“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).
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.
A 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: 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.