Rick and I go back and forth on this when discussing whether we should pay off debt or invest. One option we’ve looked at is helping others pay off their debt, through peer-to-peer lending, that would also allow us to make money as well. The bigger, and probably more important question, is what is each individuals comfort level with their debt.
We didn’t do any investing while enrolled in our debt management plan because the our payments to our monthly financial commitments were just too high to allow us to do so.
Yeah, the debt definitely stresses us out, and as I mentioned, we have a fairly good chunk of money saved for retirement. As several have said, each situation is unique, but I tend to favor paying off debt first, especially high-interest debt. I think it’s a mistake to think of repaying debt differently than or separate from investing. I think, like some others have said, that with a DTI so high paying off debt really becomes the priority.
When you get to the point where you think you can commit to some investing without having to rely on your credit card, the 401K might be a really good place to start. Well I wrote about how I was not planning on paying more than the minimum on my student loans and I got about 40 comments disagreeing and about 3 that agreed with me haha. Interesting situation and one that I’m thankfully not having to make since the only debt we have is our mortgage. Most people feel uncomfortable about having debt and want to get rid of it as soon as possible.
The surprising truth is that some types of debt are actually good for you, depending on your goals.
When you pay off a debt that costs 15% in annual interest, it’s just like getting a 15% guaranteed annual return on your money after-taxes. On the other hand, paying down a debt that only costs you 2% or 3% after-taxes is an inefficient use of your money. Additionally, the longer your invested money grows, the more you take advantage of the power of compounding interest. The bottom line is that if you send extra money to pay down a debt, but overlook investing for retirement, you may be making a huge mistake. Sending an extra payment to your mortgage each month instead of investing in a workplace retirement account or an IRA may be a great idea—if you’ve already got plenty saved for retirement. But if you don’t have a healthy nest egg, you’ll probably earn more by investing your money now, than you would by using it to pay down an inexpensive debt.
Some or all of the interest you pay on these loans can be used to reduce your tax liability. Interest you pay on other types of debt, such as credit cards and vehicle loans, isn’t tax deductible. But in some cases, the interest is so low that you’re better off keeping the debt. For instance, if you have a car loan that’s less than 5% or an extended no-interest financing offer, use your extra cash to invest for your future instead of paying down the debt. When you finance something that’s likely to increase in value—like real estate or a business—it’s an investment. Using debt to buy an asset that will grow more valuable over time is a smart way to build wealth. Debt that doesn’t have good characteristics, such as high-interest credit cards and loans, should always be avoided. So choose your debt wisely and understand when it hurts your finances and when it can be used wisely to create a more secure financial future. It’s easy to pound our fists and say, yes, debt is, quite obviously, strangling us one dollar at a time.

