Should I Pay Back my Loans Early or Invest? Decision Making Based on Your Loans. Part Six.

Should I Pay Back my Loans Early or Invest? Decision Making Based on Your Loans. Part Six.

How can to make the simple calculation yourself to determine if you should pay off your loan or invest?

This is part six of this blog post series. You should really start from the beginning to get a good feel for the topic.

Link to the rest blog series:




Editor: Paying down debt and investing wisely is one part of your financial success. The other side of the coin is earning more income. This is where your most vital professional skill, negotiation, comes into play. As a physician, you’ll be expected to negotiate often, including your salary. It’s shocking how few Physicians have any training in negotiation, which places them at a huge disadvantage. trains physicians to become experts in negotiation, while also teaching them how to preserve relationships. Check us out. We may be the missing piece you need to truly succeed.


So, after reading the blog series carefully and doing your own research, you've decided to calculate your Guaranteed Return, The Equity Risk Premium, and the Guaranteed Return Premium.

You also are for an example of how to use this information to make decisions. Remember, this is not a financial advice blog and you are responsible for your own research and decision making. 

Here’s the steps. I’m making it simple on purpose. You can stress out and worry about taxes and other things if that’s what interests you. I prefer to chill.



If doing calculations aren’t your thing, I have a spreadsheet available.

Scroll down to the "Free Webinars and Resources" Section and enroll. You will need to provide in email in return. That’s your Social Media Risk Premium that I charge you!

Here are the steps:

  • Determine the interest rate on your loan. That is your guaranteed return
  •  Go online and find the USA 10-year note
  •  Determine the Interest rate of your loan minus the 10- year yield rate.
    • If this number is a negative number (i.e.; your interest rate is 2% and the 10-year bond is 4%) then invest your extra cash. Possibly prioritizing 10-year notes which you can buy easily at treasury direct
    •  If this number is above zero than add it to your loan rate. This is your relative loan value and guaranteed return.
      •  For example, your interest is 5% and the 10-year yield is 3% which equal 2%. Add that 2% to your interest rate of 5% and you get 7%, that 7% is your guaranteed return premium for paying off your loan early.
  •  Look at all your other loans. Credit cards, car notes, student loan, etc.
    • If the interest rate on those loans are greater than the loan you are considering, pay them off early. I doubt you’ll find a better guaranteed return than paying off a credit card debt at 22%.
  •  Determine the Equity Risk Premium.
    • This can be found quarterly on many websites.
    •  Alternately you can look up the implied equity return or ICOC (or whatever you decide to use) and subtract the 10-year yield above to get the equity risk premium
  • If your relative loan value/ guaranteed return is greater than equity risk premium, then pay off your loans
  • If your relative loan value/ guaranteed return is less than the equity risk premium, then invest in the market
  • If the difference between your relative loan value/guaranteed return and the equity risk premium us not that much, like 1-2 percentage points, then split between paying off loans and investing. Give preference to the way the difference is favoring. Maybe 60-40 or 75-25 split depending upon the difference.



Math is easy. But, explaining math through prose is hard.

If the above is confusing, just spreadsheet and chill



You can stop stressing about what to do about your loans. The answer has been known for a long time, but the complexity of the concept has made it difficult to understand. But, not you,- you understand the role of Equity Risk Premium in loan payback decision making.



Remember, the best way to have assets to invest or pay down loan is to earn extra income. Negotiating  a better physician contract is the surest route to more income. Be sure to check out out and our educational resources.

Other blog posts in this series:

Check out the rest of our blog



A brief final review of this wide-ranging subject:

  •  Investment is the assumption and management of risk
  •  A loan is in many ways a type of a reverse bond.
  • Some loans, like student loans, have special provisions such as the inability to forgive the loan in bankruptcy. This may alter the true value of paying off that loan early, even if there is a lower actual cash return.
  •  Paying back a loan early gives you a guaranteed return
  • The return of paying back a loan is based on the interest rate of a loan
  •  In general, the higher the interest rate, the more return you will obtain by paying that loan off earlier
  • Different types of investments give different returns primarily based on risk. The higher the risk, the greater the return.
  •  The difference in return vs risk is called the “Risk Premium”
  • Typically, the standard “base” value for comparing risk is the guaranteed return of the USA AAA+ rated 10-year treasury note.
  • By comparing the expected return of the stock or equity market to the guaranteed return of the 10-year note will allow you to calculate the “Equity Risk Premium”
  •  Using the interest rate on your loan and comparing it to the guaranteed return rate of the 10-year note and the expected return rate from the calculated Equity Risk Premium will allow you to make an educated prediction as to where to invest your extra money for the best return/risk ratio.
  •  Just as Modern Portfolio Theory advises you invest along an efficient frontier, you can also apply the same to your loan payback. If there is no clear return advantage to the payback of loans or investing in stocks based on the Equity Risk Premium, then consider splitting your investment between the two. You can consider investing more into the investment that may appear to have an advantage.
  •  You can always Spreadsheet and Chill…
  •  Don’t spend all this effort trying to earn every dollar investing and then leave tens of thousands of dollars on the bargaining table. You are a doctor- your entire success will be based on your ability to reach favorable agreements. Learn how to become a master physician negotiator.



I hope you enjoyed this in-depth review of a very complex subject. It was a pleasure to write it and quite challenging to find analogies and examples while also trying to keep it entertaining.

Please be certain to copy, post, and share to keep the knowledge moving.

In the next blog, I answer your questions


Link to the rest blog series:




So what do you think? Have I delivered on my promise to solve the question that plagues many people looking for the best way to gain financially from extra assets? Have I just made it more confusing? Will you spreadsheet and chill? Will you just ignore everything and invest in the equity market no matter what the arguments say? Let us know in the comment section below.

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