Pay Down Debt vs. Invest? I’m Split!


The general assumption in investing is that the stock market returns around 7% a year on average.  Some years are better, some worse, with some variance due to fees and investment choices.  And so it goes that if you have debts with interest rates anywhere between say 3-6% (typically a mortgage or student loans), you have a difficult choice to make.

Should I invest or pay down debt?

Type that into google and you’ve got yourself a months worth of reading and discussion.  For 99% of the population that probably sounds like torture!

So how do you decide?

Cash Flow Is King

When you hear “cash flow” you probably think of it in terms of a business or high level accounting jargon.  But cash flow actually has very real implications in your personal finances.

You have money coming in and money going out every month.  A positive cashflow means more comes in than goes out, and a negative is, well, the opposite.  A positive cashflow leaves you with money leftover to allocate however you like.

But shouldn’t I pay myself first, set up automatic transactions, and “assign” every dollar so I don’t waste it?

Actually, you can do both.  My student loans are on an automatic payment, which means I’m never late and I get an interest rate deduction.  My savings (retirement and others) are set on automatic transfers as well.  But I don’t max out my cash flow with monthly expenses and automatic transfers.

Instead, I have my monthly expenses, and smaller amounts for the automatic transfers (minimum payments for student loans and 15% for retirement).  If you’re just getting your finances in order, or paying off credit card debt or working to increase your income – whatever it is that means you don’t have anything leftover after the minimums, be patient with yourself.  It took me at least a year before I consistently had money leftover to make a choice with.

“It’s All Just Wealth-Building”

I know I said minimums were okay a few sentences ago, but that’s not entirely true.  So it’s important to remember that even if you’re making minimum student loan payments and only saving 6% of your income that you’re still building wealth.  Remember, this blog is about how we already manage our money, so finding ways to do it better aren’t complicated.  You’re building wealth (slowly), but thinking of your money in terms of cash flow can give you the resources to build wealth more quickly.

Which brings me back to my final (and original) point.

The interest rates on my student loans range from 3-4.5%.  The stock market had a great year this year too.  More than double the 4% on my loans.

But somehow I ended up split.  I made nearly identical gains in saving and investing as I did in debt reduction.  Some months I put all my excess money towards loans, others I invested.  And in the end it all came out about even.

By managing my cash flow to the point where I have an excess each month and knowing that I’ve already made a debt payment and invested, I can put that excess towards either one and feel good about my decision.  Because in my mind it’s all going towards the same goal – building wealth.

Don’t get me wrong, I love trying to make my finances more efficient and finding every possible way to earn and save more, and spend less.  But not worrying about whether paying off debt or investing is more efficient (because I’m doing both) has freed up a lot of mental energy.  Take it one step further, and think of all of this as “building wealth”, and you instantly feel like a personal finance tycoon, expanding an empire and on the road to total domination.

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