Anyone with debt and a decent cash flow will eventually find themselves with a choice. What should be done with all of that excess money? Assuming your goal isn’t to spend it all on buying things, you’re basically left with two choices.
- Pay off your debt aggressively.
- Invest the surplus.
The pure mathematical answer is to play the interest rate arbitrage game. Excess money should go into assets that provide a rate of return higher than whatever interest rate your debt is at. It’s a pretty simple calculation from that vantage point.
Of course, most of us aren’t money optimizing robots. We use our money in ways that we think are best for us and not necessarily in ways that yield the most money every single time. So in the invest vs. payoff debt debate, there’s much more that goes into the calculus beyond just which option might lead to the biggest pot of money. What might be the best decision for one person, isn’t necessarily best for another.
When I began my debt payoff journey several years ago, I found myself landing on the payoff debt aggressively side of the debate. This held true even after I refinanced my loans down to a lower interest rate.
When it comes to debt, I saw two advantages to paying it off aggressively. First, it gave me flexibility in my career and lifestyle by reducing my monthly fixed expenses. Second, getting rid of my student loans was the safe play. It reduced the risk and uncertainty I had in carrying debt. Plus, you can’t really go wrong when you make the decision to pay off debt.
Flexibility – Or The Ability To Stay Lean And Mean
Financial independence is all the rage these days in the personal finance world. And one of the biggest factors to becoming financially independent is the ability to keep your fixed costs low. If you only need a small amount of money to meet your needs each month, then it becomes relatively easy to save enough money so that you’ll never have to work for money again. Even without the goal of financial independence, keeping your fixed costs low is a smart thing to do. Remember, we never know what the future might hold.
That’s why I’m a big fan of staying “lean and mean” when it comes to my finances. I want to have as few bills as possible each month. By keeping fixed costs low, I’ll need far less in order to become financially independent or to survive if the going gets tough. And I maintain flexibility in my career choices because I don’t need to rely on a certain level of income in order to meet all my financial obligations.
Let’s take my own student loan situation as an example. The minimum monthly payment on my $87,000 of student loans came out to a little over $1,000 per month. Paying $1,000 per month towards student loans might not seem like a big deal when you’re making a pretty good salary. But living comfortably while also servicing a $1,000 per month student loan payment meant that I needed to assume that my salary would never decrease. It also meant I couldn’t consider other options for work unless the job paid as well as what I was already earning. If I kept my student loans around, that meant I was stuck in my job, even if I hated it. I didn’t want to be in that position.
Reducing Risk – We Don’t Know What The Future Holds
The goal of staying lean and mean leads to a second point that’s often understated when it comes to paying off debt vs. investing – the risk inherent in carrying debt.
It’s easy to see why we underestimate risk when it comes to keeping our debt around. People are notoriously bad at predicting the future. Inevitably, we overestimate the likelihood of positive events and underestimate the likelihood of negative events. That isn’t to say that it’s bad to think positively. We should expect that things will likely work out for us. But at the same time, it’s also a good idea to think realistically.
I’m sure most people probably never expect to lose a job during their lifetime. And many of us expect our income to constantly move on an upward trajectory. But, our income isn’t set in stone, and job losses can happen. You might have plenty of money to pay your fixed expenses now, including your debt. But you can’t guarantee you’ll always have that much money. People don’t default on debt because they just suddenly decide to stop paying it. It’s because something happened that they didn’t expect.
This goes back to my goal of staying lean and mean. For me, paying off my debt meant $1,000 less per month in fixed expenses. It’s part of the reason I was able to leave a job I didn’t really like and take one that paid $50,000 less per year. And in the event of a job loss, finding a way to make enough to cover my bare minimum in fixed expenses wouldn’t be the hardest thing to do. Some of those fixed expenses could even be manipulated. I can lower my food costs, use fewer utilities, or cut my internet if absolutely necessary. But when it came to my student loan debt, that payment had to be made every month, no matter what might come up.
Paying Off Debt Aggressively Is My Preferred Choice
Ultimately, whether you want to pay off your debt aggressively or not is a matter of personal preference. There are arguments for both sides. Some are more comfortable keeping the debt around – and that’s totally fine if it aligns with your goals.
For me, I prefer the simple route of paying off my debt aggressively. It’s given me flexibility in my career choices. And I sleep easier at night knowing that I don’t have to keep a certain type of job just to avoid defaulting on my loans or in order to maintain my lifestyle. I might not be financially independent yet. But I at least know that I don’t need to rely on a certain paycheck amount in order to live my life how I want.
The idea of investing the surplus instead of paying off debt also makes a big assumption about people. It assumes we’ll actually invest that extra money instead of spending it on stuff! I have a feeling most people who delay paying off debt make this excuse, but in reality, the excess money is going off to other things. When you earmark money towards debt, however, it makes it much easier to keep it from slipping through your fingers.
Most of us begin accumulating debt when we’re young. You could let your debt hang around all your life and tell yourself that the reason you’re not paying off your debt is that you’re investing the surplus.
Or you could just buckle down for a short period of time and pay it all off. I prefer the freedom of knowing that my debt is gone forever (and hopefully never coming back).
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More Recommended Ebike/Scooters
Check out these other ebikes and scooters I've reviewed:
- Urban Arrow Ebike – Last year, I made one of the largest purchases I’ve ever made – I bought a $9,000 electric cargo bike from Urban Arrow. In my Urban Arrow review, I will discuss what it is and why I decided to buy this bike, as well as discuss how impactful a bike like this can be on your journey to financial independence.
