“You'd be a fool to pay off your student loans instead of investing!”
“Why in the world would you pay off your debt instead of buying stock?”
“The market has average returns of 7% you know.”
I think if I asked all of you to raise your hand if you've heard those arguments before, the weather might change from so much air being moved at once.
To be clear – those people aren't necessarily wrong about the investing vs. debt argument. One of the things that is so cool about this site and the community it has created is that you are all nice people and listen to arguments from different sides (minus the occasional crazy person here and there).
Related: Like the M$M Facebook page! We have fun and post cat and dog pictures from time to time. đŸ™‚
From a pure numbers standpoint, there is definitely a point to be made for investing vs. paying off debt. Depending on the circumstances, it actually can be a really good idea.
Some readers I've come across have ridiculously low interest rates (think 2%), so it's more than fair to leave that debt alone and go for other investments. The margins are just so good, but it's a super rare situation.
It's not just about money…
Everyone that has paid off a significant amount of debt can probably relate to this. There is SO MUCH MORE to paying off debt than just the pure math.
There is tangible value in getting rid of student loans or any type of debt for that matter that most of the people I come across never really see.
Less debt = more freedom (if you want it)
Just a quick note – I'm writing this post in a Canadian airport while waiting to board my flight back to Houston. Salesforce (a big big big company) flew me out to Toronto to participate in a panel discussion on millennials and their money.
The reason I bring that up isn't to humblebrag, but to prove the point of this post.
M$M has been running for a little over two years, and it has completely changed my life. I've been places I never thought I'd go, live a life I never imagined for myself, and as a nice side benefit make much more money than I ever could have as a teacher.
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The only, and I legitimately mean only, reason it was possible is because I paid off my student loans before I was “supposed to.”
It gave me the confidence to change careers and take on so much more risk than I would have if I still had the debt.
Read also: From Teacher to $12,000 a Month: Here's What I've Learned
AÂ lot of you have experienced something similar in your lives
So many of you have leveraged your debt freedom (see what I did there?) to make big changes in your life, or even just feel better about the life you are living. So many more of you are on your way there soon.
There is something about it that absolutely supersedes any dollar amount gained by earning 2-3% more than your debt's interest rate.
If you disagree with that, the only thing I can say is that you just haven't experienced it.
Paying off debt is a guaranteed return. Every. Freaking. Time.
This is potentially the strongest argument out there for getting rid of your debt before doing anything else.
I get that the market has historically gone up, average returns, etc.
Read also:Â Investing 101 for Millennials
None of that is guaranteed. It's just not. People always seem to forget that you can lose money investing just as quickly as you can make it.
When you go after your debt, you're keeping future interest in your pocket. It's actually guaranteed. Pretty cool.
Would you borrow money at 5% to attempt a 7% return?
I don't really have much to say on this one, other than I love it when I see readers use it in defending their debt payoff strategy. I'm yet to see an honest “Well yes, I would try to do that.”
It flips the argument on its head in a really interesting way to: “Would you take this much risk for this small of a return?”
Don't worry real estate investors – this isn't really for you
Every time this discussion comes up on Facebook or Twitter, there is always ONE real estate investor that comes in super hot with the leverage argument.
You won't find any disagreement from me in regards to using leverage to produce a high cash on cash return. If you can use other people's money to make a lot of money, by all means go for it.
I actually really like the idea of real estate investing, and wouldn't be scared at all to take on $1,000,000+ of debt in a commercial investment someday (which is what I intend to do later down the road).
But, it won't be for anything as low as 2% returns.
I'm very fortunate to actually know someone successful in that industry, and there is a ton of money to be made there. It's a completely different animal than personal finance, so I don't really even consider it as relevant to the discussion honestly.
Ultimately – do you.
This wasn't written to bash people that choose to invest. I promise. It's more to defend the people that are working on their debt first.
They already get trashed so much for being “weird.” It's probably pretty nice to hear that there's someone out there (me) that thinks that they're awesome for doing what they are doing.
If you want to invest first, you should. Prove me wrong over the next 30 years – I'll be massively happy for you.
Agree, 1 million percent about paying off debt. As someone who has paid off debt and experienced the guarantee of a return, I’d do it all over again in a heartbeat. Flipping the argument on it’s head is really where the point hits home for me. “Would you borrow money to invest” is really all you need to say! Nice job as usual!
