RPF0600-A_Complete_Answer_to_Whether_You_Should_Pay_off_Debt_or_Invest
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00:00:30.000 | Guess who's back?
00:00:32.000 | Back again.
00:00:34.000 | Joshua's back.
00:00:36.000 | Tell a friend.
00:00:38.000 | Guess who's back? Guess who's back? Guess who's back? Guess who's back? Guess who's back?
00:00:44.000 | (Humming)
00:00:46.000 | My friend, you have no idea how hard it is to be a professional podcaster and entirely lose your voice for weeks.
00:00:53.000 | But man, I am glad to be back.
00:00:55.000 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less.
00:01:05.000 | My name is Joshua and I am indeed back.
00:01:09.000 | And today, I am so excited to get back to some nuts and bolts of actual technical finance.
00:01:15.000 | And I want to talk to you about one of the most frequently asked questions that I am always asked, which is, namely, do I pay off debt or do I invest?
00:01:24.000 | And I want to give you the brutal reality to help you decide this question for yourself.
00:01:30.000 | Because you need to understand all the different facets of this question in order to understand what you should be doing in your actual situation.
00:01:39.000 | So the question, the listener writes in and says, "Joshua, thank you for all you do, very kind comments, etc.
00:01:45.000 | Question on my wife's and my mind at the moment concerns prioritization of money that we are able to save.
00:01:52.000 | Thankfully, we have a savings rate of $2,000 per month.
00:01:56.000 | But between the two of us, we still have around $95,000 in student loan debt, with interest rates on the individual loans ranging from 3% to 8%.
00:02:07.000 | We have decided against saving for a house at the moment, but are not sure if the right move is to throw all of our savings each month to the loans, avalanche style, and eventually pay them down completely,
00:02:18.000 | or to first put money into retirement, Roth IRAs, company matched 403(b), all of which are Vanguard index funds,
00:02:26.000 | so that we don't miss out on the compounding interest that's possible over the coming decades.
00:02:31.000 | We are 31 years old.
00:02:33.000 | The start early and invest regularly idea echoes in my head constantly to capitalize on long-term gains and compounding, as does the idea of good debt,
00:02:44.000 | which is the kind like student loans could potentially be if they serve as income boosters.
00:02:48.000 | At the same time, the Ramsey-esque idea that debt should be avoided like setting your hair on fire speaks loudly to us also.
00:02:55.000 | Thank you so much in advance.
00:02:58.000 | There are three important areas of analysis that you need to apply to this question.
00:03:04.000 | Let's start with the technical, mathematical, financial analysis.
00:03:10.000 | It is very simple.
00:03:12.000 | The mathematical answer as to whether you should pay off debt or invest is 100% determined by interest rates.
00:03:25.000 | I repeat, the mathematical answer is 100% determined by interest rates.
00:03:35.000 | If the rate of interest that you are paying on your debt is higher than the rate of interest that you can earn on your investments,
00:03:50.000 | then you should pay off debt.
00:03:55.000 | If the rate of interest that you are paying on your debts is lower than the rate of interest that you can earn on other investments,
00:04:06.000 | then you should not pay off debt.
00:04:09.000 | You should invest.
00:04:12.000 | It really is as simple as that.
00:04:17.000 | For example, all of the question about putting money in early in this case is immaterial.
00:04:25.000 | You don't even have to factor that into your calculations.
00:04:28.000 | It doesn't matter.
00:04:29.000 | It all comes down to your interest rates.
00:04:33.000 | Now what you do need to do is you do need to properly calculate which interest rate is superior.
00:04:41.000 | And here you have to look at the net interest rate in order to understand the mathematical solution to this problem.
00:04:52.000 | What do I mean by net interest rate?
00:04:55.000 | Well, on the positive side, you have to look at how much you would earn on an investment net of expenses such as taxes or fees.
00:05:11.000 | Now, if you are investing using retirement products such as Roth IRAs and company sponsored 403b plans,
00:05:19.000 | then taxes will go away as a cost, but they will have to be factored in as an additional benefit.
00:05:29.000 | Because, for example, if you invest your money into that company sponsored 403b plan and you take a tax deduction,
00:05:37.000 | now that's an additional what's equivalent to an interest rate, an additional return.
00:05:45.000 | You would then have to pull off your fees if you're paying any substantial fees,
00:05:49.000 | be they fees with the actual mutual funds that you're investing in or be they fees with the overall investment vehicle,
00:05:56.000 | the 403b plan that you're investing through, or if they're fees of any other kind of investment, you have to factor those fees in.
