A Visual Breakdown of Why Investing Is Better Than Paying Off Debt

A Visual Breakdown of Why Investing Is Better Than Paying Off Debt

[georgerobinson]

I wasn't financial free until my 40’s and I’m still in my 40’s, bought my third house already, earn on a monthly through passive income, and got 4 out of 5 goals, just hope it encourages someone that it doesn’t matter if you don’t have any of them right now, you can start TODAY regardless your age INVEST and change your future! Investing in the financial market is a grand choice I made. Great video! Thanks for sharing!
Very inspiring! I love this.

[aaronramsden]

I'm in my late 20's and this show is a godsend

[RestaurantManager]

You threw out Dave Ramseyism. “ live like no one else so one day you can live like no one else” lol well my dad did both his whole life, invest and pay off mortgages. God took him at 64. Life’s a curveball

[Jesusx]

I enjoyed the show and don't disagree with the theoretical arbitrage between home mortgage rate (current rates) vs historical returns of stock market. However, I have a few thoughts to consider for people watching this:




1. Long term returns will likely be less than assumptions in the video, which means the upside for "boring investor" over 30 years is less vs just paying down the home mortgage.
2. This also assumes the average person wont panic sell when the market corrects, which we know is not the case. I would argue it is the opposite for home owners. They don't panic sell their homes.
3. Non-Financial benefits of less debt. I feel physically better with less debt (i.e. mental health) I would take more way more career risk if I did not have to make the mortgage payment.



I have concluded the correct path is as follows:

1. Have a healthy emergency fund (cash) so you are never a forced seller of either your home or investments.
2. Accelerate the mortgage pay down from 30 years to something closer to 20 years
3. Invest what is left over into a low cost index because the Money Guy is correct in referencing Einstein famous quip; The most powerful force in the universe is compound interest.

[Dilldog]

Is the additional interest paid over the full 30 years vs the interest saved when paying it off early factored into the net of each scenario. If that was covered I may have missed that.

[ChrisInvests]

The main thing to consider is risk. Otherwise, I like to invest more 😀👍

[SunriseKnight]

If you live below your means, it's not too difficult to max out investments and pay extra to mortgage. Also, these numbers don't represent risk; which is a big factor why many focus on mortgage. Purely by the numbers, you are right.

[HardcoreGamer]

Dave Ramsey is way too old-school for my tastes. I definitely agree with this method.

[element]

Raise your hands if you're disciplined enough to invest the difference in the stock market every month, without fail, until the mortgage is fully paid off.

[smokindog]

Stock market crash-Buh bye cash. Paid off house-Peace of mind.
I would rather have a paid off house.
It is OK to have different financial goals that meet YOUR life situation and risk tolerance.

[cancel.lgbtq.]

You forgot to mention the " WHAT IF " factor. Say if you lose your job due to economy down turn or some serious health issue. Also you are paying extra interest on that mortgage for 20 more years. Hey, each to his/her own.

[MillerMedeiros]

Here in Brazil mortgage rates are so high (~10%) that IMO it doesn't even make sense to borrow the money in the first place - stock market average return above inflation is about the same 10% (past 26yrs)... - even tho I have enough money to pay in cash for the apartment I live in, I still prefer to rent, and invest the money elsewhere...

Will likely only buy a house if it represents <50% of my net worth (paid in less than 5yrs, maybe even in cash), and if it's way nicer than where I currently live in... Don't want to have the majority of my money tied to a single illiquid asset.

[Acinomnieves]

We have our main retirement income thru my husband's investments. My pension is the Extra fun since we don't want to rely on it. We decided to invest those Extra mortgages payments into a Roth ira IF we ever need it we can pull out the principle and pay off the house. Our mortgage is 15 years at 2.4% and will be paid off naturally by 45 tho so we are in a unique situation

[jeepcherokee]

Hmm interesting. However, this is also assuming that the debt crusader is not participating in any sort of employer match into a 401k or something? this sounds like straight up mutual fund/index/stock market investments?


In a real world situation, the debt crusader would have been putting enough towards his 401k to get a company match (free money, although this is against what Mr Ramsey says to do). A typical scenario of that is a 5% investment for a 4% match. So 9% of his salary could have been going into retirement from the beginning, which means from age 30 to 40 @7% that's $100k balance after 10 years and not $0.


And then also with the house, the boring investor is also paying an additional $170kish in interest (240k @ 4% for 30 years), so that brings the spread even closer. At the end, if we're assuming that the house appreciates at 4% over 30 years, a $240k purchase p rice house would sell for around $779, 000. The boring investor would have paid 240 + 170 = $410k for the house, so he makes $369k on his investment. The debt crusader pays off at 10 years, paying $51k in interest. So he paid 240 + 51 = 291k for the home. 779-291 is $488k, so he made an additional $119, 000 on his investment over the steady investor.


Then if we wanted to go a step further, that $119, 000 extra cash could be living expenses for 2 full years, allowing the debt crusader to let his 401k appreciate even further (1.95million * 7% for 2 years) brings the totalup to 2, 232, 555, while the steady investor removes $60k per year for living expenses . If we took this a step further and said the debt crusader was actually doing what i said and putting the 5% with 4% match into his 401k, everything else the same, he would be 65 with 2.3 million in the 401k, and then 67 (to account for the 2 additional years of not withdrawing) with 2.65million. The SAVER at 67 would have 2.7million. So while these numbers can be convincing to some, realistically it's a wash at the end.

Overall moral should be to just pick a path and then dont stray from it...in the end you end up very close to one another and then at that point you pick a withdrawal rate for the lifestyle that you want.

[bryansacco]

Only thing you don't include is the amount of interest paid over time so not really apple to apple comparison.

[pasha]

bs.. your investment ROI is not a sure thing. your mortgage rate is.
if all this was true then everyone should cash out refi and put that money into the market, never paying off the house :)

[justinbone]

Great analysis as always fellas- gives folks responsible with money better options for long term wealth building. I like how you guys always hammer the importance of early savings and the amazing compounding effect

[jamie]

It is so simple. If you can earn more by investing than you can save by paying off debt, then you invest. If not, you pay off debt.

If I told you could borrow $10, 000 at 4%, and invest that 10k and make 5%, your only question should be "can I borrow $1, 000, 000"?

[mattcook]

Brian and Bo,

I am a CFP professional and have been asked to give a presentation to a group of realtors in NC in regards to this topic. I would love to use this example. If credit is given on the slides, could I have permission to utilize this example during my presentation?

[MoneyMan]

The interest rate is over 4% because of other borrowing costs like Origination fee (about 0.5% of loan amount)
plus Mortgage broker fee (0.50% to 2.75%) etc. Getting 6 to 8 Percent tax free by paying off mortgage is better than Losing 35% percent in one month in the stock market