Yeah in most cases (other than real estate) I’d pay off my student loans every time.
So…it took me into my early 40’s to be serious about my debt. I’m now debt free (except for a modest house that I purchased a year ago). It feels wonderful!! I can fully attest to that!! My situation is a bit different though. I’m engaged to be married and heading back into the pit of debt (his). It is totally manageable and luckily we are on the same page of not taking on additional debt and getting his paid off as soon as possible. It helps to have the same goal money-wise. I just find it interesting how I’m feeling a bit drug down knowing this debt is coming. I can’t wait till we get to the day when we can say that we as a couple are debt free!!! (Then we attack the house a bit more aggressively!!)
I have friends that have gone through that exact scenario – you’re going to be fine!
I graduated in 2012 with $106K in student loan debt at 22 years old. As it stands (after a slow start), I’m on track to have it all paid off exactly 4 days before my 30th birthday in 2020.
So now that my loans are all at 4.07% (as of this week), could I get more out of the stock market? Yeah, probably. Especially long term.
But the LIBOR rate jumped 0.2% last month, and because I have variable interest rates (knowing that my payoff timeline was short), my interest rates all jumped 0.2%, too.
I’ll take the certainty of NOT having to worry about the LIBOR rate or my last $58K in debt into my 30s over what is, by my best calculations, an extra $40K in investment gains over my lifetime.
Plus, think of all the useless junk I could buy with an extra $1615 a month in my pocket.
Haha so much useless junk for that much. Yeah I really think it just comes down to a personal decision. How do you want to live? Does being debt free make your quality of life go up? For a lot of people, at least from an emotional standpoint they would say yes.
When I paid off my student loan and credit cards last year…..I’ve experienced a freedom that has lightened my burdens. I can now take on more home improvement projects, save for emergencies and sleep better at night.
Good feeling right?
The biggest factor is RISK. There is no guarantee that your preferred investment – which now might be annualizing @ 7-10-12 or more % – will be earning the same a couple months from now. Even though the market has historically averaged around 10%, there have been periods (think a couple years ago) where the market was underwater for quite a while. Pay off your debts first before investing, the debt rate is constant vs a possible gain (gamble) on Wall St. Also, peace of mind is hard to monetize.
Yes the peace of mind part is the most important part of the puzzle for most of the readers I’ve come across.
PUH-reach. It does come down to the numbers. Since some interest rates are pretty damn low, I can see the temptation to invest that money instead of paying off debt with it. But like you said, there’s a GUARANTEED return if you pay off debt. Plus, if you lose your job or encounter an emergency, you have more cash on hand without those annoying monthly debt payments. As we’ve eliminated debt payments, we’ve been able to get out of debt faster. We do plan to invest more heavily after we pay off our student loans, but overall we’re doing debt first.
Yep, it’s definitely about what makes you sleep best at night!
I agree. I do invest in the market a bit (I’ve even gotten into options trading) but you need quite a bit of money to really start making money. Paying off your debt will release more money to you immediately to then invest. At least that’s how I see it. If I pay off my credit card and car (not even considering my student loans) that’ll then leave me with an extra $400 a month that bill see in my bank account immediately! That’s better than waiting 10 years to MAYBE see that return in the market.
I agree!
My wife is a physician and we’ve been together since her 1st year of Med School. I’ve watched a bright young girl full of energy slowly get ground into the dirt over the years. Naturally with each successive contract and more experience, her income rose dramatically. But so did the expectations, responsibilities, and workload. We’ve resisted the urge to ramp up our lifestyle and instead focused on paying down all of our debt including our mortgage for the simple reason that I did not want to become addicted to the money. I looked into the future and feared that the day would come when she wanted to slow down and work less, change specialties, or even careers and not be able to do so because of debt. I didn’t want an important life decision to come down to whether or not she could afford the pay cut. As of November 2016, we’ve been mortgage free, and the feeling is amazing.
Im a bit older than you, so I can speak from experience, and you sir are on the right track. And thats why I follow your blog, you remind me of myself 15 years ago.
