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Should I Invest Or Pay Off Debt?

"A creditor is worse than a slave-owner; for the master owns only your person, but a creditor owns your dignity, and can command it." — Victor Hugo

"Debt is like any other trap, easy enough to get into, but hard enough to get out of." — Henry Wheeler Shaw

"Nowadays people can be divided into three classes – the haves the have-nots and the have-not-paid-for-what-they-haves." — Earl Wilson

 

Should I Invest Or Pay Off Debt?

This one of the most common questions we get and I'm always happy to hear it. Why am I always happy to hear it? Because it is an indication of critical thinking around personal finance and our culture could ALWAYS use more of that, wouldn't you agree?

And the honest answer to "should I invest or pay off debt" is always, "it depends". And what it depends on is the answers to the following questions":

1. What's the amount of money in question? How much money are you currently able to either invest or to throw at debt.

2. Do you have non-mortgage consumer debt (i.e. credit cards, car loans, student loans, personal loans, HELOCs)? If so, how much and what kind?

3. Are you in the process of addressing that debt and how? Debt snowball? Debt avalanche? Spray and pray?

4. What's your annual household income and at what rate are you currently saving/investing? Does you company "match" and if so to what percentage of contribution?

5. What's your age/stage of life and how many years until you intend to retire?

6. What's your retirement "number", meaning how much in assets do you need to be able to fund your retirement lifestyle?

These questions are thought provoking on purpose. When I ask them, I'm trying to get not only to the underlying numbers and their back story, but to the person's general knowledge of personal finance and investing concepts in general.

 

Be sure to download the free "quick start guide" that goes along with this series.

 

If You Have (Consumer) Debt, Do This

Today I'm going to try to convince you that, if you have any kind of debt other than mortgage debt (i.e. credit cards, car loans, student loans, personal loans, HELOCs etc.) AND you're currently investing, you should STOP investing immediately (and only temporarily) and throw ALL of that financial (and mental, and physical energy) at paying off your consumer debt.

Yes, you read that correctly. I'm saying that if you have debt (other than primary mortgage debt), I'm recommending that you stop any retirement funding until you've paid off all your non-mortgage debt.

I know this sounds "blasphemous" and we get a ton of pushback from most of our students and subscribers at first, but I think you'll be as convinced as I am once we truly break down the numbers as we will in this post.

Here's an example of some of the pushback we get on social media:

For some context, the #1 and #4 she's referring to are part of my 25 Simple Tips To Pay Off Debt Fast blog post:

#1. Stop retirement contributions (until debt is gone).

#4. Save $2000-$5000 in cash as an emergency fund.

It doesn't "make sense" to most people to pause retirement funding. I get it. It's definitely counterintuitive according to "conventional wisdom". BUT, the reason we recommend it is bigger than just pausing retirement contributions as an end in itself. It's all about the bigger issue of momentum in paying down your debt fast. It's all about crushing your debt as fast as possible, so that the dollars you can then put toward retirement have real super powers.

 

By the way, this is precisely how I saved/invested over $600k over the past 5 years. I took the first 2.5 years to pay down my $43k in consumer debt (hyper-focus). THEN, I was able to (hyper-focus) on investing, as I didn't have debt-interest eating my lunch every day. 

 

And yes, even if you’re getting a "company match" in your 401k or other retirement plan, I recommend that you press pause on this. And again, I know this may seem counterintuitive and again, we do indeed get pushback from students and subscribers when we first introduce this idea. 

Believe me, I know that this is SO countercultural. But, let's pause and talk about how the numbers play out 99% of the time.

Ultimately, we go through an exercise where we calculate ALL of the interest you're paying monthly and subtract the amount that you’re earning through investments. I know this will likely take some digging to get all the information together and that's precisely why I want for you to do it.

99% of the time the analysis shows that you're either being eaten alive by the interest on your debt OR (at best) they're close to basically canceling each other out. 

I want to show you a MUCH more effective and productive way for you to reach your financial and investment goals, which is what we're going to talk about next.

 

Not Everybody Should Be Investing (Just Yet)

Not everyone should be investing, especially if they have high levels of debt. Let me explain in a little more detail before you dismiss me as a heretic. :)
 
So you see, investment strategy is contingent on several different factors: debt level, income level, stage of life, risk aversion profile and overall personality time to name just a few.
 
As a matter of principle, when we engage with new students that have any kind of consumer (non-mortgage) debt (i.e. credit cards, student loans, car loans, personal loans, etc), we automatically recommend that they stop all investing temporarily. In fact it's "Step 0" in our 8 Steps To Erase Debt system:
 

The 8 Steps To Erase Debt

0. Stop All Retirement Investing (Until Step 4)

1. Build A Budget

2. Starter Emergency Fund of $1000

3. Eliminate Debts Smallest To Largest (a.k.a The Debt Snowball)

4. Full Emergency Fund of 3-6+ Months' Expenses

5. Invest A Minimum of 15% Income Into Retirement Accounts (and increase savings rate to 50%+ if possible)

6. Education Funding (if applicable)

7. Pay Off The Home Mortgage

8. Build Wealth, Serve and Be Ridiculously Generous 

 
Why do we recommend this? Because in personal finance you can only truly focus (with the required intensity) on one thing at a time, in order to get traction and systematically accomplish your goals.
 
As I illustrated in the example above, every single time we've run the numbers and done an analysis with a new student as to the interest they're paying on their debt vis a vis the interest they're earning on their investments its: 1) at best "a wash" meaning they're cancelling each other out or 2) at worst (and more commonly) they're being eaten alive by the interest they're paying on their debt.
 
