Should You Invest or Pay Off Debt? The Surprising TRUTH.

if you had to choose which is more important would it be investing or paying off debt today we're going to be talking about some key questions you should be asking yourself when you decide the answer may shock you [Music] hi I'm Joseph and I'm Tasha with one big happy life and we make videos about how to find balance build wealth and live happy everything that you need to create the life that you want today we're going to be talking about investing versus paying off debt but first I want to invite you over to our free live master class the money mastery plan how to save money pay off debt faster without having to give up the things that you love now this class is happening later this week and will only be available for a short time so be sure to head on over to one big happy life com forward slash money plan to sign up and we will be there sharing amazing strategies to help you build wealth today while also living a life that you love and will be there answering questions live so you don't want to miss this free class head on over to one big happy life com forward slash money plan to join us live now general wisdom in the personal finance world says that paying off debt is the default thing to do if you have any debt at all and not only paying it off but paying it off really fast by sacrificing all of their financial goals and just doing that first now and that's also one of the questions that we get the most like it's not the number one question the number one question has to do with like budgeting and reconciling your budget but the number two question has to be if we have all of these assets which we do why don't we just just liquidate them all and pay off all of our debts so that we can be debt-free like Joseph said debt freedom is often put as the gold standard and personal finance but the reality is like we like to remind people no one's actual ultimate goal is to debt freedom that's a preliminary goal everyone is looking for financial freedom which means having so much money that you can stop working aka retirement aka financial independence but we thought we would take some time to work through at this question about which is better saving versus paying off debt okay first let's start with some assumptions we're going to assume that in this scenario you have some debt and you have some income enough income that you get to decide whether or not you're going to invest with it or whether or not you're going to pay additional payments or additional principal against the desk that you have so minimum payments are being met already mm-hmm so first let's start with the pros and the cons of each starting with the pros of paying off debt so obviously if you focus on paying off debt as your priority you will pay off your debt faster which many people point out has a psychological benefit now the caveat that we want to give here when it comes to the psychological benefit is that we see a psychological benefit we feel stressed about debt because we are told to feel stressed about debt look at it this way we all will be paying electric bills for the rest of our lives electricity is going to be a thing most of us have no aspirations to go off the grid and yet no one's sitting there saying oh my gosh my electric bill like not people who have surplus income who are able to meet all of their financial obligations they're not like oh my gosh this is gonna be a ball and chain on me for the rest of my life so why do people look at a 200-dollar say roof payment or mortgage payment any differently than a $200 electric bill it's because of a mindset issue it's a societal thing that's ingrained in us to think that one type of payment is worse than another type of payment so we just want to point out so while there are psychological benefits and people do talk about debt being stressful it's largely a result of societal influence on us about how we look at our debts because I can guarantee Joseph and I are not sitting there like oh my gosh these debts how are we going to because we have a debt payoff plan in place and we're comfortable with our financial plan another pro is purely math it is you will pay less interest over time if you pay your debts off faster that's just that's gonna happen if you have less debt there is going to be less interest and that's that's just about it but as you're making those payments you're not going to be saving as much interest as you get deeper and deeper into those loans so like right now you're paying a lot of interest on on say your mortgage but it starts to get just to be a little bit of interest at the end so depending on where you are in your loan life you might be saving a lot of interest or you might actually not be saving that much interest at all and then the caveat on the interest thing is people just look at the amount of interest that you pay on the debt but they don't look at how much you could earn in compound interest over time if you invested that money so in terms of wealth building which is the goal sometimes it may be that it's better to go ahead and pay more interest on a debt so that you can use the money to earn even more interest in investing so that's just the caveat on that Pro another thing is that the goal of paying off debt is cut and dry it's very easy to target you have a balance on a credit card let's say and you want to make that go down to zero it's really simple to understand there's not a lot of back-and-forth about well exactly how do I measure my goal it's there right for you not to mention that it's an easier goal like just straight up paying off your mortgage is easier than saving enough money for retirement because for most of us and you will need more money for retirement than your mortgage costs and so it's easier to aim for that because it's frankly a shorter term goal than investing for the long term so that you can reach financial independence okay now let's talk about a few of the downsides of paying your debt off as fast as you can so the first