Wow Bob thanks so much for the kind words – always good to hear I’m on the right path!!!! Congrats on your debt freedom đŸ™‚
We followed a financial program to pay off all our student debt and our cars. Then we were able to put down a huge down payment on a home and on plan to pay it off in 10 years. Besides financial benefits, if we have children in the future, I can be a part time worker or stay at home. To me that is the biggest benefit to being debt free, we have freedom to chose were our money and time is spent. If we have kids, we want time with them.
Freedom is a huge part of it!
Debt-free then we’ll see. Cheesy, yes, but words to live by.
I got rid of $20K in student loans, $10K consumer debt, and $30K of credit card debt. We have about $5K in credit card debt to go. We have a habit of eating out too much. Have to kick that.
But, once we’re out of debt, we plan to replenish the emergency fund, pay off the house, and buy rental property. Oh, and of course I hope my blog takes off and people want to fly me places too!
Cue the debt-free eye roll … Mom, you there?
Haha yeah being flown places is pretty cool I have to admit. Just keep grinding – you can get there with a lot of hard work!
I’m planning to start investing quite soon… once I get rid of my student loan, of course! I’m now used to not having a certain amount amount of money every month so it’ll just continue putting aside the same quantity to invest it in the stock market later on. You always need to set yourself new goals, don’t you?!
Yes! Gotta keep making new goals. Otherwise…what are you really doing?
I think there is such thing as a balance. You can invest a small amount of money, while putting your main focus and all your energy to paying off your debt.
For example, I think people who are striving for that debt-free life should absolutely still contribute to their retirement plans, whether through an employer or self-managed. You don’t want to miss out on a couple years of retirement contributions (especially with employer-matching) to pay off debt that you have more time with.
However, I strongly agree that paying off debt is about more than just money. It’s a mindset. I have a friend who is constantly so hard on herself because of her debt. Between student loans, car payments and credit card debt, even when everything is going right in her life, she still has the financial stress of her debts.
I think paying off your debt and giving yourself that freedom is so important. As you’ve alluded, being debt-free can open up so many doors for someone!
Totally agree – I wish I had mentioned 401k matches/retirement in this post! I think you should always take the free money if you can.
This post was so wonderful! I’m constantly thinking about how I should start investing but I can’t right not because I have a TON of student loans. It can definitely feel like a crutch sometimes especially when you start comparing yourself to all your friends…but reading your post was super comforting =). Thanks!
You’re welcome! I guess it’s just because I’ve been there too. Everyone is out there trying to tell you what to do with your money, when in reality you need to do what makes you happy. People tend to forget that sometimes.
I totally agree with this principle! We are in a bit different situation as we are debt free including our mortgage but have a HELOC on our house as traditional financing wouldn’t work on our house with the condition it was in when we paid cash to buy it.
My dilemma, pay off the 4.5 percent loan or investment in my deferred comp. I’m choosing to pay the loan officer. And do it as fast as I possibly can. Because I hate not making progress on retirement. And it is a guaranteed 4.5 percent return…and it’s adjustable and just going up.
Going about things this way can get you highly motivated to get it done and gazelle intense about it! Great article, it’s nice to see someone with the same perspective! Hoping to have 400k paid off home by the age of 35!
Nice it sounds like you’ll get there Todd!
For my situation it’s definitely about paying debt, especially with 6.8% interest. There’s no way I can realistically make more money investing than I can save by doubling down, especially when accounting for fees for mutual funds, transactions, and account management (in some cases). Now not to say I’m saving, but my priority is debt.
Also, I’ve had a lot if friend talking about the tenuous existence of public service loan forgiveness and they are all regretting not paying more aggressively because they’ve just paid the minimum and now will ultimately pay way more because they figured after 10 years they would be out if it. Just a hard lesson in shifting politics/policies and compounding interest working against you.
Yeah the loan forgiveness programs are going to be interesting to watch moving forward. I really hope it works out for the people that have decided to go that route!
Definitely will be interesting. There have been a few good articles written about it recently. Surprised me to learn that it was written in a way that was apparently non binding in the first place.
Love the article. Agree with you 100%. Paying off debt is a guaranteed return. The stage I’m at in life, I’ll take the guarantee and keep working to pay off my loans as fast as possible. After that has happened, then I’ll move to put my money to work through investing. I’ll have more funds available to do so, too.