00:06:03.000 | So you have to figure out your net interest rate because it's the net interest rate that matters.
00:06:09.000 | So you look at your positive return of your investment and you say, what do I expect to earn from?
00:06:17.000 | And in your case, you're specifically stipulating that you're investing in mutual funds.
00:06:22.000 | So you would look at it and say, what do I expect to earn from these mutual funds?
00:06:28.000 | What is the actual net rate of return that I expect to earn?
00:06:33.000 | And you, of course, have to factor in market fluctuations. You have to factor in dividend flows into your total return.
00:06:40.000 | You then factor in your tax savings. You factor in your company match. Very important.
00:06:46.000 | If you're getting a 25 percent boost because they're matching you a dollar for four, that's a really powerful increase in your returns.
00:06:54.000 | Now, you factor in all of the positive benefits of investing and you try to guess at what you think you would actually return in your funds.
00:07:04.000 | Then you go over to your debt and you try to factor in all of the costs of your debt.
00:07:10.000 | Here is where there is a very big difference between debt that is at 3 percent versus 8 percent.
00:07:16.000 | And so you would have to look at each of your student loans, the percentage of interest that you're paying.
00:07:21.000 | But then you look at any discounts that you're entitled to.
00:07:25.000 | For example, are you participating in a program like the student loan forgiveness program?
00:07:29.000 | You don't say that you are, but if you're using a 403(b), that's a nonprofit sector and you might be a teacher or something like that.
00:07:37.000 | So you factor in that type of thing and you calculate what your net interest is that you're actually paying if you're pursuing something like that.
00:07:44.000 | Or you calculate any deductibility of student loan interest that you may be entitled to on your tax return.
00:07:49.000 | If you're able to deduct some of your student loan interest, that will help you to receive a discount.
00:07:54.000 | And now that may make the effective interest rate go from 5 percent to 3.5 percent because you can deduct it against your taxes.
00:08:03.000 | Now the actual facts of your situation will start to become apparent as you do this analysis.
00:08:12.000 | It's possible that when you do this, the numbers will be very close.
00:08:16.000 | But it's also possible that the numbers would be very far apart.
00:08:20.000 | Assume for a moment that you have, let's say that most of your debt is actually at 3 percent.
00:08:29.000 | And that 3 percent is deductible under your current tax filing system.
00:08:34.000 | And so you can get a small discount on that depending on your income, et cetera, and you try to figure out that number.
00:08:39.000 | And so now the net cost of that 3 percent has declined to, debt has declined to 2.5 percent.
00:08:45.000 | Now on the flip side, you're investing in very low cost investments that have a high probability of a long, over the long term of earning a very high interest rate.
00:08:55.000 | You're heavily stock based. You're getting a dollar for dollar employer match.
00:09:00.000 | And you have all of these extra bonuses and you're getting the tax savings.
00:09:05.000 | And in your case, that's so helpful to have those tax savings as far as what I mean by contributing to a 403(b).
00:09:11.000 | Now in this situation, it's very hard to stomach the idea if you were getting in a situation like that, a dollar for dollar match, contributing to 403(b).
00:09:19.000 | It's very hard to stomach the idea of paying off 3 percent debt while giving up dollar for dollar matches and putting it into funds that could return a net 7 percent, 8 percent.
00:09:31.000 | Because mathematically, that makes a big difference over the long term.
00:09:34.000 | It's not when you started saving. It's not the time period in this case. It's the interest rate that's the difference.
00:09:41.000 | It all comes down to the interest rate.
00:09:45.000 | If you will get a higher interest rate in your investments, then you will mathematically be wealthier by investing than you will be by paying off debt.
00:09:58.000 | That is a mathematical certainty.
00:10:01.000 | So why is this so difficult?
00:10:03.000 | Well, predicting the mathematical certainty is very difficult.
00:10:08.000 | And here's where there are all kinds of personal behavior challenges that come in, all kinds of market timing challenges that come in, and all kinds of predictability challenges that come in.
00:10:19.000 | Why do I say those things?
00:10:20.000 | Well, personal behavior.
00:10:21.000 | There's been good evidence created over the years to show that most investors significantly underperform their own investments, some by even as much as 50 percent.
00:10:32.000 | So although you might look and say, well, the historical return of the stock market is blah, blah, blah percent, let's say it's 8 percent.
00:10:38.000 | Well, there's good evidence to show that most investors get 4, because they do foolish things.
00:10:43.000 | They go in and out at foolish times.
