Debt is for all intentional purposes is owing somebody money. That can be a person or a company it really is the same. Bad Debt seems to always be a focal point in finance. I have heard everything from debt is bad to debt is good. Yet this post is not to bore you with the ins and out’s of what debt is and all that nonsense. This post instead is a little insight into my personal take on it
I don’t think debt being bad is always the case. Yet I often see some people very dogmatic that debt is bad and must be paid off fast… Yesterday fast is the usual response I get in most groups. But what if instead, we turned that idea upside down? Could not paying the debt off fast be good?
But what if instead, we turned that idea upside down? Could not paying the debt off fast be good?
Hear Me Out On This
I know as I said above traditional advice is to pay the debt off as fast as possible. My curiosity had me think “what does the math say?”. Again I have learned I’m better off going with the math as it gives me more freedom, less risk, and takes the human error out of finances. I went down this rabbit hole and really looked at my own situation as an example. Mind you this can work with your situation or anyone for that matter. It’s just a simple math equation that I break down later on in this post.
My curiosity had me think “what does the math say?”
I Have Debt…
Yes, you read that correctly! I have debt and I choose to keep it. No, I’m not crazy nor do I care if you hate debt. Just hear me out on this one and make the right choice for your situation.
I have debt and I choose to keep it!
As you can see above I have two debts. One is my truck the other is my RV I live in.
I’m more of a math and logical investor vs an emotional one. The more I have learned and the further down my path I go the more I lean toward the math and logic side of finances. I honestly prefer this because it takes the human factor for error out of the equation. It instead focuses on what Is best for wealth, lower risk, higher ROI, and ultimately what would give me a better quality of life. These are all factors when I look at the math and logic behind all my choices.
It instead focuses on what Is best for wealth, lower risk, higher ROI, and ultimately what would give me a better quality of life.
Why Keep Debt?
Because as crazy as it sounds “math” is why I have chosen to keep my debt. As you saw above I have right around $22,434 worth of debt. I literally could pay this amount off today with about 3 clicks on my computer. Or I could pay extra on the debt with my cash flow every month.
Above is what I have in my investment accounts as I type this post. As you can see I could use my taxable account at Vanguard and pay this debt off. By the time you are reading this, I’m sure my debt will be a bit lower, and hopefully my investments a bit higher. I love using M1 Finance for their fractional shares, and the sick graphs above from Personal Capital.
Let’s Get Back To The Math
My RV has the highest interest rate of the two debts being 6.2% the truck being 5.2%. Now, this is an important part of the math and why I have debt and choose to keep it.
Simply put I will be wealthier by keeping the debt!
Yes, that is right I said, “I will be wealthier by keeping the debt”. This is just a simple math problem. If I can earn more in the market than my apr on the debt I become wealthier by keeping the debt. This sometimes is hard for people to understand because they let emotions blind them. For this, I’ll use the good old internet calculators to make my point.
Above is a breakdown showing if I put my $2,000 a month of cash flow to my debt. The end result is it would be paid off in 11 months and result in me saving $607.95. This is the savings we talk about that is guaranteed when paying off debt. That is pretty cool that in less than one year I could be completely debt-free. Imagine the happiness, excitement, and all the other great emotions that would bring out. Not only that I saved $607.95 by doing this. Now that is a win-win.
But What If I Instead Invest That $2,000 A Month In Say VTSAX And Chill?
For this task, I used a simple compound interest calculator online. I input $2,000 a month for 12 months at a 7% ROI. Which by the way the average return right now in the market is 9.8% over the long haul. But I think 7% is a good starting point for this post. The results are below…
Above we can see that after 11 months we would have earned $785.17 at 7% ROI. So the math shows us that by investing and getting just a 7% ROI you would have $177.22 more money after 11 months. While this is not a huge win it’s still more money.
Some people might say well you are not guaranteed that you will earn 7% in those 11 months but you are guaranteed to earn whatever the apr is on the debt. This is 100% true and I would not argue that one bit. In fact, I think some people should focus on debt and investing at the same time. Check out my debt 101 Blueprint for an easy step by step strategy to pay down your debt.
If we take a look at the graph below we can see that in any given year you have about a 75% chance of having a positive return. To me, those are pretty good odds yet that is not to say it will be a 7% return.
Which Path To Take?
This is totally up to the individual and what works best for their situation. My only hope is people choose not simply based on speculation but instead what helps them better sleep at night. If that is paying down the debt good for you. If that is to keep the debt and invest sweet. There is no right or wrong if you are well educated on both approaches. Then there is always a hybrid point of view. Which is to pay extra on the debt and invest the rest.
I have focused on the investing side as I don’t mind having a little debt these days especially with the liquid net worth I have. Even more so because my plan is to FIRE in four years at age 39. So I also want to get as much invested as I can now because I’m not sure if I will have any passion income coming in that I could invest. The more I can get invested now the better for compounding and growing the wealth stash.
Even with all of this, It is nice to write about it to really get a real breakdown in black and white in front of me. Honestly, I was surprised that I could pay off the debt so fast with my $2,000 of cash flow. Something about seeing it broken down makes it easier to digest for me. After this post, I think I will start using a hybrid strategy. I will start paying a bit extra on the RV. Then once it’s paid off start paying extra to the truck. I’ll do this at the same time as I invest.
Hopefully, everyone makes the right choice for their situation and fully understands their choice.
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Awesome post David. I love the data you share here. It should give people the opportunity for choice with the confidence to know they made the right moves for themselves.