According to historical trends, inflation and the advice of Warren Buffett, investing in the stock market will typically give you an annual return of 7%. Each person has a unique situation, so before you decide to invest every penny in Coke or Apple stocks, take a few steps back and do the math.
But if Kollin decides he is going to pay an additional $500 each month to tackle his debt faster, according to our calculator, he’ll knock his interest payments down to $2,428.47. However, if Kollin pays the minimum amount on his loans and invests that $500 each month for ten years, an investment calculator (at 7%) will show that he’ll be walking away with over $88,000. In other words, in this particular case, it makes more sense for Kollin to invest rather than pay off his debt faster. In other words, you shouldn’t be thinking about investing if you’re overwhelmed by credit card debt. Much like Kollin’s example, there are specific situations when investing is a much better alternative to paying off your debt faster. There’s lots of debate in the PF blogging world about whether or not people should pay off debt or invest, or do both at the same time. One minute we feel immense urgency to get the debt off our plates, and the next minute we are planning our investment strategy and how to design it to catapult us to financial independence quicker. This would allow us to invest small amounts that wouldn’t take away too much from our debt repayment efforts.
As someone with $200k in student loans at under 5% interest (some of them at 2.5%), the math is in favor of investing. From a basic math perspective, it depends on the type of debt, and tax deductions and which interest rate is higher.
Knowing that the debt is decreasing is encouraging but not seeing any type of savings or investments increasing is a little depressing. I know you may miss out on several years of investing but paying off large amounts of debt takes intense focus and discipline as you know. For those with high levels of debt though, they should probably be paying that down especially if the interest rate they are being charged is higher than what they could expect to make investing.
Mathematically, a debt payment is identical to making an investment with a guaranteed, risk-free return equal to the debt’s after-tax interest rate.
The best thing about focusing on the debt is that it frees up future money for whatever it is you want, and allows your future self much more freedom. In other words, getting rid of certain types of debt ahead of schedule could actually be a bad idea. That’s fantastic because you’d be hard-pressed to find a similar or better investment in the real world.
Investing small amounts today can yield far greater returns than waiting to invest until after you pay down a debt sometime in the future.
If your after-tax interest rate is less than what you’d earn on an investment, opt to invest your money and keep the debt instead. Most consumer purchases end up costing you two or three times the original purchase price, depending on how long it takes you to pay them off. Too often do I see people who, with good intentions, try to pay down their debt as quickly as possible.
If he continues to pay the minimum payments, Kollin will end up paying $7,535.79 in interest payments alone.
If you take away the minimum payment total ($7,535.79), that’s still a savings of over $80,000 in ten years.
For instance, if the interest rate of the debt is higher than the interest on the investment, you wouldn’t be coming out ahead by investing your excess money. Getting credit card debt under control should be a high priority for anyone who’s serious about increasing their wealth.

I mean, at least we’ll be growing more wealth as we pay off our debt, even if that debt payoff will take longer to achieve. But if you don’t put something toward investments, you might miss out on years of compounding by waiting until debt is all paid before starting. Beyond that, I think some of it has to do with an evaluation of the interest rate on your debt and then some of it has to do with personal financial goals and comfort level. That paid off in 2013 with the huge gains I was able to see, far above the interest rates of my student loans. You could invest that money money instead and make 5% to 7% after-taxes from a fairly conservative investment. For Americans individually, on average, that’s $15,611 in credit card debt, $155,192 in mortgage debt and $32,264 in student loan debt.
They think, hey, since debt is bad and I can afford to pay more than the minimum payment, I should use that money to crack away at my debt at a faster pace.
This means, in some cases, it actually makes more sense to invest excess money rather than using it to pay off your debt faster. If you want to use credit cards as a way to rack up the points, that’s fine, but pay off the debt at the end of the month, every month. As long as your debt is hovering around 6% or lower, it’s usually better to continue making minimum payments on your loan, while investing any excess funds. Plus, investment earnings could surpass the amount we’re paying on interest debt each month. We are working on an emergency fund, but obviously with the minimal amount of interest savings accounts are paying, the emergency fund isn’t going to be the investment vehicle that catapults us to massive amounts of wealth, nor should it be.
Yes, this method makes it so your debt is paid off later, but with very careful research and investing, you might be able to make more in interest income than the interest rate on your student loan debt. I think it’s ok to invest while you carry debt like mortgage, studen loans, car payment, etc. Perhaps focusing on debt but a little bit of emphasis on investing is the way to go as a general answer. I also am putting 6% into my 401k every paycheck so that I can take advantage of the 3% match that my employer offers – can’t beat free money! For too long we’ve roped a wide range of debt into one, malicious-looking lump, whether that be debt from credit cards, mortgages, student loans, personal loans or car loans. This works for major purchases, such as a home or college tuition, which would be unreasonably expensive if you had to pay the entirety upfront. They become so focused on the debt that they don’t take the time to consider investing their excess money.
By doing this, you are able to see how extra payments on your loan will affect your overall amount of debt. So, I think that making the decision between paying off debt or investing should be a gut-check. I’m more of an intense person and focus more on the debt repayment side just to get it out of the way. Instead, we need to be diving into these types of debt and discovering which types can be managed, which should be embraced and which should be avoided like the plague. There will always be risk in investing, but statistically, putting money toward investments can be the best decision for you and your bank account.

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