INVEST OR PAY OFF DEBT? - How You Can Do Both

hey guys it's a mom and Kristina from our rich journey in this video we're gonna be discussing which one is better to pay off your debt first or to invest first or maybe even to do both I think there's this general concept known as FOMO which is fear of missing out people feel like if they invest in real estate or they invest in some other stocks or bonds then they can't also pay down their debt or vice versa or maybe they want to do both so in this video we're gonna break it down we're gonna talk about whether it's better to invest or whether it's better to pay off debt so let's talk about this concept of fear of missing out when it comes to investing or paying off debt see what people struggle with is that they believe that their investments will generate enough return to actually pay off of their debt but as we've said throughout many of our videos investments are not guaranteed you don't have a guaranteed return on your investments but that debt is always gonna be there and you're always gonna have to pay that off this idea that people can get a better return by investing than paying off their debt falls apart for two major reasons 1 investing is not guaranteed you can lose your money overnight whereas paying off debt you're guaranteed return on that on that payment you won't pay the interest on that debt the second reason why this theory falls apart is that investing is a very long-term thing you invest today but you may not see those returns for 10 15 20 years but if you pay off debt today you will see those returns immediately so most people probably want to hear that they should be investing because that's the fun thing to do you get to put your money in something and you get to watch it grow so let's talk about our advice and we start off by distinguishing between bad debt and not good debt but bad debt and not so bad day yeah this idea of good debt versus bad debt all debt is bad debt as far as we're concerned in fact I think that banks probably came up with this idea of good debt versus bad debt because they want you to think that a low-interest mortgage is good debt somehow because you're paying it over 30 years but when you're paying on a mortgage for 30 years you're paying twice the price for a house and that doesn't sound too good me so we don't look at debt in terms of good debt and bad debt we look at debt in terms of bad debt and worst debt so let's go through the categories that we put into the worst debt category the first item in the worst debt category is debt that doesn't necessarily come with interests but it's the debt that you owe to your friends and family now there is not an interest rate attached to this debt but there is a cost it's a request to your relationships so for us that type of debt is the worst type of debt and the other forms of debt that fall under the worst category of debt is payday loan debts credit card debts and tax debts now payday loans and credit card debts are in this category because they typically have very high interest rates and tax sets are in this category because the government can typically or will garnish your checks in order to collect that tax debt now the bad debt that people typically refer to as good debt are mortgages and student loans they call this good because the interest rate is usually lower and it's and the payments are spread out over a long period of time but we found that this debt can actually be just as bad as the worst debt if you overextend yours if you overextend yourself especially if you get a house that is too big or you take on student loans that you cannot afford to pay back now we distinguish between bad debt and worse debt because your approach to paying off the debt versus investing will depend on which category of debt you have so to address this debt or invest we've developed two approaches let's talk about the first approach now this first approach assumes that you have both bad and worse debt so under this approach there are some things that you have to put in place before you start tackling your debt and the first thing you should do is build an emergency fund because you're focusing on paying down the bad debt in this phase what you want to do is just build an emergency fund it's only about the months worth of expenses now typically people say that you should have three to six months of living expenses in your emergency fund but under this approach you're really focused on tackling your debt so you want to have some minimum of an emergency fund and that should be one month once you have this emergency fund it's important that you start to make lifestyle changes because at this point you want to start to aggressively pay off the worst debt so you want to do things like develop a budget take that budget and go line by line and start to cut expenses at the same time you want to increase your income and we talked a lot about increasing your income with side hustles but you should be doing side hustles working extra hours of work doing whatever you can to tackle this worst debt so with an increased income and reduced expenses you can take that additional money and start to tear away at the worst debt now you want to aggressively pay down your worst debt so you're throwing all of your money down into this worst debt with one exception and that's your 401k matching plan that you have with your employer now if you have a 401k plan where your employer matches part of your contributions or all of your contributions your goal should be to invest in your 401k plan up to that maximum contribution before you actually start paying off your debt and the reason for this is because when you invest in your 401k plan and your employer matches your contribution that's a guaranteed return on your investment so for example if you invest $100 in your 401k plan and your employer matches $50 to your $100 that's a fifty percent return on your investment now 50% is higher than any interest that you would have on a credit card but if you have a payday loan those interest rates can be as high as three hundred percent and in that case it makes way more sense to pay that payday loan than they invest in your 401k so under this approach the focus is doing both you get to invest in your 401k but at the same time you are aggressively paying off your worst debt you also are making drastic lifestyle changes I mean by lowering your expenses and picking up the side hustles you are doing something that a lot of people that pursue financial independence are doing by generating all of this income once your debt is paid off that is money that you can eventually invest in the stock market or invest in real estate but now you'll be investing with these very large sums of money our favorite stories are those families that pay off $100,000 in debt because we know after they've paid off that debt they have more money to invest so instead of paying credit cards or these bad loans now they're putting that money into the stock market and they're growing their wealth they're getting closer to financial independence now let's consider our second approach our second approach is for people that don't have worse debt and only have bad debt so if you've gone through the first approach and you've tackled off your worst debt you're in the second approach now so paying off bad debt and investing you really have to take into account your timeframe see what people fail to consider when they start asking this question is maybe how much time they have left on their mortgage and the reason why this is important is because of the amortization schedule that you have on a mortgage so with the mortgage you're paying most of the interest upfront and then you're paying principle towards the end so if you have a mortgage that you've been paying on for fifteen or twenty years you're at a point where mostly you're paying principle and in that situation it doesn't really make sense to pay that principle any faster because you've already paid the interest let's assume that you've looked at your schedule for your debt payment and you're actually at the beginning of your debt payment for example on a mortgage now the best ideal situation for you is to actually invest if you look at investing in an index fund in the stock market the average return over a hundred year span has annually been about eight to nine percent and that's typically higher than the interest rate payments that you would be paying on a mortgage the point that Christina just made emphasizes why this question is so hard to answer because on the surface it may appear to be a straightforward answer but as you dig deeper you find that your financial situation makes more sense to do one or the other and you know psychology really comes into play if you find that you're investing all of your money and you're not inspired by that and you're really inspired by paying off your debt or pay your mortgage then all the numbers go out the window and it just makes more sense to pay off your mortgage because that's what you'd be committed to doing and you'd like to see that number go down so you should do that so I do want to make one point about investing is that when we're talking about investing we are talking about investing in index funds in the most traditional sense of investing as opposed to gambling investing where you're investing in very speculative type things things that you're trying to hit a homerun with but don't have a proven track record so everyone is gonna feel differently about paying off debt versus investing and it's a really hot debatable topic but what you really want to look at aren't your numbers what type of debt you have where you are in terms of paying off your debt and how you want to invest your money these are all things that you should be thinking about when you're investing and when you're paying off debt so I hope we've made this decision a little more easier for you it's pretty complex but maybe we've given you more things to take into consideration if you like this video please give us a thumbs up subscribe to our Channel and join the journey

Channel: Our Rich Journey

Views: 124,936

Keywords: Saving, Investing, Financial Independence, financial freedom, early retirement, earn, save, invest, Financial Freedom and Early Retirement, ourrichjourney, Our Rich Journey, FIRE, save or pay of debt, invest or pay off debt, invest or save, paying off debt, when to pay off debt, is it better to pay off debt or invest, paying off debt versus investing, when is it better to invest than pay off debt, can i invest and pay off debt, investing when you have debt

Id: VXRmjDuf6co

Length: 9min 38sec (578 seconds)

Published: Fri Feb 01 2019