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  • Writer's pictureDarius Smith

Should I Pay-off Debt First vs Start Investing?

The Ultimate Dilemma

What some people say: "Never ever, ever start investing while you have debt. You can’t start taking risks with investing while you still owe people."

What other people say: "Make sure you start investing today, right now, this second. It doesn’t matter if you have debt because waiting is dumb."

I’m sure you’ve heard extreme arguments like these on both ends of the spectrum of the pay debt vs invest debate. I’m here to tell you, both of those perspectives can be right at the right time, under extreme circumstances. While the best solution usually lies somewhere in the middle for most people, this decision could literally be the difference of hundreds of thousands of dollars or even millions in many cases. Watch to see how you should weigh your options in many different scenarios.

A Real Story of Debt and Investment

In 2019, I had well over $100,000 in debt from credit cards, student loans, a car note, a personal loan, and even a business loan. On top of all that debt, I had just started my career and was making like $63,000/year, which was just barely enough to get by. Since then, I paid off most of that debt and currently have over $50k invested. But did I wait invest first or pay off that debt? In this video, we’ll discuss what factors you need to consider when deciding which goal to tackle first. And because you’re watching this video, you can use the debt pay off calculator I used when I got rid of over $100k in the description below.

Investing is the only way to build wealth!!! Time in the market is the number one factor when it comes to successful investing. This means you should have started investing yesterday but the next best time to invest is today, like right now.

At the same time, holding debt is probably the main reason why you feel broke now AND the main reason you can’t afford to invest. Just think about all of your minimum payments. If you didn’t have that credit card payment, or car note or whatever you spend money on every month that is extra money just sitting in your bank account every single month. It’s like giving yourself a raise. So paying off debt also seems like a mandatory first step. So what do you do?

It's Not All or Nothing

Now, let me pull back the curtain on my own financial hardships. Picture 2019 — the year I decided it was high time to tackle my finances. Did I dive headfirst into paying off my debt? Well, sort of. Did I kick off my investment journey that year? Not quite. I'd actually dipped my toes in a couple of years prior. Here's the kicker: While the struggle to make ends meet was very real, I made it a point to stash away 10% of my hard-earned income into a 401k. Now, don't get me wrong; that extra 10% wasn't a magic bullet solving all my financial problems, but it got me started.

In that pivotal moment when I decided that debt was getting evicted out of my life, did I continue investing? You bet. However, I dialed down my 401k contributions down to my employer's match, at 4%. I'm not turning down no free money they were throwing my way! So with that extra 6% and every extra dollar I could get my hands on, my main focus was demolishing those stupid high-interest debts! Because let's be forreal, financial journeys aren't about all or nothing; they're a dance, a delicate balancing act between priorities and aspirations. And hey, if you're nodding along, you're not alone. We're all in this together, navigating the twists and turns of our unique financial stories.

Rule One: Chasing Returns

Consider your debt's interest rate your guaranteed return on investment. Paying off a credit card with a 22% interest rate ensures a 22% return. On the flip side, investing introduces an element of risk, where your return on investment varies dependent on your investing skills.

Knowing your numbers becomes important, and not knowing is where you lose money. The average annual stock market return sits at 10%. Yet, other investment avenues might promise higher returns, like the risky but potentially rewarding terrain of being an early investor in a startup or diving into Airbnb ventures.

So now you compare the return on investment of paying off your debt. In my example, it was a 22% interest rate credit card, with investing in the stock market with an average 10% return on investment. The debt pay off hands down increases my net worth much more!

Rule Two: Maximizing Cashflow

Try asking yourself: What is interest costing you monthly?

My wife and I subtly celebrated a recent painful win in our finances where we emptied our savings account to pay over $20,000 in debt. This happened when we answered the question above for ourselves and realized we were paying about $900/month; not on total debt payments, but solely on the interest parts of those monthly debt payments! Two credit cards, each with +20% interest rates and their own interesting narratives became a burden. Yes, depleting our savings stung, but we are trusting the process and now we can run it back up super quick. We could have directed that money towards investments, but this route will save us so much more money than the investment would have made in the long run.

Other Pay Debt vs Invest considerations

Make sure when making this life altering decision you also consider:

  • Where will the funds to pay off debt come from?

    • Savings, investments, monthly cash flow, borrowing, equity — the options are varied.

  • Does debt make you uneasy?

    • If you can't sleep at night knowing you owe money, then focus on your metal health before investing.

  • What aligns with your goals?

    • Are you optimizing for cash flow today?

    • Are you optimizing only for building wealth?


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