00:10:46.000 | And so where before paying off that 3 or 4 or 5 percent debt didn't look so good because you were comparing it up against an 8 percent rate of return.
00:10:55.000 | When you actually look at the reality, most people don't get that 8.
00:10:59.000 | Not that they couldn't, they just don't.
00:11:02.000 | And so it's hard to adjust most people's behavior.
00:11:05.000 | What about the market?
00:11:07.000 | There are some market periods where the return of your investments is just shooting up.
00:11:13.000 | You know, the last years have been just like that.
00:11:16.000 | If you were doing an analysis and a number of years ago you paid off your debt and you were looking at financially where you would be today if you had just stayed invested in the broader stock market with your index fund, you would have been embarrassed.
00:11:29.000 | Because you would have been better off financially to have stayed invested.
00:11:35.000 | Problem is we don't know what tomorrow holds.
00:11:38.000 | And then we face this problem of trying to compare a guaranteed return of paying off debt where you know this return is guaranteed versus a non-guaranteed return.
00:11:51.000 | You don't know what the market return will be over the next few years.
00:11:55.000 | And when you add in additional things like the sequence of return risks as far as, yeah, over the long term it will work out I think, but when you're actually buying in, maybe it all works out the wrong way.
00:12:07.000 | Maybe you are investing, investing, investing and the market is down, down, down for the next few years and now you're stuck with a low investment portfolio and still a big pile of student loans.
00:12:18.000 | And that's a frustrating place to be and we don't know the future.
00:12:21.000 | We don't know how these things work out.
00:12:23.000 | If you did know, it would all be about the math.
00:12:27.000 | But because we don't know, it's a little harder.
00:12:31.000 | So hear me loud and clear, the mathematical financial answer to your question of should you pay off debt or invest is 100% related to interest rate.
00:12:47.000 | The net interest rate of either choice.
00:12:51.000 | Remember to calculate net for your investments, pull off any costs, costs such as taxes, costs such as fees, commissions, advisory fees, add any additional benefits such as employer matches or such as any tax benefits.
00:13:11.000 | And then you do the same with your cost of your interest.
00:13:15.000 | And you look at it and you say, what about the cost of the interest of the debt?
00:13:21.000 | Is it deductible in any way?
00:13:24.000 | Is there any way to have some of it forgiven?
00:13:26.000 | Can I renegotiate that interest, etc, etc?
00:13:29.000 | It's mathematically all related to interest rates and whichever interest rate is higher, that's the one you should do.
00:13:39.000 | But we need to also analyze this on at least two other fronts.
00:13:46.000 | The second front has to do with your own time period of focus and financial change.
00:13:54.000 | And the key here is your personal motivation.
00:13:58.000 | Would you find it more motivating to save and invest money or would you find it more motivating to pay off debt?
00:14:08.000 | Because that motivation will cause you to do different things.
00:14:13.000 | This is the secret of why the Ramsey-esque idea that debt should be avoided like by like setting your hair on fire or just getting out of debt so quickly.
00:14:24.000 | This is why it's so compelling.
00:14:27.000 | The key is motivation.
00:14:29.000 | Most people will have a clearer vision of what debtlessness means than they will of what it means to save money for retirement.
00:14:39.000 | Most people, especially most 31 year olds, can more clearly understand how their life will be affected by being debt free.
00:14:49.000 | Then they can clearly understand how their life will be affected by their retirement account balances at 65.
00:14:57.000 | Most people can clearly imagine what their life would be like if they have no debt.
00:15:02.000 | After all, they know the numbers.
00:15:04.000 | You can get those numbers very, very quickly.
00:15:06.000 | Just pull your credit report, find out how much debt you have.
00:15:08.000 | And so most people can grasp that.
00:15:12.000 | And most people's debts are relative to their income.
00:15:16.000 | And so not only does that make these debts conceivable.
00:15:19.000 | So for example, with $95,000 of student loan debt between you and your wife, I assume that both of you are well employed.
00:15:26.000 | Because you should be.
00:15:27.000 | You paid a lot of money for a college degree.
00:15:29.000 | Hopefully that college degree bought you access into a great job.
00:15:33.000 | So now you have a lot of money and you can pay down that $95,000.
00:15:38.000 | Now somebody who doesn't have a good job, they may have $9,500 and they have a $9,500 problem.
00:15:44.000 | Most of our debts are relative to our income.
00:15:47.000 | So if we focus on them, we can create a plan to get debt free fast.
00:15:53.000 | Most people who are earning $2,000 a month don't owe $100,000 in debt.