Thanks! Yeah the guarantee is definitely a plus for a lot of people!
I agree with you but the most important point is that paying off debt has to become a mindset. I have seen time and time again people who pay off one loan or chunk of their debt and free up cash flow only to go out and buy something twice as big and put themselves right back into debt. If you start young, pay off your debt and keep that saving mindset you can retire and have some cash to spend. Too many people go through the debt game and then they get to age 65 debt free… but with nothing to live on.
Balance is key, it’s all about the habits
I completely agree that eliminating debt increases freedom. I agree so much that I won’t borrow money ever again. Even for rental real estate one day. Getting rid of debt has given my wife and I so much freedom that nothing could ever make me go back to it.
I agree that there is so much more to it than just paying off the student loan… From a personal standpoint, seeing yourself out of the red is very liberating… As for investment properties, I have rental property and it feels great seeing the money come in every month, but it isn’t without a cost (i.e., you will find yourself moonlighting as a plumber, painter, ect). If you are to truly profit from investment properties you must be capable of handling the routine upkeep yourself. Nevertheless, it is totally worth it at the end of the day… Go for it!!!!
This is so true, Bobby. I remember paying off my 22k car loan in 18 months. Everybody I told that to thought that I was nuts – but my interest rate also sucked on it. In addition to the GUARANTEED ROI on it (which probably would have outperformed nearly any investment anyway), having the extra cash flow was great, and the psychological WIN from paying off debt is just so good.
I’m a huge proponent of that, and then using that great momentum and good feelings to save.
What a timely message this is! My wife and I were just discussing this last night as we received a $5000 gift from a relative in the mail. I immediately had the temptation to spend or invest but after reality sunk in (thanks to your blog and other big guns who say the same thing) we realized that we still have a way to go on our debt before we can think about investing. Thanks again for your wisdom in this and for sharing with those of us who are still tempted to jump off the path from time to time!
Wow I’m so glad to hear the blog helped Greg! Very cool!!!!
For the most part, I have been fortunate enough to have enough income to do both. My philosophy has been that my time horizon for investing is long enough that I didn’t want to forfeit years of compounding returns in retirement accounts to aggressively pay down my student loans. Plus, I have benefited from a sub-3.0 interest rate on my undergraduate loan and a relatively modest monthly payment on my law school loan (which I will pay off later this year – woohoo!) Understood that everyone’s situation is different, but I feel like I have been able to strike a balance that works for me and my finances.
Yeah I do think that there are some people that have the opportunity to do both. We haven’t bought a house yet, and I’m going back and forth about paying it off extremely fast or doing a 50/50 type of strategy. Higher incomes certainly give you more options.
Great post! Debt payoff should be the first priority for anyone who is working paycheck-to-paycheck. No doubt! After that, I think there’s a healthy medium you can reach between paying off high interest rate debt and investing after that. If you have debt with interest rates below 3 or so percent, then in the long run you’d be better off investing the extra cash as opposed to throwing it all at that low interest loan. With that being said, debt payoff defies logic of money. As you said, it’s more than just “I’ll be better of if I invest instead of payoff my debt because of the interest rate paid vs what I could earn.” It’s about freedom. And that’s the ultimate goal.
Good stuff, Bobby!
Thank you!
I agree with your post and with almost all of what’s been said in comments of your readers. There is an overwhelming sense of freedom and piece of mind that comes from being debt free that all the math in world cannot overcome. While I was working aggressively on eliminating $200k in debt (to enjoy the guaranteed return) I did also keep investing 5% of income in my 401k to gain the 2 for 1 employer match because of the free money (more guaranteed return). Two years ago I unburdened myself with the last of that debt and am now able to invest 38% of my income (maxing out all retirement accounts plus aggressively growing taxable brokerage accounts) while I’m also cash-flowing my son’s college education at $20k/yr. After he graduates from college in 2 yrs I will also be investing much of that $ to commit over 50% of my income to long term investing. This freedom allows me to be very aggressive with my investments and allows me to chose independently where all of my time and money goes. I also have the freedom to leave my job tomorrow if I want. I am able to work on my terms and stand on principle if ever there is a conflict with my employer. I haven’t had to do that many times but knowing I can walk away whenever I choose is a power that math cannot quantitate.
