Why Pay Off Debt If I Can Invest at a Higher Interest Rate?

Ryan starts off this hour in San Antonio hey Ryan how are you I'm a new favorite thing better than I deserve how are you bitch that's the same sir how can I help good deal I have a question here for you I just found your show about two weeks ago and to give you a little background I was in about $60,000 in debt after college I graduated may 2017 and I was making some choices I was still making child choices I was doing what was feeling good and so I decided to take a job out of state and move to Texas where I could be away from distractions and I just wanted to knock out all the debt so I also own a small IT business and that business is cashflow positive I bring in about an extra five grand a month with it now and I work a full-time salary job now my all of my credit card debt has been completely paid off and I was previously saving up for house until I found your show and I had about 25 grand saved up there and I've been investing and playing in the stock market with about 10 grand I took the 25 grand and I split it between my student loans in my car now so and but I still have the ten grand and I'm having a hard time taking that out and taking away my contributions to my 401k because my returns are better than my interest rates do you think that it's still the wrong move to be making with that ten grand I usually well it's been growing progressively it's at ten grand now that I but the risk is a lot higher but I'm averaging about ten to fourteen percent a month on that and my 401k is averaging about nine percent a month right now and my student loans have a four percent interest rate I think you mean a year I don't think your 401k is making nine a month I'm sorry to you yeah I'm sorry about that it's okay I thought I knew what you meant okay so what is your income total what are you what are you making the coming year no your household income where you don't pay taxes on the coming year you got five grand from the tech business and you get your in you get your salary about a hundred and thirty thousand before tax how old are you I'm 25 all right how much dad do you have I owe 10 thousand more on my car and 15 thousand on zero and zero credit card okay so here's the question that I think you're asking and let's see if I am as if I'm correct when you're 35 which way will cause you to have the most money investing in your 401 K now and and getting out of debt slower and continuing your stock market game that you're playing or stopping all of that temporarily and knocking the debt out freeing up the cash because you have no payments at all using that money to invest which one of those two ways will cause you to be the wealthiest at 35 the answer to the question is stopping the investing is that logical to you I mean it is logically so the thing is here's what happening here let me stop you okay I just got I just tricked you okay let me tell you what I did I made you think long term when I bailed you 35 years old when you were when you're presenting your case to me you're thinking short term when you think long term your brain allows you to factor in risk when you're comparing a 10 or 12 percent rate of return to a 5 or 10 percent interest rate on a loan you're not taking into consideration risk and and the slowing down of your life and everything else here's what happens with your life any part of our life mine too what you concentrate on is what you win at no one wakes up one morning and goes you know I've never run a mile in my life I'm gonna run marathon tomorrow now they get up and they train in they train in they train and they work a system and they work a process and they do the nutrition and they do the miles and they wear out shoes and they run and they run they run and then they're not surprised when they are able to complete a marathon and check that off a bucket list when you're dating someone that you end up getting married to you're unbelievably focused on that person to the exclusion of everything else to the point your friends are sick of you you know because you're focused on that one person and that's called courting in the old days and it causes people to get married if you do not focus on her to the exclusion of everything else she likely will not marry you very few people just you know love hanging out with people that don't focus on them so you know what you focus on on your career you win that when you focus on electrician your body is in better condition when you focus on nutrition and exercise your body's in a lot better condition and so on and this is true here so when you focus on getting out of debt to the exclusion of other things on a temporary basis you will hit that goal faster more likely and will then be positioned to build wealth so all of that's a big long drawn-out answer to say stop your 401k shut down your stupid investment plan with your stock you're gonna lose your butt on that and pay off your car today and then let's don't take money out of the 401k but stop adding to it and by this time next year you're gonna have an emergency fund in place of three to six months of expenses you'll be a hundred percent debt-free you'll be saving towards your house and you can restart your 401k probably won't even take that long you're twenty five you make a hundred twenty-five thousand dollars a year stop doing a bunch of crap and pay off the debt you only got twenty five thousand dollars in debt you got ten thousand of it in that one stock account so we're down to 15 I mean you ought to be debt-free in twenty minutes here it feels like really focus on it don't try to do six things at once and do none of them well and that's why we've had so much success Ryan helping people build wealth because we first get them out of debt and your most powerful wealth building tool is your income it's not the spread of your investments over your debt interest rate as I've interviewed millionaires I never interview millionaires and they say Dave you know the way my money was I borrowed as much as I could at 5% and I invested it at 12 I never hear any millionaire say that I mean never never they say I got out of debt I'm gonna no any debt payments I'm maxed out my 401k oh and that tournament paid off my house too in ten point two years that's the average time of millionaire pays off their house ten point two years and with no payments at all ding ding we start ringing the bell and we become debt free and we start building wealth good question man thanks for joining us and oh by the way to some of you people who are on Twitter never have we talked to a millionaire an interviewed one that said they made all their money because they saved on the expense ratios on their mutual fund the reason they get millionaires is not because they concentrate on the expense ratios they looked at returns and consistent long-term investing they invested and invested and invested invested invested they didn't forgot reasons not to invest how do you people have a lot of theories and do nothing with a lot of opinions about money you're pretty sickening this is the Dave Ramsey show

