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To invest or to pay off debt... that is the question. When it comes to personal finance, investing and retirement conversations we generally have a lot of questions without any clear-cut answers. Should you invest or pay off debt is one of those questions.
Many feel that it is foolish to stop investing (temporarily) to pay off debt because you would lose out on your 401K match. I mean, it's FREE MONEY! Are you seriously going to pass that up?
Well in most cases I think that I would. In this video I'm going to explain why, in my opinion, it is often better to take a temporary break from investing to pay off debt.
What Is Your Car Payment REALLY Costing YOU?: https://youtu.be/nLR-0baUah8
Debt Snowball Vs Debt Avalanche: https://youtu.be/jtgnRJKSJlw
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Please watch: "The Budget That Pays You First | Reverse Budget Explained | Budgeting For Beginners"
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Problem with all of these videos is they are impossible when you live in California or New York. Even if you make 60k a year you will use at least a third of that on rent and chances are at least in California. If you say oh well rent in a lower income area. Your things will get broken into for sure.
I understand the financial aspect of investing even if you have debt, but the human side of it is just way more important for me. I'm just about done paying off my $100k student loan in 6 years instead of the 15 years that I was booked to pay it for. I am finally starting to feel human again. I can't imagine NOT paying my debt first and living that hell for another 9 years. Always afraid to lose my job and not being able to make payments. The present is more important than the future when you're desperate, and paying off your debt affects your present.
It's easy to talk about it strictly in financial terms but a lot of these advisors that say invest have obviously never felt the dread of being in large debt.
Great educational video. From my own personal experience, I have decided to pay off my debt first, save money and contribute to my 401k in a moderate/conservative way and I can share, that the financial weight and stress that I had on my shoulders has banished and that my friends, it’s priceless!!! FREEDOM HAS NO PRICE!!!!
7:05 You stop right when they get the student loans paid off. Why? Wouldn't it be more accurate to continue this scenario into retirement? Because the whole point behind putting money into investing while you are still paying off debt returning at lower rates than the stock market returns is so that you get compounding interest. And we know that money will be collecting compound interest because it's in a 401(k). I'm running the numbers right now about what the difference in the retirement fund will be at age 62. Something tells me the couple that invested an extra $1000/month in a 401(k) at age 23 will be much better off at age 62 than those that put that money toward their debt.
And then why did you play paying off some debt and investing some after selling the cars as a better option than just investing straight away. If you would have done the math you would have seen that selling the recently new cars (or better yet, never having bought new cars in the first place) and putting all of that money into used cars and investments would yield the greatest returns. Yes, greater than putting some of that toward paying off the debt sooner.
I don't contest that psychology is very important during debt repayment. But you can't just go around saying you'll get the greatest returns by paying off your debt first when 'returns' are being measured by what you'll have in your 401(k) when it matters, when you retire. Mathematically, it is best to invest as much as possible as early as possible for retirement, so long as the debts have a lower interest than the interest you'd get in the 401(k).
Bitcoin future of money 💵 crypto its time to look into this asset class . 2018 \2019 could be great to pay off thoses debts in the future . Anyway banks are looking into this and fidelity investment also . Respect
The false premise of this video is that your only investment option is the risky stock market. There are other investment platforms that are less risky and more profitable. But the math is the math. If one dollar invested earns you 8 cents (8%), but that same dollar, if used to pay down debt, saves you 18 cents (18%) in interest, then paying down debt is the better option. If however you use that same dollar to pay down a 4.5% mortgage, then you're losing 3.5 cents of every dollar spent by not investing. Which is the bigger number?: the interest earned or the interest saved. That's your answer.
I was about 50,000 in debt and decided to pay it all off. It took about 4 years. I now have zero debt and invest all my extra money. I understood the pay yourself first rule but put that concept on hold since companies were making money off the interest of my stupid desicions. I paid everything off. My debts are all settled and now I invest knowing I earned the f*ck out of my current financial situation. I will NEVER willingly put myself in that kind of debt again 👍
Are you an investment professional? Probably not. Then you should go with index funds. Funds that track the performance of the economy as a whole. There might be corrections that look painful, but the gains made have always been greater than the losses suffered. Averaged over a few decades the stock market returns 6-8%. To be clear, that 6-8% is BOTH good years and bad years. Unfortunately, picking your own stocks quickly gets expensive and you have a low probability of beating the market.