00:16:00.000 | I hope that that's coming through.
00:16:01.000 | They may owe $7,000 in debt.
00:16:04.000 | And so because they can make a plan and they can clearly visualize the outcome of having no debt.
00:16:12.000 | And they can see how they can get there in a reasonable amount of time.
00:16:16.000 | Then now they can put in place the power of clear goal setting.
00:16:22.000 | It's a very unusual person who is motivated at 31 years old to have a clear goal of a $7 million portfolio at age 65.
00:16:35.000 | That's very unusual.
00:16:37.000 | But many people can grasp the simplicity of zero debt.
00:16:44.000 | It's easier, of course, to grasp the concept of zero than the concept of $7.2 million of inflated, you know, inflation adjusted portfolio balance, blah, blah, blah, blah, blah.
00:16:54.000 | So they can grasp zero debt and most people can grasp 12 months or 18 months or 24 months.
00:17:02.000 | And that's the power because once somebody can grasp that simple goal, then they can start working on it.
00:17:07.000 | That focus, that ability to clearly visualize what my life will be like if I had no debt.
00:17:14.000 | Because as they're writing out that monthly credit card payment or as they're sitting there seeing that student loan debt pulled from their checking account, they can look and say, man, I would like to do something else with that $300.
00:17:24.000 | After all, if I had that $300, then a weekend trip away would be no big deal.
00:17:28.000 | I could do that every month, but instead I've got to pay the stupid debt.
00:17:32.000 | So the power of that clear focus is what creates change in their life.
00:17:39.000 | And the power of that clear focus leads people to work more, to earn more, and to spend less.
00:17:48.000 | And it's that clear focus that motivates people to change their lives, to create excess cash flow because they're changing their behavior.
00:17:57.000 | They're working more, earning more, and spending less. And that change of behavior creates excess cash flow, which can now be funneled into your plan.
00:18:07.000 | Now the question is this.
00:18:12.000 | The mathematical constant still holds.
00:18:17.000 | The excess cash flow should be diverted to wherever the highest interest rate is, towards paying off the debt or towards saving for the future.
00:18:28.000 | It should be diverted there.
00:18:30.000 | But would that excess cash flow have been created if the goal were savings and not getting out of debt?
00:18:44.000 | And for most people, the answer is no.
00:18:51.000 | You might be very motivated to fully fund your 401k or your 403b.
00:18:56.000 | You might be very motivated to fully fund your Roth IRA.
00:18:58.000 | And if you are, and if that's motivating you to work as much as you can, earn as much as you can, spend as little as possible, awesome.
00:19:10.000 | But most people are not motivated by that.
00:19:14.000 | They're also not motivated by it for an extended period of time because there's no reward.
00:19:23.000 | There's no payoff.
00:19:25.000 | And this is what's so powerful about being focusing on paying off debt.
00:19:30.000 | When someone like Dave Ramsey, his entire idea, his entire program is built on this concept of short-term goal achievement.
00:19:42.000 | You will almost never hear him talk to somebody and accept a plan that takes somebody five years to get out of debt.
00:19:50.000 | Now, there may be a reality that some of those unusual situations, somebody has massive medical debt or massive failed business, et cetera.
00:19:57.000 | Like those things do occur.
00:19:59.000 | But he's all about the one year, two year plan.
00:20:02.000 | And people can hold that in their mind.
00:20:05.000 | That's a human scale.
00:20:07.000 | 40 years is not a reasonable scale for most people.
00:20:11.000 | It's a very, very small percentage of the human population that has the ability to think in that long time perspective.
00:20:19.000 | Those that do are very successful, but that's a very small percentage of the population.
00:20:24.000 | There's a much broader percentage of the population that can think in that one to two year time period.
00:20:29.000 | And so when somebody says, we're going to get out of debt one year from now, they're working and saving and spending nothing and paying extra.
00:20:38.000 | And that emotional energy creates far more money than the emotional energy about I'm fully funding my retirement accounts.
00:20:50.000 | Is this coming through?
00:20:51.000 | Do you see how clear this is?
00:20:53.000 | It's that extra money that when fat funneled into the equation can make one of these choices writer, but writer, I may be back, but I've lost my ability to speak English better or worse.
00:21:06.000 | So now let's say that your net interest rate of your debt was 4% and your net interest rate of your investments was 7%.
00:21:17.000 | But the person who's paying off debt not only takes the $2,000 per month of, of excess that they have now, but they put another $2,000 a month of additional income and additional savings behind it.
00:21:29.000 | So now they're paying $4,000 because they're motivated to get out of debt.
