Should You Pay Off Debt Or Invest

hey everybody welcome back to whiteboard finance my name is Marco and I'm here to help you master your money and build your wealth in this video we're gonna talk about the controversial topic of should you pay off your debt first or should you take that money and invest so I'm gonna talk about like the philosophical side of things I'm gonna talk about the actual debate points as well which aren't really that complicated but you'll see what they are if you don't know them you'll definitely learn from it and then also I'm going to ask you four questions which will help you kind of understand where you're at and if you really should pay off that debt or if you should invest so for the math nerds I hate to disappoint you this video is not going to go to in depth into math it's gonna go into a couple different things but we're not gonna dissect every penny and every dime in this video okay this is more of a video to get you thinking about the big picture and if you're ready to invest or if you're ready to pay off debt so without further ado let's get right into it so I'm gonna go into the philosophical side of things right here so debt sucks everyone knows that that is the worst there's a definitely good debt there's definitely bad debt but in general most people don't want to have debt okay so debt I'm gonna get into one of my famous drawings here one of my other viewers said that my animal drawings are really good and I said maybe I should start drawing children's books and he said I'd give them nightmares alright so if this is a person that is kind of like a big weight on your shoulder okay so that says 50 whatever 50 kilograms 50 pounds whatever so debt is a big weight on your shoulder and it's always on your conscience as well okay so it's kind of like this never-ending thing that's just always like hey you know I'd like to do this but I have all this debt I would like to invest in this but I have all this debt I want to take this vacation but I can't I have all this debt so it's kind of like a never-ending wait that's always chipping away at you so debt obviously can cause stress it can cause marital problems I did read something that said 57% of divorces had some sort of financial component or financial stress to them and I think the rest is from social media but that's a different conversation for a different day you can make hasty decisions when you have debt so say for example having for bid you get laid off and you have to take another job instead of being in the market longer and finally picking that dream job that you want maybe you don't have the time to take that dream job and you have to make a hasty decision and take the crappier job that you don't want just because you know you have no choice you have this over looming debt okay so at the end of the day personal finance is obviously financial and it's personal but a lot of it's behavioral rather than mathematical so some of the common talking points that come up in this debate are typically Marco you know if I want to invest the difference I can make 10 percent instead of paying off whatever the loan is let's call it you know student loans at six or seven percent okay they're thinking that they can make a spread of that four to three percent by investing in the market rather than you know just paying off the student loan debt so everyone knows that paying off your debt say these are student loans is a guaranteed rate of return okay so if these are student loan debts that have six to seven percent if you pay this off right away let's just say you have 20 grand you paid off today you are guaranteeing yourself an annual rate of return for this amount because you're not paying the interest on that so you know then you get the comment that I mentioned earlier is that hey I can invest this ten percent I can kind of just service this debt as it comes along the minimum monthly payment and I can invest the difference instead of paying off the student loan I can put this in the market and kind of make that spread yes that's absolutely true but that typically comes from people that haven't been investing for that long and have never experienced that downturn in the market so these are people that are usually you know mid late 20s they watched a few investing videos on YouTube and they're like yeah man I can make this for sure and they have some experience in the market but ultimately they don't remember 2008 where everyone lost 40 50 percent of their portfolio pretty much over the course of a year so with that being said this is definitely a viable argument however I would say that a guaranteed rate of return it's kind of like a bird in the bush as our bird in the hand is better than two in the bush that's something that I would personally consider so another talking point is you know if I if I put all my money towards the student loan and I'm not investing in my 401 K I'm missing out on essentially free money or the free match that employed my employer would make okay that's also a viable argument as well the only thing I would say to that is that if you still keep the overhead the debt service the interest the monthly cost it takes to actually service that debt are you even coming ahead with the free match so depending on how much overhead you have with the debt how much interest you're paying on that debt that may even be negating the free contribution that your work is giving you yes it's gonna grow over time because it is your 401 K and I understand all that but right now I'm just thinking philosophically to say hey would it be worth paying off this debt right here rather than worrying about you know your company's three percent match for example so let's get into the first question that I want to tell ask you to see if paying off debt or investing would be a more viable option for you so the first big question I want to ask you is what are your financial goals so if you don't know your goals look at a handwriting these new markers are smooth these are like butter dude if you don't know your goals this kind of dictates the whole path of which you're gonna take so a perfect example I know people who made four hundred thousand dollars a year and they're mid-20s they were never satiated they were never appeased they were always hungry they always wanted to make more and more and more consume consume consume right so if you're that type of person your strategy is gonna have to be investing whether it's in real estate whether it's in stocks whether it's in you know whatever because you're always going to have that appetite only you can answer this question because you know yourself better than I do most people are probably gonna be somewhere in the middle okay the middle class is typically going to be you're eight to five w-2 employee they know they need to invest but they also have some debt if you want to be kind of like financially independent by the time you retire and lead a non stressful life to where your marriage can prosper you know you can take care of your kids you don't have to worry where your next meal is going to come from you probably would be better off paying off your debt first and then investing the reason I say that is just because the peace of mind that this gives you especially in the economy that we may be entering when it comes