Is paying off debt before investing the best financial strategy? The most famous personal finance talking head swears by it. Those who deviate from his one-size-fits-all method are considered out of touch with reality and Biblically illiterate.
Is he right? What are some of the pros? Undoubtedly, there are some negative aspects as well.
Paying off debt before investing is terrible advice. Time in the market is vital. Delaying investing because of debt is destructive in many situations. Additionally, many people will stay in debt forever. Those lost years are gone forever. The debt will remain and the investment fund will be empty.
What would you think of a personal trainer who discouraged you from exercising? Would you find that advice a bit troublesome? I would.
“Thanks for hiring me as your personal trainer. Here’s my plan. Watch what you eat. You need to cut your calories down to 1,000 per day.”
You timidly ask, “What about exercise? Wouldn’t I reach my goal quicker if I did some walking or running?”
“Stop exercising immediately! My plan works if you follow it to a T. You’re going to be hyper-focused on dumping the plump. One thing at a time, friend. As soon as you drop fifty pounds, then you are going to train for a marathon! Intensity is the name of the game on this plan!”
Alrighty, then.
Does The Bible Forbid Debt?
Have you considered your primary financial goal? Has anyone asked you what you truly want to accomplish? Or have you passively adopted another person’s financial goal?
Is getting out of debt your goal? If so, put your life on hold and solely attack debt.
If your goal is different then perhaps you should reconsider your options.
Many fear the debt boogeyman. Its legend is massive. The Bible discourages debt. It doesn’t forbid its use.
Debt is not dumb. It is risky.
Life in general is risky. We assume risks every day.
Here’s an article that I wrote titled, What Does The Bible Say About Debt? The Bible is not nearly as restrictive towards debt as certain people promising financial peace.
Tortoise Tenacity or Gazelle Intensity
I have known hundreds of families who have attacked debt with extreme zeal. Most peter out a few months into their journey of borrowed conviction.
I’ve run seven half marathons and one full marathon. My first race was the Chicago Rock & Roll Half-Marathon. I was super excited. The training was complete and now it was time to get the 13.1 miles into the record books.
Gazelle Intensity
In my excitement and zeal, I started way too fast. I was gasping for air early in the race and I never recovered. The race was an abysmal failure. I trained some more and vowed to never make that rookie mistake again.
Some zealous gazelles do the same thing, financially. They begin with gusto and then find themselves gasping for financial air a few months into the program. Often, they never recover and give up on getting out of debt.
Others keep running the entire time with no issues. The verse typically used to refer to gazelle intensity is Proverbs 6:1-5. Contextually it’s about consigning and not debt in general.
Bible verses are often taken out of context. Here’s an article that I wrote about Misused Financial Bible Verses.
Tortoise Tenacity
I believe that tortoise tenacity is a legitimate alternative to gazelle intensity. What in Sam Hill is tortoise tenacity, you ask?
Tortoise tenacity is starting a program and remaining patient until it is complete. In the book, The Tortoise And The Hare, the tortoise wins.
The Founding Fathers affirmed the Declaration of Independence in 1776. King George surrendered in 1783. There were many fights, battles, skirmishes, and setbacks over the next seven years.
During this time the colonials didn’t abandon their other responsibilities. They farmed, raised families, hunted, and bought and sold. Life went on with the dark cloud of war constantly in their view.
A long-term-tortoise-tenacious view of debt freedom works for many families. A debt-free date is determined. Debt freedom is declared. Then the work begins.
Does it matter if five years (0r more) is required to accomplish debt freedom? So long as progress is being made it shouldn’t matter.
Other important things can be accomplished during this time. Surely, you can walk and chew gum at the same time.
Always Take The 401(k) Match
Many employers match retirement contributions. It’s a way for employers to give “raises” while also saving on taxes. It’s free money with a catch. The catch? Employees make a contribution and the employer matches it.
The most common employer 401(k) match is 50%. Employees who contribute $100 will get $50 from their employer. It’s free money and a guaranteed 50% return on investment. Some employer match 100%!
I agree that a big portion of personal financial planning is behavioral. Only a small portion of it is knowledge.
However, knowledge should not be arbitrarily rejected. A 50% match on investment contributions is superior to paying down debt — even extreme credit card debt.
Always take the 401(k) match when it’s offered.
Pay the minimum payment on each debt.
Get the company match.
Use the remainder of your funds to snowball the rest of the debt.
Here’s an article that I wrote titled Always Take The Money With a 401(k) Company Match.
Refusing the company match is poor stewardship and awful math.
The financial planning community supports the prioritization of investing when it makes financial sense.
Paying off a loan with a 2.9% interest rate early instead of getting a 50% return is awful advice.
Time Is Ticking Away
Ecclesiastes 11:6 In the morning sow your seed, and at evening do not let your hand rest, because you don’t know which will succeed, whether one or the other or if both of them will be equally good.
I bought into the “pay off debt before investing” concept when I first began taking my money seriously. Snowballs were in place. We practiced gazelle-like intensity.
Frustrations mounted.
Time continued to tick, tick away.
Opportunity cost exploded.
Eventually, I came to my senses. I realized that I had a solid plan to win the war on debt. We were not taking on any new debt. Plus, we were chipping away at the existing debt. Eventually, we would win.
We started with a 1% contribution to my 401(k). My employer matched it 100%. The worst possible interest rate is around 27%. Some of my debt had 0% interest (hospital bills).
A 100% return is way better than a 27% savings.
Here’s an article of mine titled Defeating the Debt Demon. It provides specific details on how to permanently downsize debt.
Cookie Cutter Financial Plans
One-size-fits-all financial plans rarely work. Cookie cutters should be used to make Christmas cookies and not financial plans.
Some families should focus on debt destruction. Others can successfully do both. Making a call without knowing all of the details is malpractice at best.
Personal finance is personal.
Borrowed conviction eventually loses its appeal.