00:21:33.000 | Whereas the person who is just saving money for the future only has the $2,000 and they're not motivated to increase that.
00:21:40.000 | They don't want to work all those extra hours because it's a 40 year timeline.
00:21:46.000 | I've got plenty of time.
00:21:47.000 | I'm going to have plenty of money with the $2,000.
00:21:49.000 | And so now the person who puts the $4,000 into the debt, they will be richer, not because of interest rates, but because of that extra $2,000 that the power of focus on debtlessness created.
00:22:02.000 | So it's all about that ability to focus.
00:22:06.000 | And if that focus and that clear goal setting creates change, then it's powerful.
00:22:14.000 | My experience has been as much of a money nerd as I am, I am.
00:22:20.000 | I have always been much more enthusiastic and motivated to pay off debt than I have ever been to save for a long-term goal.
00:22:32.000 | Now, should it be that way?
00:22:34.000 | I wish it weren't, but we're not robots.
00:22:37.000 | We're emotional creatures.
00:22:39.000 | And it's an emotional fact that that has been my experience.
00:22:43.000 | I envy those people who don't seem to function in that same emotional way.
00:22:48.000 | They seem to have as much clarity about their long-term accumulation goals as anything else.
00:22:54.000 | They exist.
00:22:55.000 | But I've always found that when you nurture a hatred for your debt, it gets you out of bed earlier, gets you in bed later, and it gives you a clear thing towards saving money.
00:23:06.000 | And when you're paying off debt, you have such neat charts and things that you can build that just give you an idea.
00:23:14.000 | Just one of the silly thing I used to do when I was paying off debt.
00:23:17.000 | I used to, when I was going out to dinner or spending some money and I forewent an expenditure that I would have liked to have engaged in, but I forewent it because I was paying off debt.
00:23:33.000 | I would always give myself the immediate gratification of paying that immediately.
00:23:37.000 | So, for example, if I said, you know what, I would really love to have a nice glass of red wine with this dinner, but it's $8.50 and I'd have to tip, I would pull out my cell phone and I would say, I'm going to move $10 and I'm going to go ahead and make a $10 micropayment over towards that debt payment because I'm going to get this debt gone.
00:23:56.000 | And I would do it right then and there.
00:23:58.000 | So I'd have the experience of actually knowing, hey, I've changed my decision and that's helping me get to my goal.
00:24:07.000 | I have never once been motivated to make that decision when I'm working towards an accumulation goal.
00:24:12.000 | Accumulation goals, they only work for me if I just put them on autopilot and continue, but I've never been motivated to do all that much more for long-term accumulation goals.
00:24:22.000 | I have been about certain purchase items and things like that, but the only way I've ever been able to motivate myself towards long-term goals has been by putting in place overall constraints.
00:24:33.000 | Let's move on to the third area of analysis and we'll wrap this up.
00:24:37.000 | What about the lifestyle impact of either of these decisions?
00:24:44.000 | You can make an argument that either way, the financial benefits of the lifestyle should be identical.
00:24:52.000 | Meaning it shouldn't be the case that having debt or having savings, it shouldn't be the case that they're any different.
00:25:06.000 | If you could make a $500 payment towards your debt, but you instead put that $500 payment into your Roth IRA and you just view your Roth IRA as a savings account.
00:25:16.000 | If three months from now you want to take that $500 out of your Roth IRA and pay it against your debt, it should be equivalent.
00:25:23.000 | After all, that may be one month's payment.
00:25:26.000 | I make those arguments myself.
00:25:29.000 | You should be able to free your mind and just make any decision that you want, simply knowing that you have $100,000 in the bank.
00:25:36.000 | And if you have $95,000 in investments and $95,000 in debt, you're in exactly the same place that you would be if you paid off the $95,000 and had no money.
00:25:47.000 | It should be that way.
00:25:50.000 | For some people, it might be that way.
00:25:54.000 | I'm unconvinced that for most people it is that way.
00:25:59.000 | I think real life has proven to me and to many others that the concept of being debt free is much more in tune with the human capacity for planning than the concept that I just am a robot and I have all these complex financial spreadsheets and I am able to think the same way.
00:26:22.000 | Somebody who has zero debt is going to think differently than somebody who has debt and the same amount of money in the bank, at least when we're talking for most people and in most circumstances.
00:26:39.000 | I concede.
00:26:40.000 | I wish we could all be smart people, but I think the reality is we have a far higher estimation of our capacity for complex reasoning and complex mathematics than we should.