Avoid managed funds because what looks like a tiny 2% management fee is a ton of money when you look at how much you lose in compounding interest by the time you retire. For every one dollar in management fees you pay at 20 years old is $30 you will not have when your 63, a 3000% increase in value. It's about $14 if you invested it when you are 30, a loss of 1400% growth. $6 as much when you're 40, 600% growth.
Didn't finish the video yet, the answer is the usual ”depends”. Run your numbers and see which one increase your net worth more. Also understand that investment is variable, debt is set and guaranteed. I would say a ballpark figure if your debt is higher than 4% you pay your debt first.
Don't forget you should always pick up employers free money before paying off debt.
And now boys n girls we get to watch the savvy 25 yo tycoons who ‘own’ 8 houses and a million dollar share portfolio, all thanks to a debt / equity ratio of 60/40 and easy credit. Let’s say, they have a portfolio of $5 million in assets and $3 million of that is debt. And now we have a big crash. All of a sudden, they have 8 houses that are worth a fraction of what they were in their prime and their shares have plummeted in worth as well coz the whole thing has collapsed. Unfortunately the debt didn’t reduce. They still owe $3 million and their properties and shares are only worth $1 million. ‘Oh poo, time to sit on a pineapple and enjoy the pain’ factor comes in as their renters either move out or chase lower leases coz of the reduced economic conditions and your shares must be sold off at reduced prices to cover your loan repayments.
This is when the clever people, debt free with cash reserves, step in and buy bargain blue chip shares (well under their true value thanks to all the people riding the Pineapple Express) and while they are at it, they can buy a single property at a bargain price with a modest mortgage.
Small steps boys n girls. Small steps.
what would happen then if one of the couples got sick at the age of 35 and was only able to work half time….or their newly born child is sick, and mother decides to stay at home.....what if debts were not paid , money would be in invests and the downturn of GDP would occur at the same time? …….They would not be willing to sell their stocks at that market situation, but what about the loans?....The reality is the more loans you have in your personal economy. the less flexibility you have for sudden changes in life....It is OK to have some debt, but it is important to keep it so that it does not build a big burden to your life. Good to remember…..nobody's life goes as planned as young. We all get things happen, bigger or smaller.
Hmm I would have done it slightly different, pay the 401K to get the full match, THEN use the rest to pay off debt, when that is done ramp up the 401K, never say no to FREE money and 150 bucks free per month for 4 years is still $7200 which also over the time gain interest.
Being debt free allows a lot of mental freedom as you're stress free, can try new things like start your own business or work on a skill set that builds towards future success. Living pay check to pay check - or worse credit card payment to credit card payment - kills those options.
What do the numbers do if they take the $1,000 and split it. $500 towards debt, and $500 towards savings? Also, I'd love to know where the 8% return number comes from. I'm not getting close to that in my 401K, and I have way too little control over where the money is invested.
Would have loved to hear more about the psychological side. And there is one point you didn't cover: most people aren't financial experts so they probably aren't going to make that much more investing. They might even lose their money if they invest it badly. So, paying debt off is the safer option.
I would say that it’s always better to get your head above the waves before you start to climb that mountain!
You can always invest in opportunities but having to carry a load of debt around would just weigh you down mentally and cause unnecessary stress. The great thing about paying off the debt too is that once it’s gone, it’s gone as long as your wise enough not to get sucked back into it👍
I decided 20 years ago I would pay off the large debts in my life off first and give most of my attention to those debts, house and vehicle mostly. Once I had payed my mortgage off in 12 years, tripling my payments for the last 3 to 4 years, I was mostly debt free! Also the value of my house from 1997- 2009 had tripled! Thus leaving me debt free and basically ended up indirectly investing at the same time! I won on both accounts IMO. Having said that I was basically house poor for most of that time did not take any trips or buy many luxuries for myself. In retrospect I regret not having more fun in those years age 25-37. If I could do it over again I would tweek that approach abit, following the Everything in Moderation including moderation rule. You can always make more money, but you can’t get time back! Some advice to those starting out. Good luck.
