Debt Payment or Investing? Which Really Comes First

If you even have been slightly interested in investing in some form, then you have probably heard the phrase “the earlier you start the better” (or some variation of this) at least once or twice.

Many people will tell you that “time is on your side”, when discussing starting your investing career early, but for millennials… is starting early really an option?

Many millennials, like myself, find themselves in a situation where they are in their early 20s, facing a mountain of debt, and don’t really know where to make their next move.

(Spoiler: If you are one of the few that don’t have any debt whatsoever, then you can do yourself a favor and skip this article and go check out some of my other articles about investing and saving consistently.)

Also, If you are like me and want to be the most financially responsible person you can be, then you probably want to go ahead and open a brokerage account. Something not too expensive like Robinhood or even the new zero-commission TDAmeritrade, and begin buying securities in the hope that compound interest will work for you in the long run.

This all sounds fine and dandy, and you think that everything is going great. You are making money. Holding on to high-quality companies and love seeing your account value go up in small increments.

However..

Is investing while still in debt really a good idea?

Let’s take a look at my personal numbers in order to understand where I am coming from.

(Disclaimer: My numbers are for my situation personally. You’re own life may determine whether you are comfortable investing with a debt load and that is up to your personal discretion.)

I started out by inheriting my girlfriend’s (and now wife’s) $33,000 worth of student loans. (Thanks babe. lol)

In all seriousness, I did not feel bad about this because I understood that the system is set up for students to take on these “massive” loans in order to make ends meet with tuition and other educational fees. This is the norm for many millennials so I thought it would prove useful to showcase how I was able (still in progress) to overcome these burdens.

She also brought $2,500 worth of credit card debt along with her as well.

I had no student loans of my own, but I did have an auto loan of $12,100 for a Jeep that I purchased by sophomore year (again not the most financially conscience decision I could have made).

I also had about $4,000 worth of credit card debt on my own.

On top of all that, we bought a mattress using a payment plan for $2,700

With all of this, I decided to open a brokerage account and begin investing in securities.

Nothing too fancy, I just threw $1,000 in there just to see how it works.

Our checking accounts where to big either, just a couple thousand bucks in there as well.

So here we are, facing this balance sheet:

Assets:Rate:Account Value:
Checking Account0.01%$2,000
Investment Account8% $1,000
Totals:0.03%$3,000
Liabilities:
Student Loans4.25%$(33,000)
Auto Loan14.5%$(12,100)
Credit Cards17%$(6,500)
Mattress24%$(2,700)
Totals:(9.04)%$(54,300)

and our totals are:

$3,000 assets

$(54,300) liabilities

Now what?

The clear answer (and what I ended up doing) is:

Attack the Debt first.

Historically, the only debt that I could outperform on a consistent basis is the student loans, and in order to do that I would have to increase my investment account by over 3000%.

I sold all my securities in order to pay off my mattress first (as it was the smallest balance with the highest interest rate) and then spent the next few months paying off our credit cards, and finally the Jeep loan.

I ended up leaving the student loans for last because it would cost an incredible amount of capital, and it may be relieved through other loan programs.

The result?

An immediate return of 16.47%.

This is calculated as the weighted average interest that I saved over the course of the loan in the current year of making payments. The actual return could have been slightly less, but even if it were, it still almost doubles what I could have expected from the market.

What about after that?

Set up an investment plan that allows your to contribute consistently.

Now that you have all of that debt paid off, what are you to do with all of this extra money that you have lying around at the beginning of each month.

The answer to do is: use it to invest.

Use that same money that you used to pay off your debt and begin investing in quality companies or index funds. This is what will allow you to set yourself up for long term wealth.

Don’t like the stock market?

Save up for a down payment for an investment property.

The point is that now you have a little more freedom with directing that path that your future is headed. You are now on the pathway to financial freedom, and you must continue to think smart and work hard so that you can keep it this way.

Key Takeaways

If you want to start investing most efficiently, then eliminate most (if not all) of your high-interest debt. This will allow you to save money in the long run which you will be able to use to fuel your investing account.

Will you miss some opportunities?

Of course you will, but there will be more in the future that you will be ready to take advantage of. The key is to be patient and do things when they make the most sense financially.

If you want to start a smaller portfolio just to get started, then I think that it is a great idea. Just don’t get to overly zealous with your monthly contributions because every month that you wait to pay off your debt is a month that the compounding of interest works against you, instead of for you.

Here is a quote to leave you thinking..

The building of wealth is a marathon, not a sprint. Discipline is the key ingredient.

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