27 Replies to “Why Pay Off Debt If I Can Invest at a Higher Interest Rate?”

  1. I swear some of these people just call to brag about their income. His debt could literally be paid in a few weeks

  2. If I have 15k in debt for a car and 8k available to pay down the debt, does it make sense to throw 8k at it or wait until I can pay it off in full?

  3. Question, should I LOWER my 401k contribution from 11% down to the 6% company match and put that extra into the mortgage to pay off faster? I do have a Roth that's maxed each year. I'm over the 15% Dave recommends to invest and would be about 14/15% after

  4. Unfortunately I feel much more secure with wealth right now than the possibility of getting married and having kids…

  5. Depends… If the interest for the loan is below inflation rates I would consider investing instead. Why pay down a 1.5% interest student loan when inflation is over 2%? Student loans are always below inflation rates, they are basically "free" loans where I live at least. I didn't even study for real, I just "took courses" to get a student loan so I could get some starting capital. Worked out fine, made D's and E's just showing up to exams, just so I could keep getting loans the next semester. Much cheaper than a 6% business loan.

  6. Outstanding explaination i have also done exactly those things and everything in my life is much better off then it was before i watched this video

  7. This is hilarious Robert Kiyasaki said the opposite…he says use good debt to accumulate assets which pay it off while holding onto the cash wealth you have accumulated already.

  8. I agree with Dave's philosophy, but I think the 401k advice was oversimplified. If you have employer matching on the 401k, you should almost always contribute enough to get the match. It's often equivalent to a 100% guaranteed gain on your money, and you can't do it retroactively.

  9. I don't understand this at all. Yes the stock market is more risky but with the S&P500 average long term you're somewhat guaranteed about 8-10% a year. Sometimes it might be negative, sometimes it might be 20-30%, but overall you can expect, over then next 30 years, it will do about 8-10%. My student loans have a 3% interest rate. Its makes 0 financial sense to pay off the student loans early. You want compound interest to work for you. if you can get debt at 3%, you should absolutely take it. With inflation that debt is only costing you 1% per year in real value. You can turn money into more money . If the economy collapses then yes there might be a problem, but then the least of your worries is your lack of debt.

  10. you will lose way more money in the long run if you stop investing. Your money will compound exponentially in any kind of investment so long as you maintain continual consistent growth to the base principle. The debt this guy has on the other hand has an interest rate that is set and the base principle is always going down therefore you will owe less in interest over the payment period. My advice to him would be, keep your current allocation of funds to his investments and cut back in other areas for a short period of time to make heavier payments on debt….at the end of the day do what mathematically makes sense. Dave's one size fits all approach to debt payoff is not always the most advantageous, especially in situations like these where this individual is clearly in control of his finances.

  11. But if he stops investing isn't that gonna hurt him long term???? He can pay off the debt and still make more money long term.

  12. lol ๐Ÿ˜‚ yeah listen to the people in the comments saying how wrong he is…should I listen to broke people who think they know everything or to the millionaire that has nothing to gain weather I win or loose?

  13. With the benefits of Tax deferral and Compounding interest in retirement funds, paying off debt and cancelling retirement contributions to do so is rather short-sighted. Don't forget about company matching funds that are basically free money if you contribute, you give up that too?? Ramsey focuses on simple recommendations that make sense to the masses, but this recommendation doesn't make sense long term.

  14. Does your house count as debt? That is the biggest expense. I can be debt free fairly quickly otherwise

  15. Someone making $130k a year should EASILY be able to pay off $60k in debt in a year and still have $70k to live off of.

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