00:26:53.000 | The story that disabused me of that concept was when I was in college.
00:26:57.000 | I studied the long-term capital management debacle.
00:27:00.000 | And the short version is back in the mid 90s, long-term capital management was founded as the most incredible hedge fund that was going to be completely driven by the smartest people in the world with the smartest formulas and strategies in the world.
00:27:18.000 | And it wound us up almost sinking the global economy, especially the Southeast Asian economy.
00:27:23.000 | It was a nightmare because people thought they were smarter than they were.
00:27:28.000 | And I've seen that again and again and again in human terms.
00:27:32.000 | There are some people who are smart.
00:27:34.000 | It wasn't that their formulas were all wrong.
00:27:36.000 | It wasn't that there weren't smart people, but people who are smart, who build their world on complex spreadsheets and have leveraged forms of finance coming in and investments over there.
00:27:48.000 | A lot of times that game gets out of hand.
00:27:50.000 | It's just bigger than the human capacity.
00:27:52.000 | Not all the time, but a lot of times.
00:27:55.000 | Whereas on the other side, there are a lot of people who approach their life very simply.
00:28:00.000 | And because they're capable of sticking with the plan, they can just, they can make it work.
00:28:07.000 | It's on a human scale.
00:28:10.000 | I also think things like getting out of debt work well in terms of the psychological games that we play with ourselves around goals.
00:28:17.000 | Giving names to money.
00:28:19.000 | The human brain doesn't seem to have a good concept for numbers, especially numbers that are always changing.
00:28:24.000 | We have to constantly inflation adjust our numbers.
00:28:26.000 | We constantly have to adjust our numbers for taxes and fees and costs and simplicity works.
00:28:35.000 | So when you think about the lifestyle of somebody who's debt free, I think they'll enjoy that lifestyle oftentimes a lot more than somebody who has complex systems.
00:28:50.000 | Now, I don't say that's absolutely true.
00:28:53.000 | And what happens is in different stages of life and in different types of business, you just simply outrun your ability to even ever possibly be debt free.
00:29:04.000 | Or it just doesn't make any sense for you to not set things up in a more complex way for various reasons.
00:29:15.000 | But for most people, because they can understand the simplicity of the lifestyle of saying, "Hey, I'm going to be out of debt," it's a really powerful emotional thing.
00:29:27.000 | And here's where, again, you have to then think about you and your wife, your own personal emotions, your families, etc.
00:29:35.000 | And consider what will be helpful to us.
00:29:38.000 | I believe there's a real power in that idea of being debt free.
00:29:42.000 | So those are the three areas that I would recommend that you focus on.
00:29:46.000 | You have to know the actual numbers because mathematically those numbers make the difference.
00:29:53.000 | You have to look at what the time period of focus is and ask yourself, "Will I be more motivated to work a lot more and save a lot more and spend a lot less if I'm saving money or if I'm paying off debt?"
00:30:10.000 | And then think about what lifestyle changes would be possible for you if you did or did not pay off debt or if you did or did not invest.
00:30:17.000 | Now, for most people, if you work that process through, you'll start to come to your own conclusion.
00:30:26.000 | Let me give you a few examples here to show you how this can be different for different people.
00:30:32.000 | I'll begin with an example that's not you.
00:30:36.000 | If you had somebody who was relatively low income, meaning maybe a household income of $40,000, something like that, and they had $3,000 of credit card debt just always nipping at their heels, and they looked down and they sent a $6,000 boat payment.
00:30:53.000 | They looked down and said, "We don't use the boat. We can just sell the boat, and we can have this credit card debt paid off in about six months if we really just start saving a little bit of money, spend an extra 500 bucks a month over to it."
00:31:05.000 | That's the best thing they can do, because six months and then being free of the nagging frustration of that, and then if they're willing to stop using the card, so then from now on, they never accumulate it, which changes their overall spending habits.
00:31:18.000 | They don't spend too much on family vacation. They don't spend too much at Christmas time.
00:31:21.000 | They actually plan ahead and save money, so when the transmission goes out on the car, they have the money for it, et cetera.
00:31:27.000 | That is so much more powerful in terms of behavior modification than them saving an extra money in the Roth IRA, because the Roth IRA doesn't have any behavioral impact.
00:31:38.000 | They might put the $500 into it, but it doesn't have any behavioral impact.
00:31:42.000 | They'll keep the $3,000 of debt, just paying the minimum, and then next Christmas, they'll overspend.
00:31:47.000 | And the next time the transmission goes out, they won't have an emergency fund.
