SUPPORT THESE VIDEOS:
? Patreon – https://www.patreon.com/NextLevelLife
START INVESTING FOR FREE:
? M1 Finance – https://m1finance.8bxp97.net/NextLevelLife
GET YOUR FREE AUDIOBOOKS:
? Audible FREE Trial (Includes FREE Audiobook) – https://amzn.to/2zEFqhT
? My Favorite Books – https://thefinancialghost.com/books/
START YOUR OWN SIDE HUSTLE:
? Bluehost (Start Your Own Website) – https://www.bluehost.com/track/nextlevellife/
? ConvertKit (Build Your Business) – https://convertkit.com?lmref=cdSVnQ
? TubeBuddy (Grow Your Own YouTube Channel) – https://www.tubebuddy.com/NextLevelLife
? VidIQ (Alternative to TubeBuddy) – https://vidiq.com/#_l_1ra
You’re Wrong… Paying Debt Off Early Works (4 Reasons):
Conventional wisdom suggests that paying off debt early at the expense of some of your investment money in the short term is a bad trade unless the debt you’re carrying is high interest debt like credit cards. The thinking is why would anyone want to pay off debts with 5% or 6% interest rates when they could instead invest that extra payment money into the markets and earn 7%-10%. And, to be fair, there are certainly instances where that logic makes a lot of sense. I know the title of the video is pretty black and white, but that’s mainly because in my experience the discussion surrounding this topic presents it as a very clear cut decision and I feel that there’s a bit more nuance to it that often gets lost in translation. Today I’m going to be going over 4 reasons why I feel that, in certain situations, paying off even lower interest debts can be the better approach, even if it means giving up some investment returns in the short-term.
SUBSCRIBE FOR WEEKLY FINANCE VIDEOS: https://www.youtube.com/channel/UCbsDR27rGCFdDKQVRl_tgEQ?sub_confirmation=1
WANT TO LEARN MORE ABOUT MONEY?
All of my Personal Finance videos: https://goo.gl/3qMbXW
All of my Financial Independence & (Early) Retirement Videos: https://goo.gl/R5JU8E
All of my Stock Market & Investing Videos: https://goo.gl/swSUQN
All of my Debt-Related Videos: https://goo.gl/9HkrtF
All of my Budgeting Videos: https://goo.gl/D3iiSn
All of my Side Hustles/How to Make More Money Videos: https://goo.gl/oQui48
All of my Book Summaries: goo.gl/xmWeaD
SUPPORT THIS CHANNEL:
? Patreon (Exclusive Content From Me) – https://www.patreon.com/NextLevelLife
? M1 Finance (Start Investing Today) – https://m1finance.8bxp97.net/NextLevelLife
? You Need A Budget (Excellent Budgeting Software) – https://www.youneedabudget.com/
BOOKS & EDUCATIONAL RESOURCES:
? Audible FREE Trial (Includes FREE Audiobook) – https://amzn.to/2zEFqhT
? My Favorite Books – https://thefinancialghost.com/books/
? Skillshare (Affordable Online Video Classes) – skillshare.eqcm.net/NextLevelLife
START YOUR OWN SIDE HUSTLE:
? Bluehost (Start Your Own Website) – https://www.bluehost.com/track/nextlevellife/
? Wix (Alternative to Bluehost) – https://wixstats.com/?a=30171&c=2611&s1=
? ConvertKit (Build Your Business) – https://convertkit.com?lmref=cdSVnQ
? TubeBuddy (Grow Your Own YouTube Channel) – https://www.tubebuddy.com/NextLevelLife
? VidIQ (Alternative to TubeBuddy) – https://vidiq.com/#_l_1ra
???? NordVPN (Protect Yourself & Your Business Online) – https://go.nordvpn.net/aff_c?offer_id=15&aff_id=30988&url_id=902
???? Fiverr (Hire Freelancers to Help Scale Your Business) – https://track.fiverr.com/visit/?bta=51908&brand=fiverrcpa
? Grammarly (Free online Grammar Checker) – https://grammarly.go2cloud.org/aff_c?offer_id=182&aff_id=45298
OTHER RECOMMENDATIONS:
? Check Out My Merchandise (Shirts) – https://teespring.com/stores/next-level-life?aid=marketplace&tsmac=marketplace&tsmic=campaign
#PersonalFinance #Wealth #Money
Disclaimers: All opinions are my own, sponsors are acknowledged. Links in the description are typically affiliate links that let you help support the channel at no extra cost to you.
