Is inflation inapplicable in a comparison of paying off debt vs investing?
"Debt is nominal, which means when inflation happens, the value of the money owed goes down.  This is great for the borrower and bad for the lender. ""Investing"" can mean a lot of different things.  Frequently it is used to describe buying common stock, which is an ownership claim on a company.  A company is not a nominally fixed asset, by which I mean if there was a bunch of inflation and nothing else happened (i.e., the inflation was not the cause or result of some other economic change) then the nominal value of the company will go up along with the prices of other things. Based on the above, I'd say you are incorrect to treat debt and investment returns the same way with respect to inflation.  When we say equity returns 9%, we mean it returns a real 7% plus 2% inflation or whatever.  If the rate of inflation increased to 10% and nothing else happened in the economy, the same equity would be expected to return 17%.  In fact, the company's (nominally fixed) debts would be worth less, increasing the real value of the company at the expense of their debt-holders. On the other hand, if we entered a period of high inflation, your debt liability would go way down and you would have benefited greatly from borrowing and investing at the same time.   If you are expecting inflation in the abstract sense, then borrowing and investing in common stock is a great idea. Inflation is frequently the result (or cause) of a period of economic trouble, so please be aware that the above makes sense if we treat inflation as the only thing that changed.  If inflation came about because OPEC makes oil crazy expensive, millennials just stop working, all of our factories got bombed to hades, or trade wars have shut down international commerce, then the value of stocks would most definitely be affected.  In that case it's not really ""inflation"" that affected the stock returns, though." I'd agree, inflation affects the value of the dollar you measure anything in. So, it makes your debt fade away at the same rate it eats away at dollar denominated assets. I'd suggest that one should also look at the tax effect of the debt or assets as well.  For example, my 3.5% mortgage costs me 2.625% after tax. But a 4% long term cap gain in stocks, costs me .6% in tax for a net 3.4%.
"&gt;No, virtually ever item in the CPI is adjusted using hedonics, which by definition can only be used to lower inflation, not adjust it up.  Wow. Just wow.  Let's analyze this:  &gt;virtually ever item in the CPI is adjusted using hedonics  How does one apply hedonics to energy? There are so many items in the CPI basket for which this does not even make sense I don't know where to begin with such a blanket statement. [Here is how the BLS computes CPI](http://www.bls.gov/cpi/cpifaq.htm#Question_6). Note the categories, and that they currently track hundreds of goods in each of about 200 categories, totaling tens of thousands of goods. With a little digging you can find the weighting. [Here is the list of what they apply hedonic weights to](http://www.bls.gov/cpi/cpihqaitem.htm). It is a vastly smaller subset of all goods tracked, and the weightings makes them not affect overall CPI much *at all*. All the precise methodologies are listed on the BLS site, and you can track it all down. As stated below, someone has done the analysis (and there is a PDF on the site) and they obtained that incuding hedonic items affects inflation only by 0.005 percent per year.   &gt;which by definition can only be used to lower inflation  By your definition? The actual definition does not force either direction. In reality it adjusts up and down as clearly shown in BLS reports, which I'll link below.   &gt;, not adjust it up.  As I'll list below, it in fact does go both ways.  Finally, analysis of hedonics seems to indicate it has a miniscule effect on inflation rates, again papers are cited in the link shown below.  [Critics often incorrectly assume that BLS only adjusts for quality increases, not for decreases, and that hedonic adjustments have a large downward impact on the CPI. On the contrary, BLS has used hedonic models in the CPI shelter and apparel components for roughly two decades, and on average hedonic adjustments usually increase the rate of change of those indexes. Since 1998, hedonic models have been introduced in several other components, mostly consumer durables such as personal computers and televisions, but these newer areas have a combined weight of only about one percent in the CPI. A recent article by BLS economists estimated that the hedonic models currently used in the CPI outside of the shelter and apparel areas have increased the annual rate of change of the All Items CPI, but by only about 0.005 percent per year.](http://www.bls.gov/cpi/cpiqa.htm#Question_4).  &gt;inflation represents how the value of the dollar has accrued vs the value of a 20"" TV, which is what the definition of inflation is.  No, inflation must measure the price *of the same good* over time. When some goods are no longer available, other goods must be investigated to provide continuity in the comparisons. Otherwise you'll have me comparing the price of a horse to the price of a car since they both provide transportation, yet over time one replaces the other, and direct comparisons on $ alone does not accurately measure what one gets for their money.  