00:31:51.000 | And so if I were coaching somebody in a scenario like I've just made up, I would say, "Pay off this debt in six months and just stop these stupid games.
00:31:58.000 | Don't borrow money for stuff.
00:32:00.000 | Your situation is probably different.
00:32:04.000 | You have a lot of student loan debt.
00:32:07.000 | You don't have any other debt.
00:32:09.000 | My guess would be that you went to school and took this on intentionally as good debt, wanting to increase your earning ability.
00:32:19.000 | If you're able to have an excess $2,000 per month, there's a good chance that you have decent household income between you and your wife."
00:32:28.000 | So now I would look at that and say, "Hey, what are the benefits here?"
00:32:32.000 | And there is a very strong chance that you should at least make sure that you fund company-matched 403(b)s, because when you take company matches and you take tax discounts and you take potential deductibility of student loan interest, it's hard for me to see that you shouldn't at least take company matches.
00:32:55.000 | But I would probably just take company matches and then pay off the debt, especially the 8% debt.
00:33:02.000 | And of course, you should keep on doing everything you can to renegotiate those interest rates, get that down as much as possible, refinance that debt to wherever you can that's cheaper.
00:33:10.000 | But I would probably do both, because you probably have the financial head that you can keep a track on both.
00:33:17.000 | Now, there are scenarios in which I would say to somebody, "Don't even bother paying extra on the debt."
00:33:24.000 | The type of scenario where I would say to someone, "Don't bother paying extra on the debt. Just make the minimum payments if you can," is when there's no possibility of a short-term behavior modification paying off the debt.
00:33:39.000 | I've worked with a number of clients who are business owners.
00:33:42.000 | And some clients who started their business with just nothing but credit cards and some personal loans and mortgages on their house, and they wind up so deeply in debt with a business that could go gangbusters.
00:33:54.000 | They're so deeply in debt, there is no possibility of their paying it off just by a little extra frugality.
00:34:02.000 | It becomes almost laughable to say, "Well, if you spent $100 less on groceries this month, then that would enable you to pay off your debt. Instead of it taking you 432 months, it would only take you 430."
00:34:22.000 | It's just laughable in some situations.
00:34:25.000 | The only way to solve those situations is for the business to either succeed or to completely collapse.
00:34:32.000 | And when it succeeds, the money just rolls in and you stroke big checks and you pay off the debt.
00:34:37.000 | And so I've been in several situations like that where I've just counseled the person, "Don't worry about it. Don't try to be super frugal."
00:34:44.000 | That's another thing that sometimes when somebody's in a phase where they're making these big business payments, sometimes the idea of being frugal on little things, you know, stressing out about how much they're spending on groceries, whether they're spending $1,200 a month or $1,000 a month, stressing out over that $200 decision.
00:35:05.000 | When they're over here, they're making $200,000 decisions left and right and just waiting for the business to pop.
00:35:11.000 | It's stupid to stress someone out over that.
00:35:14.000 | You just say, "Wait, in a few years, we'll sell the company, the funding will come in, this product is going to market," and you get to it.
00:35:22.000 | And so there are many of those situations where you just say, "Invest. Invest. Don't pay off the debt. Just keep the minimum payments until you get a bunch of excess cash flow."
00:35:31.000 | Then when the profits start rolling in, you just write $100,000 checks, pay off all the credit cards, pay it all off and move on.
00:35:37.000 | I'm not recommending that. I'm showing how there are three different scenarios.
00:35:41.000 | My guess would be your scenario is in the middle where you should do some investing and you should do some debt repayment.
00:35:49.000 | But that's the method of analysis.
00:35:53.000 | If you will do the analysis for yourself, you actually study the costs, the actual costs, actually study the investment returns, the actual investment returns.
00:36:05.000 | And one comment on that business scenario.
00:36:07.000 | When we're talking a business scenario like I described, I'm just thinking of a couple of people that I worked through that with.
00:36:15.000 | The investment returns, we're talking thousands of percent in terms of when you start an early company and you found it and you're getting through those first few years to profitability.
00:36:26.000 | Thousands of percent, especially companies that are scalable.
00:36:31.000 | And then you're looking over here at a piddly 20% credit card interest rate. Big deal.
00:36:36.000 | It's like, I don't even care about the credit card interest rate.
00:36:39.000 | That's immaterial compared to these thousands of percent opportunity over here with this business that can completely blow up.
00:36:46.000 | That's a that scenario. It all comes down again to the interest rates.
00:36:51.000 | That's very different scenario than somebody who's an employee and who say, I'm going to put money into index funds.