Pay your debts! It will free up money so that you can enjoy life more. Life is not only about investing.Investments mean nothing when you suddenly die.I rather opt for a nice dinner and a proper bottle of wine than throw it into an obscure investment fund.
My wife and i live debt free and we will keep it that way!
Very very misleading info. In second scenario you are driving a 10 yeara old car. As mention human nature to buy new car after paying dept means in second scenario u paid car loan in 4 years but to prove the point john didnt get a car.
also in second scenario john n jenny kept no saving for safety and paid 100% to loan. Believe me a simple math 8 is greater than 4 and no insane scenario should make u believe 4 is greater.
Better solution: buy a beater car for the both of them. Use the "car payment" to get out of debt. I'm 28 and I've been debt free since I was 23. I avoid debt like the plague it is, including student loans.
Work full time, take a few courses a term. It will take you 6 years to graduate, but you're debt free. (Yes you will need to shop around for colleges.)
If you invest into something that earns you additional income than investing first is better. Say you make 2000$ a month and then upgrade to receive and additional 500$ a month thats 500 extra you have every month to help pay off your debt or in tough times.
Debt used to buy useless things like giant TVs that don't generate income is what's bad debt. Debt used to produce income is good debt. Balance both, debt isn't life. when you die your debt won't hang over you, don't let it control your life. Also, 401ks are for losers.
Very good illustration but a home loan or rent is missing in this example. I think you would have to redo the video because I would buy the house and use public transportation if the numbers in the example remain the same.
Invest first , but you must have a quick return on your money , but make sure the investment is in the a plus . I would trade options , not stocks . There will always be debts . Stay away from car loans , what if you took that 400 bucks and put into dividends paying stocks . I'm interested in paying the IRS at the end of my retirement .
401k? I gather this is American and irrelevant to the rest of the world that watches you tube. That aside, I get the message, do the math and compare absolute dollars with as many assumptions built on on interest rates, inflation (any relevant govt incentives etc).
You simply have to do both at the same time. Reducing debt in one direction leads to financial security in the other. Lenders refer to this as gearing. Its the relative proportions of debt and equity that a company uses to support its operations, and its a sound model to follow if you want to reduce personal debt and remain financially secure. Case in point.
I'm new to your channel. It would be nice if you can also have a video about Variable APR and Fixed APR. As this, I think also affects if you want to invest the money or pay off debt. Typically, you'd want to pay off debt that has variable apr because the apr is based off of your balance. Fixed APR typically is already included in life of the loan. So paying extra on fixed rate loans doesn't really make sense (unless you just want to be debt free).
Pay off debt enjoy the freedom then you can always believe for extra $ comes in you can invest....dumb dumb people mess up & invest & lose everything!!!
The best life every is to be able to pay cash pay in full with no loans or credit card...people pay off your debts then you need to learn alot more in investing many people get out of debt to go back into debt smart things is NOT to go back into debt ever!!!
All of the negative comments in this video just back the fact how defensive people get about there ‘Debt’ and that we have a massive Debt problem in America. Whoever thinks they can ‘borrow’ there way into wealth need a wake up call ...
During the beginning of a bull market, invest. At the end of a bull market, pay off debt. Since we're coming to the end of a cycle, you should be paying off debt right now and investing in real assets with what you have left.
Also, paying off debt helps you realize where you really stand in life and makes you think twice about what you really need. Investing often leads to spending the potential gains before they are realized.
Not to over complicate the example; there are several elements to consider; Risk primarily, then taxes. Any investment carries taxes, if now, later. Debt, certain types is not tax deductable. Also interest is compounded and it is certain, investment are not guaranteed.
In the first example, couple took out a second car loan after 5 years for another $60,000 and ended up with $215,000 in 401k. As an aside, it was noted that without that if they'd bought a cheaper car instead they would have ended up with $206,000. How are they $9,000 ahead with the second car loan over the $5,000 cars?
