Which Comes First, Paying Debt or Investing?

In an age of the internet where everyone has an opinion to offer, I have come to take a stance on mine.

It is an age-old question.

What comes first? Paying off debt or investing?

Similar, to me, to the question of “What came first? The chicken or the egg?”

The reason that I compare these two questions is because if you ask 50 different people, other than Dave Ramsey, then you would probably get results that are split fairly evenly down the middle.

Some people hate the idea of leveraging other people’s money in order to buy anything, and some people believe that leverage is the number one way to build wealth in the United States.

I’ll talk about my opinion on both sides of the argument here shortly.


What I want to start off with is this:

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.

I have talked to a number of financial advisers, portfolio managers, and investment bankers, and many of them believe that starting early is one of the best ways to ensure that you will build wealth over the long term.

Many of these 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.

It’s like being stuck in quicksand, it seems like the more that we struggle to get out of it, the further we fall into more of it.

(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.)

Moving forward, 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 WeBull (by the way if you want to get two free stocks valued up to $1,400 then you can click here) or even a newly zero-commissioned brokerage like TD Ameritrade or Charles Schwab.

After you open that account you will most likely 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, well maybe not in today’s market. But you are 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?


The honest and true answer is that it depends.

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 at the time (and now finacee’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 to (still in progress) overcome these burdens.

We also combined $2,500 worth of new credit card debt along within the first year of our relationship because we weren’t the most financially conscience at the time and like to splurge on smaller things.

For me, 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). The story about this purchase was that it was a necessity to buy a car, however, if I could go back then I would buy a much cheaper and affordable car than what I bought.

I also had about $4,000 worth of credit card debt on my own before the start of the relationship that I was carrying along with me as well.

On top of all that, after a year or two, we bought a brand new mattress for our apartment using a payment plan for $2,700.

All of this is at a time in our lives where we were not laser focusing on our finances being improved. This is because we had yet to form a budget or start paying back our loans other the minimum payment.

However, there did come a day when we decided to start thinking about our future and new that it was time to figure things out.

So with all of this debt that we were drowning in, I decided to make a preemptive decision 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 weren’t too 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

To explain quickly, I am not using the Robert Kiyosaki definition of assets and liabilities. I am using the normal calculation.

Robert Kiyosaki defines assets as something that you own of value that brings in cash flow, if it doesn’t bring in cash flow, then it isn’t an asset.

The normal definition is just something that you own of value can be considered an asset of yours.

Now that that is out of way, let get back to my story.

So we are looking at our personal balance sheet and see that it is massively lopsided.

Our liabilities outweigh our assets ten-fold and we didn’t have a plan in place to balance it back out either.

So now what?

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


Attack the High Interest debt first.

Historically, the only debt that I could outperform on a consistent basis is the student loans, because they had an interest of below 7% and the market has typically returned a little over 7% on an adjusted year of year basis.

However, in order to balance the amount of interest that I was paying out to the student loans with the amount of money that I was bring in from investments then I would have to increase my investment account by over 3000%.

This just wasn’t plausible to me.

Then taking a look at the other liabilities that I owned, I began to realize that the interest rates were outrageous. Some of them were 4 times what the market is predicted to return!

That is when I knew that I simply had to get rid of those as quickly as possible.

So moving forward from that day, I sold all my securities in that small investment account that I had 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. In fact, I still am not completely free of this student loan debt, but I’m working on it.

The result from this?

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.

I say an immediate return because this is money that I saved right off the back from paying off the loans early. I no longer was responsible for paying the interest payments, and as I mentioned in other videos, interest payments are simply the cost that you pay to rent money.

After realizing this return, I am left with a much better looking balance sheet, but one that is still not perfect, or even good, by any means.

So not what I am I supposed to do?

I thought about this for a few days and eventually hopped on the good ole internet to see what the experts had to say.

What I found was this:


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

That sounded like a great idea. It fell in line with the idea of starting early and building wealth over a long period of time.

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

The wrong answer is buy a new toy.

The right answer is to use it to invest in assets that can provide you cash flow through passive income.

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.

Since that time, I have been introduced to this wonders of real estate investing and have been shifting my focus a little away from index fund investing and have began to save up for my first investment property.

Once I purchase this property, I will go in depth over the terms of the deal so that you can get a good understanding of exactly what it takes when purchasing a piece of real estate.

Going back to investing:

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.


Here are the Key Takeaways from today:

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.

High interest is like a set of handcuffs that is restricting you from reaching your full potential towards financial freedom.

Do you think that you miss out on some investing opportunities in the meantime?

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.

Unknown Author

Thanks for reading!


If you enjoyed this article, check out some of my other articles about investing and entrepreneurship on The Centennial Investor, and join our free Facebook group where I share my best investing practices with a team dedicated to learning more about being financially free.

If you want to watch me go over this article, check us out on YouTube below!

Let me know what you think!