to you know job loss and things like that especially the cost of health care and all that it's just better to not have debt that way you don't have to talk about the stuff we talked about early in the video when it comes to peace of mind when it comes to marital stress when it comes to having to worry about all the overhead of your debt taking the job you don't want to take etc etc I remember in 2008 there were articles about people that were CEOs literally delivering pizzas for Domino's they went from you know high six-figure salary position to having a deliver pizzas just to keep the food on the table okay so in my personal opinion I think that paying off debt for the middle class is the smarter thing to do and then you can really kick your wealth building into gear so the second question I want to ask you revolves around time okay time is very important so time in the market is more important than timing in the market okay so what is your age how old are you like literally what is your age so if you're young everyone knows that compound interest is one of the eighth wonder of the world if you want to call it okay so the younger you start investing the more time your money can compound on itself so here's a perfect example so if you invest $5,000 a year at 7% from age I believe it's 21 to 65 guess what this five grand a year turns into okay this is a minimal investment it's not that much in the grand scheme of things you can do you can bartend you can drive uber you can do whatever you can make five hundred five grand like this not that hard if you invested this for basically forty four years from age 21 to 65 you would have 1 million four hundred thousand four hundred twenty three thousand seven hundred and forty-seven dollars in the bank okay yes it's not taking into account with inflation it's not taking into account a bunch of other things that can happen between this time frame however it's happened and a lot of people have done this who are now 65 in 2019 okay so if this is your goal I would investing in that case rather than doing nothing and also rather than paying off debt or you can do kind of a hybrid as long as you put away you know something maybe max out a Roth IRA at six grand a year for 2019 at least start doing that and then start paying off your debts if you want this to grow because compounding is a factor that you have to consider when thinking about paying off debt or investing so number three and this is probably one of the questions that most people don't even think about let's be honest most people were not taught finance they're not naturally interested in the markets are not naturally interested in real estate investing they're not naturally interested in knowing how to invest or have that mentality most people only know the consumption mentality especially in the States so number three do you even know what you're doing okay I know this is so this is so obvious but most people are so eager so hasty to get into the market they have FOMO FOMO is fear of missing out okay FOMO oh I'm on the sidelines everyone's investing everyone's doing this so are you someone that's kind of like buying crypto because your uber driver recommended it versus your bird drivers talking about it are you buying real estate because you bought a $3 95 cent book on Instagram one of those corny ads and if you guys don't follow me on Instagram I call these dudes out all the time it is so funny so if you don't know what you're doing I would start with a small amount and pay down debt first and the next question is actually gonna poorly write into this so if you don't know what you're doing start small you'll get your bumps and bruises especially in the economy that I think we're going into and then ultimately you can learn how to invest you can learn how to be more disciplined with your money and you're also paying down debt at the same time so that actually leads me into number four is do you even have enough to invest okay do you have enough money to even invest the reason I say this is because people invest all of their money and what they neglect is one of the most important things that you can have if you're being a responsible adult and that's your emergency fund okay I talked about this and a lot of my videos and it's for it's not because I'm super conservative and you know hoard all my money in my mattress and I think you know the the recessions coming you know that's not the case everyone should have an emergency fund whether you're whether the economy is good or bad okay so people invest all their money into the market and they're so concerned about you know making money and fear of missing out that they neglect their own personal financial well-being so again I always go back to the analogy of losing your job or you know say for example you get hit by a car and you can't earn an income because you're injured you know your emergency fund is what's gonna cover you for you know three to six months of living expenses so with this being said if they do have an emergency and all their money is indeed tied up in a brokerage account or in a 401k for example this forces them to encourage stupid penalties and taxes and fees or taking even even dumber they're taking loans against their 401k because they need to use that money for an emergency so it's gonna end up costing you more it's gonna end up wiping out a lot of your return because you're having to dip into the market maybe at an inopportune time okay so the markets down the emergency happens you're gonna have to touch that money in that account anyway so build up your emergency fund first okay so having enough money to invest is more important than actually just being in the market itself that's my personal opinion so if you don't have enough and money if you don't have enough money to invest in the first place I focus on building up that emergency fund then deciding whether to invest or pay down debt so as always you guys I know this was an earth-shattering stuff it just helps you flip the paradigm in your head and get the gears moving to understand hey should I really pay off this debt or should I invest so I know I didn't go into mathematical numbers there's other videos on YouTube that do that I wanted to keep this super high level because most of the people watching this channel they're people who really enjoy learning about finances and personal finances but they were never taught it so I think if I go into the mathematical aspect it'll kind of give you like analysis paralysis and you won't even take action on anything so rewind the video look at the four questions I asked you know yourself better than I do and you can make a decision from that point thank you so much you guys if you got value out of the video always give it a thumbs up share the video with one friend and subscribe if you haven't already and as always have a prosperous day

Channel: Marko - WhiteBoard Finance

Views: 354,561

Keywords: invest or pay off debt, pay off debt or invest, should you pay off debt or invest, should you invest or pay off debt, investing vs paying off debt, should you invest, should you pay off debt, paying off debt tips, invest, financial education, personal finance, retirement, paying off debt on a low income

Id: Mcg0QMI1qpE

Length: 13min 39sec (819 seconds)

Published: Wed Aug 28 2019