Thumbs down. Generic Dave Ramsey advice. Save 15-25 percent (pay yourself first), then attack debt. If you can max out anything, max it out, then attack debt. If you tell people to pay down their debts, the only ones benefiting are the credit companies, because the folks don't learn the importance of saving. Chances are, they get out of debt only to put themselves back in it. However, if they are putting a set amount into stocks or 401/403b/457/TSP/IRAs then they will continue to do so once debt is gone. People have to be conditioned to live on 75% of what they make. For example, when I got hired at my job I made 1500 every two weeks. Every 3% raise I got, I put into my 457. So now, I still make around 1500 every two weeks (which I am used too) and max out my retirement account. At this point I am maxing out mid year, so the rest of the year is like found money.... that I sock into my Roth IRA.
I agree. Schools aren't teaching basic finance. Good video. I believe it makes sense to try to balance both, investing and paying off debt. I worked for a company that gave me a dollar for dollar match is company stock. I'm glad I got that!
John and Jane should suicide. 50k in debt to make 60k a year. Instead of skipping college and driving a local delivery truck. 5k to get CDL. Companies like Old Dominion start drivers at 77k a year EACH. So 10 k for them to start life at 18 making over 140k a year. People who keep recommending college are the problem.
Basically, if you actually compared apples to apples, which I thought was the exercise in education here, and didn't have the 1st couple buy a new car but not the 2nd couple... the first couple would be at ~$273k net worth at 10 years, and the debt-first couple would be at ~$248k. In other words, couple 1 would have 10% more money...
Considering they're 33, this retirement fund can have an additional 30 years to grow. At the same 8% rate, that extra $25k would yield them an additional $400k for retirement... that's apples to apples. Now you can weigh that against risk and the "good feeling" of no debt.
The first and 2nd examples are so flawed it's unbelievable. Your assumptions are so inconsistent and Biased. First of all in the first example it was complete biased to automatically assume they'll go and take another loan on a car. But worst of all is your 2nd example where john and Jane (who are trying to get out of debt) Go and get themselves into a $60,000 Auto finance Loan, what? Come on Guy, your animations are nice but your examples are fairy tale.
Outside of having REALLY nasty CC debt, you should ALWAYS invest enough to the point where you get your companies 401K matching. It is NOT a question of "return", you principle is being doubled. And then there is the tax implementations. If you have $1000 a month to pay off debt or invest and your company matches $150 a month, you are stupid not to put in $150 a month. This video does a shit job because it muddies the waters by making the matching a 15% matching, rather then a 100% matching. First, meet the matching level of your company for your 401K, then pay off reasonable debts.
Nicole Yi, the principle doesn't change, you obviously missed the point... If you find a car for sale for $10k and are offered to pay that over 6 years at 0% interest, financing is much wiser than paying in cash...
Then you say "well, maybe he can buy 5k car instead" and then I break my forehead with my palm...
TERRIBLE VIDEO! The first example they bought new cars twice, the second they bought new cars once, and the third example they bought used cars once. If you kept the variables the same in all 3 examples, this first example would have the MOST money, not the least. Stop misleading people and remove this video.
I want to toss in the fact that the 2nd example stupidly buys a car once.... The debt free couple! I mean you gotta be kidding me...."Oh were gonna get out of debt but first!...Let's go get 60,000 in auto loans!!!"
John & Jane of course will need backup money for say a new refrigerator, a roofer, a possible vacation, car expenses ( which are on the rise), medical expenses, etc.. And what if the couple has a child. Credit cards, the market is volatile.
The avg millennial does get $1100 from the baby booming parents each month ( if their lucky), and assistance payment for college loan . But the two are on on their own now.
Layoffs are a possibility as well.
Be proactive. Don’t invest yet.
hypothetically the backup money should be budgeted in the "expenses" column. the reality is this video borders on a car salesman 4 square worksheet level of deception. the video creator is just playing a shell game and hoping nobody noticed, but of course like 3/4 of the comments did.
There is something missing from this presentation. If you don't invest in the 401k, every January 1 you LOSE access to 18.5k worth of pre-tax space in their 401k. You can never get that back. You can always pay back debt, but you only have a limited amount of time to put money into your 401k.
So because of this, the two situations are not equivalent. You have 215k in your 401k that there is no way to recoup in any other scenario.
