Pay Off Debt or Invest: The 77% Case Study

So, I was recording my podcast this week and shared an off the cuff example that answers the age old question – pay off debt or invest.

This is an important one. And it’s something that comes up a lot in my calls with potential financial coaching clients.

I’m sure you’ve heard financial gurus and debt bullies like Dave Ramsey telling everyone that if they don’t pay off all of their debt before investing then it’s a bad idea.

A lot of women are afraid to start investing because they’re paying off a lot of personal and/or business debt but what these ladies fail to realize is how many years worth of portfolio growth or retirement income this could be costing them!

So why would anyone want to rob themselves when there’s such an easy solution?

I have no idea.

When you invest in a retirement account like your 401(k), Roth IRA, traditional IRA, SEP-IRA, or 529 plan, you’re making an investment in your future.

You are putting your money to work now and (should be) giving it plenty of time to grow.

But you can’t do that if you’re using every penny to pay off debt.

So, here’s a real-life breakdown of the consequences of the ‘pay off debt or invest’ decision.

Meet Amy

Let’s say Amy, a 35 year old single woman, is struggling with the decision to pay off debt or invest.

She earns $5,000 a month after taxes.

And after the mortgage payment, car payment, car insurance, utilities, food, clothing, and miscellaneous, she has $1,000 left.

That means Amy has $4,000 a month in living expenses.

Amy also has $30,000 in credit card debt, a $20,000 car loan, and $50,000 in student loans.

Amy follows the advice of Dave Ramsey and his 7 Baby Steps.

They say she must pay off all debt except for her mortgage and have six months of living expenses saved before she can begin investing 15% of her income for retirement.

So, if she uses her extra $1,000 a month to pay off her debt, it will take her 100 months or 8.3 years.

Once she has her debt paid off, Dave wants her to save up more money – this time six months of living expenses.

The problem is that will take another two full years to do.

Amy’s Finally Debt Free

So, after 10.3 long years of paying off debt and saving, Amy finally gets to put her money to work investing for the future.

15% of her $5,000 a month income is $750 a month so that’s what she starts investing.

After 20 years, assuming an average 9% return, she’ll have $466,000 saved for retirement.

But guess what?

Amy’s Screwed

Yep, I said it.

And she is.

But not for the reason you think.

Because she would have almost double that amount if she started investing and paying off debt at the same time.

Take a look for yourself at this info graphic that shows what happens over 30 years…

pay off debt or invest

I don’t know about you, but I personally would prefer to have $50,000 in debt and less in savings when I’m 45 to have almost double the amount of retirement savings when I’m 65.

Ok, maybe I do know about you because I seriously doubt that you’d deliberately set yourself up to have a retirement nest egg this short just to pay off your debt a little sooner.

Pay Off Debt or Invest: Final Answer

If Amy hired me as her financial coach when she was 35, instead of following Dave, here’s what I’d recommend.

Starting immediately, use half of that $1,000 she has every month to pay down debt and half to invest.

That way instead of having $466,000 when she’s 65 she’d have $824,000 instead.

That’s 77% more for retirement!

The financial ‘gurus’ will claim that you can’t pay off debt and invest at the same time.

But you can.

And should.


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