@millionaireby55
I totally agree: the biggest benefit of paying off all debt is a peace of mind that is hard to put a number to. And freedom too but I have learned that since I can spend, I usually don’t. I am not sure if you have addressed the attitude of people who are in debt: they sometimes say we are crazy for not doing/buying things, but I really think there is some lack of discipline and jealousy. And I don’t say that to be mean. People, including me, justify why they need to spend or should be able to do so. My husband and I have been recently discussed planned responses to friends when I retire at 55 (he is not working (next year). It’s not any of their business, but I few will have comments. 1 of my favorite sayings is: the harder I work, the luckier I get.
My situation: $17K student loan debt; $12K used car loan; paying for a wedding (no loan but an expense that will go away).
I invest 25% of my pre-tax income into a 401k (maxed out my contributions each year). I invest post-tax income in a Roth IRA (maxed out contributions each year) and Acorns, which I use for emergency fund (amounts which have increased with raises to keep final take home steady after 3 raises).
I’m still on track to pay off my student/car loans well ahead of schedule (this time frame will only shorten once the wedding happens in July).
My justifications:
“Cash”: You can’t pay off unexpected expenses with paid-off student loan debts. The amount in my emergency fund can be used without penalty (after a day or two to transfer funds), while 401K and, specifically, Roth IRA’s could also be used to pay off unexpected expenses, though with a penalty, at a rate (10% on Roth), which is significantly lower than rates (specifically on credit cards).
Nudge: My investing activities force me to take an action that is beneficial to my future, whereas it can be quite easy to skip a payment towards student loan debt in favor of something else that is “needed” at the time.
Future Earnings: I might not make what I do in the future (specifically, I have considered leaving my current job to become a teacher), so I have forced myself to live on what research told me would be my take home pay if I made the switch. I have diverted increasing amounts of my funds to savings with raises to continue living at what I think may be my future income level.
Time: (Maybe this is wrong) I plan to retire roughly 40 years from now. If I don’t invest today, assuming my rate of return is 2.25% (Ally Bank High Yield CD — a bare minimum), an investment this year in IRA and 401k ($23.5K), which is allowed to compound 40 years becomes $57K over 40 years vs $56K if only given 39 years. If you go with the historical market average return (7%) over the life of this plan, this year one investment becomes $352K after 40 years vs $329K if only given 39 years to grow. It’s worth noting that when you delay investing, you don’t lose your year 1 return, you lose your year N return where N is the number of years between now and when you plan to retire. In the case above, this extra year of compounding is 5% if at the bare minimum return or 98% if at the historical market average.
I killed my wife’s student loan debt without a hint of regret (and created an internal debt to repay to replace the capital that was lost) when we got married, as it had become non-deductible (aka moved from “good” to “bad” debt). For my mortgage? It is complicated. I am far enough along that for me a big thing is maintaining a balance in my portfolio, augmented by the fact that a) real estate historically is a horrible investment that barely paces inflation b) every extra dollar into paying it down is locked in (outside of HELOC’s, which have gotten more constrained in recent years) that house c) between the deductability and the low rate and the fact that I have enough assets to take some risks, it is good bet to invest rather than pay down. (and yes, I acknowledge it is a bet, with some implied risk. Based on my personal numbers it is an acceptable risk with an appropriate amount of money)
That said, at least a little of any “windfall” amounts go toward the mortgage, but as part of a general plan and not any methodical plan. Plus when I refi’d I got money back, so I have been sinking that slowly back into the mortgage.
I agree with you here M$M that eliminating debt gives you a lot of freedom, takes that burden off your shoulders, and is a safe risk-free play. And depending on your goals in life, eliminating debt may be the way to go. But if you want to save (or earn) the most money over your lifetime, investing in the S&P 500 and/or other indices could be better. For example, my home loan has a 4% interest rate, but the S&P 500 has averaged over 10% over the past decades. I could pay down my mortgage more to pay it off sooner, but I can make 6% more money a year simply investing in the SPY while paying a 4% mortgage. Investing for just a couple of years may not be better than paying off debt, but investing for over a decade and longer really decreases any downside risk. (Unless there’s a depression :/ )