You cannot compare the cost of different goods purely on price alone and call that inflation.  &gt;So, no, I don't think you're correct on this.  Well, [since other places that track inflation](http://bpp.mit.edu/) arrive at very similar results using different methodologies, and a vastly larger pool of goods I think that you overstate that the changes did not increase accuracy of inflation measurement.  &gt;This is also kind of glossing over the fact that the CPI essentially makes the bold argument that energy and transportation prices never affect inflation.  CPI makes no such claim. What do you think caused inflation in the early 1970s when oil prices shot up? [Here is the most recent CPI data release from BLS](http://www.bls.gov/news.release/cpi.nr0.htm) which quite clearly shows both energy and transportation changes being reflected in the CPI.  I think when you make a claim you should at least look up if it matches the actual data. This is tiring trying to find evidence for/against so many dogmatic beliefs." "The different things in each calculator are showing you a bunch of different things. In the ""Roth IRA calculator"", it is comparing what you would have in the end after contributing and withdrawing from a Roth IRA, with what you would have in the end with a taxable account (i.e. an investment outside of any IRAs). In the ""Traditional IRA calculator"", the ""IRA after taxes"" shows you what you would have in the end after contributing and withdrawing from a pre-tax Traditional IRA. The ""IRA before taxes"" simply shows the same amount before you pay the taxes on withdrawal, which is not a useful number. So if you want to compare Roth IRA vs. Traditional IRA, you want to compare the ""Roth IRA"" from the Roth IRA Calculator and the ""IRA after taxes"" from the Traditional IRA calculator, but there are some things you need to be aware of to make a fair comparison, because if you just plug in the same numbers you are going to get a very unfair comparison (it will look like Roth IRA is a lot ""better"" even though it's not). The Roth IRA contribution is after-tax, whereas a (pre-tax) Traditional IRA contribution is pre-tax, and an after-tax dollar is much more than a pre-tax dollar, so if you put in the same nominal contribution amount, you are actually contributing much ""more"" from your wallet in the Roth IRA case. To make a fair comparison, you would need to start with the same pre-tax amount, and put in a Roth IRA contribution amount that corresponds to the equivalent amount after taxes. So for example, a $5000 pre-tax amount with 25% taxes is equivalent to $5000 * 0.75 = $3750, so you would put in $5000 for Traditional IRA contribution vs. $3750 for Roth IRA contribution. Note that if you have the same flat tax rate at contribution and at withdrawal, (pre-tax) Traditional IRA and Roth IRA are exactly the same, and you can see this by putting in 25% for the ""Retirement tax rate"" in the Traditional IRA calculator (we already assumed 25% tax rate for Roth IRA when calculating the contribution). You will see that Traditional IRA would be better in a lower retirement tax rate (e.g. 15%), whereas Roth IRA would be higher in a higher retirement tax rate." So I will attempt to answer the other half of the question since people have given good feedback on the mortgage costs of your various options. Assumptions:   It is certain that I am off on some (or all) of these assumptions, but they are still useful for drawing a comparison.   If you were to make your mortgage payment, then contribute whatever you have left over to savings, this is where you would be at the end of 30 years. Wait, so the 30 year mortgage has me contributing $40k less to savings over the life of the loan, but comes out with a $20k higher balance?  Yes, because of the way compounding interest works getting more money in there faster plays in your favor, but only as long as your savings venue is earning at a higher rate than the cost of the debt your are contrasting it with. If we were to drop the yield on your savings to 3%, then the 30yr would net you $264593, while the 15yr ends up with $283309 in the bank.  Similarly, if we were to increase the savings yield to 10% (not unheard of for a strong mutual fund), the 30yr nets $993418, while the 15yr comes out at $684448.  Yes in all cases, you pay more to the bank on a 30yr mortgage, but as long as you have a decent investment portfolio, and are making the associated contributions, your end savings come out ahead over the time period.  Which sounds like it is the more important item in your overall picture. However, just to reiterate, the key to making this work is that you have an investment portfolio that out performs the interest on the loan.  Rule of thumb is if the debt is costing you more than the investment will reliably earn, pay the debt off first.  In reality, you need your investments to out perform the interest on your debt + inflation to stay ahead overall.  