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The Dilemma: Paying Off Debt or Building Wealth?
Unbroken Investing
April 13, 2024 • Estimated Reading Time: 5 minutes
Main Article Preview (Unbroken Insights): "The Dilemma: Paying Off Debt or Building Wealth?"
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Unbroken Insights
During this time of year, many people get tax refunds, and I often get the question: "Should I prioritize paying off debt or investing?"
I wish this was a super short answer, but everyone is in a different situation, so the answer is different for everyone. Here are some guidelines to help you determine the best answer for YOU.
There are two general rules you should try to follow:
You should always be doing BOTH…
Paying down debt and investing. You do not want to wait until you are 100% debt-free before you start investing…or you may never start.
You should prioritize investing over debt payoff if:
The gains you can earn from the investment are higher than the interest you pay on the debt. For example:
Investing in a CD (at 3-5% interest) or paying off a credit card (at 20-30% interest) – pay off the credit card.
Paying down the mortgage on your home (at 3-6% interest) or investing (10-12% gains or more) – invest.
With those two rules in mind, the first question to ask yourself is:
"Do I have high-interest debt (such as credit card debt) that is over 20% interest?"
If so, you should focus on paying that debt off first. Come up with a plan and ATTACK that debt. That debt is the monster keeping you from building your wealth and financial freedom. It is evil and must be stopped!
Another question to ask yourself is:
"What can I do consistently?"
If you have living expenses, a house payment, and a car payment, and you have money to also invest every month, then you should invest what you can. However, if your expenses eat up every dollar of your income, then you should figure out how to reduce your expenses. This can be done by:
Reducing expenses consistently (spending less on entertainment, meals out, etc.).
Paying down debt (credit card, car, etc.) with a tax refund so that your monthly debt expenses decrease. This decrease in expenses should free up funds so that you can invest every month consistently. That is your target goal – invest consistently every month.
OK… Let’s assume your credit card debts are under control and you have extra money every month to apply to other debt or investing – which do you prioritize? Assuming your debt is just your car payment and house payment, I would suggest putting everything you can towards investing.
Why?
Because the interest rate on those two debts is usually pretty low. You can find plenty of investments that will earn much more in gains than the interest you would be saving by paying them off. Not only that, but you are making those loans down every month already. You should start creating your wealth so you can have financial freedom.
Let me flip that around another way. I made the same choice about 8 years ago. I started creating enough extra monthly income that I could have made extra payments on my house. If I had put all my money towards paying off the house, it probably would be paid off right now…and I would be JUST STARTING to invest and build wealth.
However, I put all the money I could into investing in a variety of assets that have earned fantastic returns. By earning 20% to 100% (yes…100%) per year on that money, it has turned into enough that I could pay off the house several times.
That example goes back to the first two rules. You should be paying down debt AND investing.
You should prioritize investing if you can earn a higher return on your investments than you are paying on your debts.
Following those two rules created my financial freedom and they can do the same for you.
You can learn more on how I consistently am earning returns of 20-100% per year by becoming part of our community.