For me, all of this is always framed against what I'm saving FOR, which is a moment when I can quit working out of obligation to earn my monthly expenses. Any monthly expense I carry into retirement means I have to have 300x that monthly number saved up to pay for it (4% rule). Getting rid of monthly expenses, like cars and housing or even the electric bill by putting solar up on a paid off house reduces how much I even need to save in the first place. Comparing where I was a year ago (age 45) to where I'll be at 55, we're going to have cut $5000/mo in expenses that were all debt on house/car/medical expenses/etc. That's $1.5mil I don't have to save up.
Thank you for putting out this video! It almost perfectly articulates my position on this debate which comes up often on a lot of financial social media pages. I'm within a couple of months of paying off my mortgage (my only debt) after about 2.5 years worth of extra payments. On the investing side, I'm only contributing the minimum to receive the maximum company match in my 401k. Everything else is on hold for now. Before I started this, I ran the numbers for both scenarios but using a 4 year time period instead of 2.5 years. The opportunity cost was around $39k between the two scenarios and my mortgage balance at the time was just under $80k. It seemed like a no-brainer to sacrifice $39k to payoff an $80k debt and I still feel that way. Of course, since I was able to cut the time down to 2.5 years, the opportunity cost is even less. Please note that I already had a sizable nest egg built up before a started so I knew that a $39k opportunity cost wouldn't affect it that much. That made the decision easier.
Interesting video! I ran the numbers of the example in reason 3 since i thought the results seemed a bit too close. I got to the conclusion that John would have an investment value of 17371.45 at the end and Jane would have an investment value of 17154.97 at the end. For John I simply multiplied the previous months investment value by 1.06^(1/12) and then added 250. For Jane I added the interest (debt value multplied by (1.03^(1/12)-1)) and then removed 250+53.91 dollars from the debt. When Jane pays of the loan in the elveventh month I start the investment for her. She has 1.76 dollars in debt from month 10 which gives an investment value of 302.14 dollars in month 11. Then i do the same as for John but invest 250+53.91 dollars each month. Am i doing something wrong in my calculations?
Paying off debt early also will lower your DTI ratio for obtaining a mortgage or any other loan you need.
Great video as always. I did the same math with respect to my mortgage payoff. I’m now just a few months away from paying it off (but I was able to pay it off within 2-3 years of when I really started to focus on it, so the time period was relatively short). When I ran the math, if all went according to plan on my investments, investing rather than paying off the debt early would have put me a bit ahead, but it was very close. That was enough for us to decide to just knock out the mortgage and get all of the other benefits of being debt free. Glad you focused on this
I treat additional payments on debt as the equivalent of buying bonds at that interest rate. If I’d be willing to invest in a bond at a 4% yield, I’m also willing to pay off 4% interest debt.
For me personally, I'm choosing to efficiently pay off my debts. One big reason is I plan on purchasing a house as a single man by some time next year. Knowing that I will be the sole person to pay for the bills, and maintenance is a bit scary to think about. I'd rather have the piece of mind knowing that my only debt will be the house. I refuse to be known as the neighbor who is house broke.
I don't think it is needed to assign a probability to cash generating returns of more than 4% or 6% or 8%. Unlike stock returns, interest rates are disclosed. So today, there is 0% chance to obtain a nominal return of 8%+ on "Cash". Unlike the 16% chance you listed at 8%+
As always, very informative, nuanced and helpful. Thank you!
Sacrifice and deprivation trains your mind to hate spending money on stupid things. This frugal mindset almost guarantees success with finances.
The figures are really US / EU centric. Mortgage rates in developing countries are more than 4%.
I agree that paying off debts as soon as possible is generally the best approach, with the exception of a low interest rate mortgage over a 30yr period. This is why I refuse to accumulate debt outside of my 30yr mortgage at 3% (which I pay the minimum on) and I do occasionally take advantage of 1yr interest free promotions on a credit card I have (when I have to make a large purchase) in which case I set up automatic payments to pay it off in 10 months (just in case).
I want to get out of debt because the job isn't guaranteed.
I'm biased when it comes to paying off debt but as someone who paid off his first home then upgraded by taking out another mortgage, I wished we would have waited to pay the difference in cash. Now we're grinding it out again to pay off this new house to get that feeling back.
Paying off debt earlier is a guaranteed return, even on 6-7%, everything else is uncertain and the possibility uptick on investment by 1% does not outweigh the freedom being debt free.
Great video! I think a lot of conversations on this topic miss the nuance that you're great at adding (on both sides).
One thing I'd add is that if a job loss or something else happens like in your example before you've paid off a debt completely, you get essentially no benefit (in terms of cash flow) from having it mostly but not entirely paid off, while having some investments does give you a larger safety net. That being said, the behavioral changes you brought up would still help in this scenario.
Great topic! The psychology that effects personal behavior is a bigger factor than the interest rate. I would like to think that I would do the ideal thing in both scenarios but in reality working towards the goal of being debt free causes far greater life change. Great job highlighting this tendancy.