Personally, I would be looking for at least an 8% annual return on your investments, and go with the 30 year option. DISCLAIMER: All investments involve risk and there is no guarantee of making any given earnings target. "Allen, welcome to Money.SE. You've stumbled into the issue of Debt Snowball, which is the ""low balance"" method of paying off debt. The other being ""high interest."" I absolutely agree that when one has a pile of cards, say a dozen, there is a psychological benefit to paying off the low balances and knocking off card after card. I am not dismissive of that motivation. Personal Finance has that first word, personal, and one size rarely fits all. For those who are numbers-oriented, it's worth doing the math, a simple spreadsheet showing the cost of the DS vs paying by rate.  If that cost is even a couple hundred dollars, I'll still concede that one less payment, envelope, stamp, etc, favors the DS method. On the other hand, there's the debt so large that the best payoff is 2 or 3 years away. During that time, $10000 paid toward the 24% card is saving you $2400/yr vs the $500 if paid toward 5% debt. Hard core DSers don't even want to discuss the numbers, strangely enough.  In your case, you don't have a pile of anything. The mortgage isn't even up for discussion. You have just 2 car loans. Send the $11,000 to the $19K loan carrying the 2.5%. This will save you $500 over the next 2 years vs paying the zero loan down. Once you've done that, the remaining $8000 will become your lowest balance, and you should flip to the Debt Snowball method, which will keep you paying that debt off.  DS is a tool that should be pulled out for the masses, the radio audience that The David (Dave Ramsey, radio show host) appeals to. They may comprise the majority of those with high credit card debt, and have greatest success using this method. But, you exhibit none of their symptoms, and are best served by the math. By bringing up the topic here, you've found yourself in the same situation as the guy who happens to order a white wine at a wedding, and finds his Mormon cousin offering to take him to an AA meeting the next day.  In past articles on this decision, I've referenced a spreadsheet one can download. It offers an easy way to see your choice without writing your own excel doc. For the situation described here, the low balance total interest is $546 vs $192 for the higher interest. Not quite the $500 difference I estimated. The $350 difference is low due to the small rate difference and relatively short payoffs. In my opinion, knowledge is power, and you can decide either way. What's important is that if you pay off the zero interest first, you can say ""I knew it was a $350 difference, but I'd rather have just one outstanding loan for the remain time."" My issue with DS is when it's preached like a religion, and followers are told to not even run the numbers. I wrote an article, Thinking about Dave Ramsey a number of years back, but the topic never gets old." You can illustrate why expense ratio fees are in the numerator with an extreme example:  Let's say you have $100 in a mutual fund, their expense ratio is 50%, your nominal return is 900% and inflation is 900%.  Thus, without the expense, your investment would give you $100 in present value (because your return and inflation are identical), and $1000 in future value.  So with the expense ratio of 50% and no change in present value, you can reason that you would expect the expense ratio will eat half the present value.  If you apply your equation and include expenses in the numerator, you end up with:  ((100 - 100(.50))*(1+9))/(1+9) = $50 present value as you would expect  If you apply the manager's assumption that fees are applied external to inflation, then you end up with:  (100 * (1 + 9))/(1+9) - (100 * (1+9) * .50) = $-400 present value.  With this example you can see applying the fees externally acts as though they are charging you the fees on future returns today.  *Edit:  It's probably not worth fighting with someone senior to you over, as inflation rates are noisy estimates to begin with and the difference between these is typically not material to the decision being made; but pissing off someone senior by showing them their math is off will probably have a material impact on you. There's a difference between physical currency and money (For example a bank may only hold only a small percentage of total deposits as cash that it's customers can withdraw).   I'm not sure which you're referring to, but either way you should read  about inflation. Liquidity Say you have $50k in student loan debt.  You come into a large amount of money and throw $10k at it.  Yes, it's now down to $40k, saving you a lot of money in interest over the long run, but it's money you can no longer 'use'. Now if you invest that same $10k instead, you still potentially have access to it if needed. Paying $10k towards a debt at a 5% interest rate has essentially the same rate of return as investing the $10k at a 5% return.  You're 'making' the same amount of money either way.  But if you say, get laid off or need money for medical expenses or a down payment on a house, you can tap into that $10k investment if needed.  It is a liquid asset. "If you are concerned about inflation, here are a couple of ""TIPS"". You can buy a mutual fund or ETF which adjusts for inflation. Here is one link which you may find useful: http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2010/12/02/etf-basics-how-to-fight-inflation"