gained in by investing that $35,000 in the stock market.
Thereby it makes no sense to pay off the bond early when the lump sum is making money for me. Here is the big “but”… since I keep my money invested in the stock market which gives me an average return of 10%. Some years it’s 8%, some years it 17%+ , BUT if you keep your money locked in low interest investments like bonds, then yes it would make sense to pay it off. However, if you keep it invested in the stock market (which many of us do).you are losing money to a tune of $31,200 to pay it off.
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