00:36:57.000 | You're not going to get thousands of percent rate of return with Vanguard.
00:37:00.000 | It's not going to happen.
00:37:03.000 | And so in that case, you compare it more deeply.
00:37:06.000 | So it all comes down to what's the actual interest rate.
00:37:10.000 | What about your time period of focus?
00:37:15.000 | And what lifestyle will be created for you one way or the other?
00:37:22.000 | And let me show you with that period of focus, how different those those three scenarios that I made up.
00:37:31.000 | Let's use the number one period of focus for the the forty thousand dollar employee household.
00:37:38.000 | If they get just stop using credit card debt, that'll materially massively improve their life.
00:37:42.000 | They stop using credit cards and to be out of debt. That'll be great.
00:37:45.000 | It'll be just such a sense of psychological freedom that they know that the little extra money in the checking account each month is available.
00:37:52.000 | That is an absolute benefit for that entrepreneur who's building the multimillion dollar company.
00:37:59.000 | Who is has one hundred thousand dollars of credit card debt for them to pay a little extra.
00:38:06.000 | They don't the company's not making money.
00:38:08.000 | They don't have the money to even pay the debt down.
00:38:11.000 | So there's no possibility that short term intense focus on the debt could make a difference.
00:38:17.000 | But the short term intense focus on building the company could make a huge difference where they turn it into a five million dollar sale.
00:38:25.000 | Eighteen months from now.
00:38:27.000 | And so that's where you apply that area of focus and you say, hey, it's going to make a big difference if I just put it put it on the investment here.
00:38:34.000 | And then the lifestyle, same thing for the for the entrepreneur who has no money, who's living on credit cards, has one hundred thousand dollars of credit card debt.
00:38:41.000 | Hang it off.
00:38:42.000 | They're still going to be broke.
00:38:43.000 | They're going to be just as broke if they pay off the credit card debt as if they don't.
00:38:45.000 | They're just broke either way.
00:38:47.000 | But if the company works and they could sell for five million dollars 18 months from now or get a new round of funding, et cetera, then now their lifestyle is in a completely different realm and they can just pay off the debt very quickly.
00:39:02.000 | So these methods of analysis, if you walk through them for yourself.
00:39:07.000 | You'll have the financial answer.
00:39:09.000 | You'll have the behavioral answer and you'll have the lifestyle answer.
00:39:13.000 | And I believe that will help you as a close today show.
00:39:16.000 | I remind you, my newest course, the Radical Personal Finance Guide to my title stinks.
00:39:23.000 | I can't even remember it.
00:39:25.000 | How to save money and never pay interest using credit cards.
00:39:29.000 | Sorry, I just blanked on it for a moment.
00:39:32.000 | It is open and available to you.
00:39:33.000 | Radical personal finance dot com slash credit card course.
00:39:36.000 | If any one of those three scenarios I made up, number one, if that person had listened to me in taking my credit card course, those just forty thousand dollar standard employees, kind of middle America type of person.
00:39:52.000 | If that person had taken my credit card course, they never would have been in credit card debt in the first place.
00:39:57.000 | And so if you're that person or you know that person, you should go to radical personal finance dot com slash credit card course and buy my course.
00:40:03.000 | If you are ninety five thousand dollars in student loan debt and you have no other debt, but you have two thousand dollars of extra extra extra per month, you should seriously consider taking my credit card course because you might learn some things and you might or might not.
00:40:17.000 | But you might start to establish credit cards and start refinancing some of your eight percent student loan debt over to zero percent credit cards while you're saving up the money to pay those suckers off.
00:40:28.000 | So while keeping your three percent student loan debt around now, of course, you need to do the math, but you would benefit by going to radical personal finance dot com slash credit card course and buying my credit cards.
00:40:38.000 | And once again, if that entrepreneur, if those entrepreneurs or those of you who are future entrepreneurs like that, you should go to radical personal finance dot com slash credit card course and you should sign up and take my credit card course.
00:40:50.000 | I will teach you not only how to make sure that you put in place a structure that allows you to always be able to pay your payments, to always have more money available to you cheaply than you ever need, but also to position yourself so that if you do, if your business fails and you do wind up going into bankruptcy, that you can absolve yourself of all of that debt, start another one and maybe make that one a success and do it safely and be able to get through it without dealing with piddly things like credit cards because you set up the structure in place in the beginning.
00:41:18.000 | So all of you should go to radical personal finance dot com slash credit card course and sign up and check out my new course.
00:41:24.000 | Thank you so much.