Furthermore, you suggest that J&J put $3600/mo toward investments, then erroneously conclude that they have more in their 401k. You did not consider 401k limits. You can only put in so much per year until you max out. If you put in $3600/mo now, you would max out within 5 months, but you calculate for 12 months of $3600 in the market. This means you're mixing non-taxable 401k investments and taxable investments which you failed to separate in your example.
So in the first example, you have 215k of pre-tax assets. In the second example, you might only have 90k of pretax investments (3600 * 5 mo/yr * 5 years) and 126k of taxable investments (3600 * 7 mo/yr * 5 yrs). Are you really that much further ahead? So instead of having 215k in pre-tax retirement accounts, you now have 90k pretax and 126k taxable. I'd argue that the person who invested first came out MUCH further ahead even using your own numbers.
Invest first, people.
John Madeja, the new car is everything. And the whole point was to make an apple to apple comparison of the math. But he says if you're wondering what it would have been if they didn't buy new carsx it wouldn't have really made a difference. That's wrong. At 10 years they'd be at 280k not 217k... just run the numbers. One is objectively better, mathematically. If you want to look at other factors, that's fine. But start with an honest comparison
He didnt add a new car if you listen because the one couple is being fiscally more responsible about debt like following the dave ramsey plan which means they wouldnt be allowed to buy a new vehicle in that time.
Unlike the other couple who is considered a normal american and as soon as their car is paid off and typically even before it is even paid off they go trade it in for a new one....so there is an assumption yes but its based on very typical behavior....
And also yes i did read your entire post but it doesnt seem like you considered in your post exactly what i said. Each person can contribute 18.6k to their 401k....thats roughly 37k a year....idk maybe its just the way you have it worded....try starting your post by not using only one person contributing
He also added a new car payment to the one couple and not the other, and messed up the math.... investing at a higher interest rate AND with employer math will *always* have a higher return... Always. Math isn't subjective. So besides the points you bring up, this video just got it completely wrong.
Next Level Life literally they'll have 5 hour meetings and write everything on 1 page, along with diagrams, charts, symbols etc...
I would just say you could have spread this over 3 pages and made it a little more readable.. but otherwise good information.
they should get rid of the car loans... they spent an entire years salary between the both of them on cars??? that is just asking to go into bankruptcy..at a combined 60k yearly salary they should each be driving 5k cars at the most...fools
You aren't a "slave" because you have debt, dipshit. You agreed to take a loan at a certain interest rate because you wanted or needed something. You have 30 years to pay off a house that you couldn't have had otherwise - so get over your victim mentality.
ryan your credit score is the cost let's say the debt was used to invest in a business and then the business goes really well? You end up quitting your job and easily paying the loan and furthermore it is an unsecured loan meaning no collateral.. versus...well, working all your life, now which is the bigger risk here?
Balance is certainly important ☺️. Though if living in a car is truly the only way for someone to either pay off debt or invest then there are certainly far bigger problems that need to be dealt with first. I hope you are not in such a situation.
Flawed comparison and completely misleading. First example involved another car loan and third example seemed to suggest selling the cars immediately after a loan was taken out, which simply does not seem realistic. The examples cannot be directly compared because the variables are so different.
Your math is broken. It's not complicated. If the average risk-adjusted rate of return is higher than the interest on the loan then in no world will you be better off paying off the loan not accounting for volitility. In your second example you created different assumptions than the first where couple 2 didn't put themselves in an extra 60k in debt for a second round of newer cars. That and the fact that couple 1 didn't get anything for their original vehicles are literally the only factors causing example 2 to be better off than example 1. Moral of this entire story: don't buy 60k worth of vehicles in debt when you make 60k/year. It's that simple
I agree with your moral entirely, sir. However what I would be more interested in is hearing what you think about the conceptual question of the video. Because you're right it didn't take volatility into account (nor did I use real year to year numbers from stock market returns as you generally don't get the same ROI every year) it was just meant as an example to illustrate the question and hopefully get people to consciously look more closely at the concept for themselves. In general, do you believe (in the real world) it is better to pay off debt first or invest? Or is it somewhere in between and why? Love to hear your perspective!
You should always pay yourself first, no less than 10%. There will become a time when you can no longer work and being debt free will not help pay for living expenses like income from investments will.
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