thing is you're actually going to pay more in tax depending on which debts you have so let's say you have some student loans and a mortgage well interest on a student loan is deductible to a point and on a mortgage the same is true and so you're actually going to be paying a more taxes because you aren't paying as much interest the next thing is that if you are paying off debt faster you may result it may result in you having less assets which we talked about earlier because obviously money that you are paying out you you're not keeping you're not using to build your emergency fund you're not investing and so you may lose out on extra interest that you could have earned and built wealth faster by paying off debt not to mention it's not just the assets but liquid assets because if your option is investing well the stock market bonds or cash CDs even that it's relatively liquid you can move it in move it out if you need to access it but once you give that money to a debt collector well they don't give it back to you it's much harder to then make decisions if you need more money the next thing is that aggressively paying off your debt does cause you to put your other financial goals on hold and can make them more expensive so in last week's video we talked about how if you were saving if you start saving when you're 20 you have to save half as much as if you start saving when you're 30 so while paying off debt faster might seem like an admirable goal it may actually make your overarching goal which is financial freedom a little bit harder to obtain because you lose that time of your money sitting in the market and growing and working for you all right now let's look at the investing side of things starting off with the advantages so number one I'll go with taxes again there are major tax advantages to investing especially for retirement because there are tax advantages accounts you can deduct a huge portion of your income up to nineteen thousand this year if you're contributing to an employer plan I mean that's a lot less tax that you could be paying it's also worth noting that retirement accounts like a 401k are typically exempt from creditor claims so when you put your money in there it's pretty safe and like I mentioned before the earlier you start saving the less money you need to come up with in order to hit your big goals so prioritizing investing makes saving for your biggest goal which is financial freedom that much easier another advantage is you're gaining liquid assets now I'm going to assume that you're not going to be investing in just real estate but that you're going to go into some stocks and distant bonds those kinds of things and so that gives you some liquidity if you need to tap into that for an emergency I mean a real big emergency you can do that because there's a market already out there to sell and buy as you need to the other major con Pro the other major pro is true financial peace of mind there is nothing absolutely nothing better than knowing that you have enough money to fund your expenses for the rest of your life and that can include also funding your debts and we've done a video where we featured someone that retired in his 30s with debt but his nest egg was large enough to still cover his mortgage so he didn't have to worry about paying off his mortgage but he was done working living a carefree life traveling months out of the year with his family including children there's no better feeling than being financially independent now the key to investing is really generating some passive income or passive wealth building and so if you're doing that you don't have to worry as much about your day-to-day working now I mean of course is the goal eventually for retirement for you to just do whatever you want you don't have to work at all but even in the interim you know that you've got some money that is being generated if you need to tap into it or if you've got you know non retirement accounts it can add to your income all right so now let's talk about the cons of investing starting with the fact that yes it is absolutely possible to lose money I mean we're all not that removed from 2008 when there was that huge market crash and a lot of people lost a lot of money so yes when you are investing there is certain amount of risk there but the thing to keep in mind is that the market has since rebounded and if you had stayed the course and kept your money in the in those investments you would have made your money back and then some over the past 10 years yeah what that's really called is the volatility and so in the short term this is the scary part for the stock market in the short term it can go up and down wildly and that is scary because the day that you invest your money you might lose a big portion of it but what is really important is the volatility over the long term for stocks trends upward and that is what you're actually tapping into when you're investing early another con is investing is not straightforward we all know how to pay off debt it's just like paying another bill the minute you learned how to pay your electric bill or your rent bill you learned how to pay off debt but investing there's more involved there you know you have to learn about how investments work you have to learn about different financial products like ETFs 401ks all of those things and so yes there's a bit of a learning curve but you can learn these things we promise you and we share all of that information and knowledge with you here on YouTube over on our website and then we go even deeper in our program wealth Builders Academy so you can learn these things last you are definitely going to be paying some type of fees to invest if it's with your employer they're the employer plan will have some fees maybe they're built in you don't exactly know what they are but trust me they're there somebody's paying something hopefully it's your employer if you're you have a private account you'll see some fees there might be fees to trade individual stocks they're gonna and that