So, trying to invest while in a deeply indebted posture is watering down both: 1) your investment strategy and 2) your ability to tackle and eliminate your debt with the required focused intensity. So, for the vast majority of folks, investing while they're in debt is akin to running on an invisible hamster wheel. No wonder discouragement causes so many people to just give up, eh?
 
So, I use that point to illustrate that personal finance is deeply personal and you often need that external set of eyes on your situation to help you 1) identify the holes in your lifeboat and 2) encourage you to take some steps to plug the holes and to more importantly start building a new and better boat.
 

Behavior Change And Momentum

Part of the transformation of this process is learning how to think and act in your own best interest. And, it's impossible to do so unless you actually know your numbers.

The truth is, I can help you get to extreme solvency and profitability much more easily once your debt is gone. So, my strategy is to say "let’s throw every dollar at the debt and get it to zero ASAP."

Again, a big part of the reason this strategy works is that, when it comes to money and personal finance, you can really only focus on one thing at time. You can’t paddle your canoe forward when you’re constantly being pushed backward by the overwhelming force of your debt (i.e. raging river), especially if it carries moderate to high interest rates. Seriously, take the time and do the numbers and you'll see.

Now, I will say that this isn't a hill I'm willing to die on. Some argue that they have mandatory contributions and that they can't stop their retirement contributions. If that's the case, then just stop anything that's above and beyond "mandatory".

Let's get every single extra dollar thrown at that debt and get you some modicum of freedom. 

And again, this methodology is precisely how I paid off over $43,000 of debt in 2.5 years and went on to save/invest over $600k in the next 5 years. I promise you, it works!

 

Conclusion & Call To Action

So, if you're asking the question, "should I invest or pay off debt", I want to encourage you that you're doing a good thing. Putting energy into your financial future is never a bad thing to be doing. But the next questions are pivotal.

1. How much money are you currently willing/able to either invest or to throw at debt either in one lump sum or as an ongoing amount/percentage?

2. Do you have non-mortgage consumer debt (i.e. credit cards, car loans, student loans, personal loans, HELOCs)? If so, how much and what kind?

3. Are you in the process of addressing that debt and how?

4. What's your annual household income and at what rate are you currently saving/investing? Does you company "match" and if so to what percentage of contribution?

5. What's your age/stage of life and how many years until you intend to retire?

6. What's your retirement "number", meaning how much in assets do you need to be able to fund your retirement lifestyle?

Okay, so hopefully by now I've convinced you that, if you have any kind of debt other than mortgage debt (i.e. credit cards, car loans, student loans, personal loans, HELOCs etc.) AND you're currently investing, you should STOP investing immediately (and only temporarily) and throw ALL of that financial (and mental, and physical energy) at paying off your consumer debt.

The "why" is all about momentum and putting your energy toward erasing the debt, so that you're not watering down either 1) your debt-elimination efforts or 2) your ultimate investment aspirations. By hyper-focusing your efforts on "one thing at a time", you'll be amazed how much more quickly you'll be able to build wealth.

This methodology is precisely how I paid off over $43,000 of debt in 2.5 years and went on to save/invest over $600k in the next 5 years. I'm telling you, it works!

 

Call to Action

I never want to do a "data dump" of new information with great prompts without giving a very logical next step that will absolutely concretize what you've just learned.

My "call to action" today is for you to actually do something with the new information you have. So, to help you externalize and systematize your financial goals, I would encourage you to go join at least one of these two communities:

1. My "ZeroDebt Tribe" Private Facebook Community: this is open at all times and free to join.

2. My ZeroDebt+ Private Financial Coaching Community:   I only open this a couple of times a year, so if it happens to be closed at the moment, go ahead and get on the waiting list. I promise it will be worth it!

Okay, now that we've gotten you in a posture to get some great results, let's talk about a (free) solid and proven system to help you master your money once and for all.

 

The 8 Steps To Obliterate Your Debt

 
This is the blog post that outlines the 8 steps I followed to eliminated $43,000 in debt in 2.5 years.
 
 
And whether this is your first or thousandth time on the blog, I want to make sure you have this “8 Steps” framework that ALL of our content is centered around. 
 
These are the steps I personally followed to obliterate $43,000+ of debt in 2.5 years
 
Maybe your number is bigger, maybe it’s smaller. Either way the principles are the same and I want you to have them.
 
0. Stop All Retirement Investing (Until Step 4)
2. Starter Emergency Fund of $1000
3. Eliminate Debts Smallest To Largest (a.k.a The Debt Snowball)
4. Full Emergency Fund of 3-6+ Months’ Expenses
5. Invest A Minimum of 15% Income Into Retirement Accounts (and increase savings rate to 50%+ if possible)
6. College Funding (if applicable)
7. Pay Off The Home Mortgage
8. Build Wealth, Serve, Be Ridiculously Generous And Go FI (Financial Independence)!
 
I’ve created a simple, easy to follow guide that you can use as your foundation as you navigate the absolute annihilation of your debt forever.
  


 

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When You Need More Help

And again, if you’re looking for some resources to get started, you can download our free budgeting printables. Also, if you’re in a place where you’re ready to kick your debt in the teeth, here's the link to our free “8 Steps To Erase Debt” guide for you to use as your foundation.
 
To your freedom,
 
Brad
 
 
This post may contain affiliate links. If you click & make a purchase, I receive a small commission (at no extra cost to you) that helps keep Zero Debt Coach up and running. Read my full disclosure policy.
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