Invest or Pay down my debt

I’m not sure if you’ve noticed this about me through my writing but I tend to think a lot, sometimes too much.  This blog is limited to personal finance mostly but still, you’ve probably noticed that I go back and forth on concepts and ideas, wavering on the execution and which strategy is best for which time.  Which brings me to my current dilemma: should I be investing my money or putting every extra penny into paying down my debt?

I go back and forth on this all the time.  I’m already paying extra into my debt to knock it back but still, I feel like I could do more.  I look at the $750 a month I spend there and literally drool at the investments and returns I could be making.  I already put away $400 a month outside of my 401k, so if I was able to put aside $1150 a month?  Now we’re talking.  At the same time though, I enjoy putting money into my investments.  Watching my $400 a month grow into something is exciting and gives me hope that I just might be doing something right with my money!

When I look at how my net worth has changed over the past year, what I see is that my debt has just slowly, moderately decreased, while my investments in my 401K and Vanguard account have led a massive charge forward.  Since I started tracking my net worth like a crazy person, in January of 2012, my debt has decreased by only a total of $7,900 while my investments have risen by $12,500.  There is a huge disparity here and while I’m not going to say I dislike it (I do like having more money as opposed to less), I tend to think about the road not traveled.

The thing is, my investments massively outperformed the interest I paid on my stocks.  Since January 2012, my investments have paid a return of over 22%, outpacing the weighted average of 5.25% of my debts (not taking into account the tax deduction for student interest).  I can look at those two numbers alone and know that my money is being put to better use by investing it.  The bigger question now is, now that I have enough savings to feel safe in case something truly awful happens, should I just do it?  Should I just go for it, cut my 401k and my investing and just knock away my debt?

I’m honestly not sure about this.  On the one hand, I hate debt.  I truly loathe it!  It’s one of the only things that can keep me up at night and I don’t even have that much of it!!  I hope I never have a mortgage, otherwise I’ll never sleep.

If I choose to jump on the debt, this is how I'll do it.  A ridiculous avalanche off of half dome.  That's right Sallie Mae, I'm going to dump your body off half dome in the middle of winter!

If I choose to jump on the debt, this is how I’ll do it. A ridiculous avalanche off of half dome. That’s right Sallie Mae, I’m going to dump your body off half dome in the middle of winter!

On the other hand, I love watching my investment account grow.  I love having money as opposed to giving it away.  In the end, I’m almost positive that I will take stashing money into a Vanguard account over paying off my debts any day.  The more quickly that account grows, the quicker my net worth heads towards positive and the less I will worry about my debt just hiding off to the side, slightly out of view.

Opinions here are appreciated.  What do people think?  I know a great deal of people choose murdering debt while others would rather build up their cash stash.  Let’s hear it, what road should I take?


Photo courtesy of somewheregladlybeyond

6 thoughts on “Invest or Pay down my debt

  1. Brian,

    It sounds like you know what the right answer is. I think you, like myself, feel more stable when there are less accounts to track. You feel like that if you get rid of the student loans, that’s one less account you’ll have to monitor. However, you’ve said it yourself: Your investment returns are exceeding your student loan interest. Wait it out and pay off the debt as it becomes due, because in the long run you’ll end up with a higher net-worth post-debt. The only difference is that you will be debt free at a later time.

    Worry less about being debt-free and more about asset retention and accomplishing that positive net worth goal that you talk so much about!

  2. Brian,
    Keep these posts coming. They got me thinking about my own financial situation and I’ve begun making positive changes for my net worth. No more money holed up in a checking account!

    • Thanks Brett! That’s great to hear that you’re starting to put your money to work. I’ll do my best to keep the posts coming as well.

  3. 22% is great, but I wouldn’t expect that trend to continue forever. In fact, equities look quite overvalued by many measures. I would pay off any debt that you have that’s above 5% right now and wait for a pullback in the market, but that’s just me.

    • While I don’t disagree with you, I’m not really a big market timing guy. Plus, if the market is going down I DEFINITELY want to be investing. That’s where the truly big gains come from in the long run 🙂

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