you got to watch out for those so that's a level of complexity and cost that is definitely going to be there with investing and the last major con when it comes to investing is there's no instant gratification I know it may not seem like it but paying off debt is very much like instant gratification because you can see those balances go down day after day and you can see that progress in a shorter period of time when you're investing you're in it for the long haul for the month for most of us we're looking at decades to reach those goals and so it is like the very definition of stay the course it's a marathon not a sprint and for a lot of people we haven't learned how to master staying the course we're used to instant gratification and so mentally it can be very difficult so it's all about you can of course counteract that with your mental mindset and knowing that you're doing what's best for your financial future by investing kind of like how you brush your teeth so you can have your teeth in your 60s you save so that you can retire whenever you want to it doesn't even have to be your sixties okay so which is better after all those pros and cons well if you know there's a little bit of a lean towards investing but it's not so cut and dry it kind of goes back and forth depending on your situation a little bit so we're gonna give you some overall kind of general principles that you can consider as you're making this decision for yourself so number one if you get employer matching you you typically want to start investing and get that employer matching because when you get employer matching that is a 100 percent return on your investment I don't care how high your debts are chances are like it's sort should be illegal for you to have debts with an interest rate of 100 percent so clearly you are earning well faster by at least getting the employer matching next we're gonna flip to the pay off debt side if the interest rate is over seven percent because that is a high enough rate that especially in the short term you probably aren't going to beat it or not with any real certainty if you're investing and so that means you'll you'll be losing wealth because that interest is just too much and and we say functionally 7% so what that means is if you're participating in a student loan repayment program if you have a mortgage that's tax-deductible take all of those things into consideration and calculate the real interest rate when you're making that decision and then next you switch over to investing to max out your until you hit your savings rate and your minimum savings rate is the amount a minimum amount that you need to put away every single month in order to hit your target financial independence date then after you have that minimum switch back over and go ahead and pay off those debts because once you get that minimum savings rate well your retirements locked up so you can go ahead and move on and then there's no reason to be paying paying less on those debts just get rid of them and so you know that we love giving you real world real-life examples using ourselves as guinea pigs so we went ahead and did the math for you guys using three different scenarios so in the first scenario we did what we're currently doing which is slow paying our lower interest debt and prioritizing investing at our current savings rate assuming we keep our current house our net worth at sixty-five will be fourteen million dollars and that includes the value of the house here we assumed an 8% rate of return and we assumed that the value of our house would grow at about three percent which is what real estate has averaged historically now if we liquidated everything to pay off all of our debts which a lot of people ask us to do they're like you should do oh yeah sell our house get rid of all of our investments I mean I would say every single week somebody's asking why don't we do that well here's why we would only have seven million dollars at age 66 if you notice that's about half and we'd also be saving more money every single month because all the money that was going to our mortgage would now be going toward saving so we'd almost double our savings rate and still end up with half as much wealth over at the same period of time next let's look at a scenario where we reduce the amount that we are investing to the employer match minimum and then use that money to pay off our mortgage like the extra money you yeah so it does a little bit better ten and a half million dollars but still clearly significantly less than what we're doing now I mean what could you do with an extra three and a half million dollars I mean I can't think of so many things it would buy so many lash extensions I tell you obviously I'm okay but the point is that when you do the math and we are all about the math oftentimes it will end up that it's actually better to slow pay your debts especially in a low interest rate environment when you have a lot of interest when your interest rates are below 5% all of ours are actually below like three and a half percent so it just does not make sense to prioritize paying off debt but of course this depends can vary from situation to situation which is why we love giving you the tools to help you figure out what's gonna make most sense for you if you found this helpful then definitely check out our free live masterclass the money mastery plan at one big happy live.com forward slash money plan I'll see you next week [Music]

Channel: One Big Happy Life

Views: 28,864

Keywords: should you invest or pay off debt, should i invest or pay off debt, invest or pay off mortgage, invest or pay off student loans, pay off debt, should you invest, pay off debt or invest, how to pay off debt, should you pay off debt, investing vs paying off debt, paying off debt, invest, debt free, invest tips, how to invest, paying down debt, build wealth, financial freedom, investing, personal finance, retirement, retirement planning

Id: deF286sb9hI

Length: 18min 51sec (1131 seconds)

Published: Mon Jun 17 2019