- Troxus Explorer Step-Thru Ebike – The Troxus Explorer Step-Thru is a fat-tire ebike that I’ve had the pleasure of riding for a while now. It has amazing power, great looks, and awesome range. If you’re looking for a great fat-tire ebike that offers a lot for the price, the Troxus Explorer Step-Thru is definitely one for you to consider. Check out my Troxus Explorer Step-Thru Review.
- Hovsco HovBeta Ebike – The HovBeta is a folding ebike with great specs and a lot of interesting features, and importantly, it’s sold at a good price point. I’ve had a blast commuting with it and using it to do deliveries with DoorDash, Uber Eats, and Grubhub. Check out my Hovsco HovBeta Ebike Review.
- Vanpowers Manidae Ebike – The Vanpowers Manidae is a fat tire ebike that I’ve been riding as my primary winter commuting bike and have also been using it to do food delivery with apps like DoorDash, Uber Eats, and Grubhub. After clocking in a decent number of miles with this ebike, I wanted to write a post sharing what my experience with the Vanpowers Manidae ebike has been like. Check out my Vanpowers Manidae Review.
- Sohamo S3 Step-Thru Folding EBike Review – A Great Value Folding Ebike – The Sohamo S3 Step-Thru Folding Ebike is an entry-level folding ebike that offers a lot of value for the price point. I’ve been riding the Sohamo S3 for a while now, putting the bike through its paces, and I have to say, this bike has exceeded all of my expectations. Check out my Sohamo Review.
- KBO Flip Ebike – The KBO Flip is an excellent bike. I’ve had a great time riding it and think it’s a versatile bike that can be used for a lot of purposes and can fit a variety of lifestyles. It’s worked out great for me as a general commuter bike and as a food delivery bike. Check out my KBO Flip Review.
- Hiboy P7 Commuter Ebike – The Hiboy P7 is an excellent electric commuter bike that’s offered at an affordable price point. The range and speed of this bike are both very good, so you won’t have any trouble getting anywhere you need to go with it. As a food delivery vehicle, this is also good – with how much range it offers, you’ll be able to work all day on a single charge. Check out my Hiboy P7 Commuter Electric Bike Review.
- Himiway Escape Ebike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
- Espin Sport Ebike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
- Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
- Varla Falcon Scooter – The Varla Falcon is an excellent scooter that offers a good amount of power at a lower price point compared to more powerful scooters. It’s not exactly an entry-level scooter, nor is it a high-powered scooter. I think it fits somewhere in-between those two categories – an intermediate scooter if I had to give it a category. Check out my Varla Falcon Review.
- Hiboy S2 Scooter – The Hiboy S2 is an excellent entry-level commuter scooter that's perfect for someone looking to save some money in transportation costs and improve their commute. Check out my Hiboy S2 Review.
- Hiboy S2R Scooter – The Hiboy S2R is one of the more interesting electric scooters I’ve been able to test out. It’s not a high-powered scooter, but for an everyday transport option, it’s very useful, especially given some of the unique features that it has. Indeed, for the price, the Hiboy S2R might be the best value scooter I’ve used. Check out my Hiboy S2R Review.
- Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.
More Recommended Investing App Bonuses
For additional investing app bonuses, be sure to check out the ones below:
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More Recommended Bank Account Bonuses
If you’re looking for more easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.
- Upgrade ($200) – Upgrade is a free checking account that’s currently offering a $200 referral bonus if you open an account and complete a direct deposit. These bonus terms are easy to meet, so it’s well worth doing this bonus as soon as you can. Here’s a post I wrote with more details: Upgrade $200 Referral Bonus – Step By Step Directions.
- Ally Bank ($100) – Of all the banks out there, Ally is, without a doubt, my favorite. At the moment, Ally is offering $100 to customers who open an eligible Ally account and meet the requirements. Here are the step-by-step directions to earn your Ally Bank referral bonus.
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- Varo ($25) – Varo is a free fintech banking app similar to Chime or Current. It’s currently offering a $25 bonus to new users that open a new Varo account with a referral link. The bonus for this bank is very easy to meet, all you need to do is spend $20 within 30 days of opening your Varo account. Check out my step-by-step guide to learn how to earn this bonus.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $300 if you complete a direct deposit.
- 5% Savings Accounts. I'm currently getting 5.24% interest on my savings through a company called Raisin. Opening a Raisin account takes minutes to complete, it's free, and all of your funds are FDIC-insured. I explain how it works, why I'm now using it to store my emergency fund and any other cash savings I have, and why I recommend everyone check it out in this review.
- US Bank Business. US Bank is currently offering new business customers a $800 signup bonus after opening a new account and meeting certain requirements.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account.
- Empower. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
Feel free to send Kevin a message here.
I have thought long and hard about this and have a post scheduled for Saturday that talks about whether we should focus on paying our mortgage early (which would be above and beyond retirement investing).
Everyone is always saying that the math says don’t pay down a 3.625% mortgage and invest instead. But I’m not so sure the math works out better in that case for us.
Let’s assume we do the following:
– Pay off the mortgage in 5-years.
– Focus on investing in mutual funds at the 5-year mark.
– After 10-years, sell the home and downgrade to something cheaper. Dump the excess cash into the mutual funds.
– After 20-years or so, we end up having a larger nest egg than if we didn’t pay off the mortgage early.
If we focus on paying off our mortgage in 5-years and then let’s say we sell our house in 10-years and downgrade to a smaller/cheaper house. If we invest the extra money from that sale and focus on investing the full amount after the mortgage is paid off in 5-years, it seems we will have more money if we focus on paying off the mortgage ASAP. I have a poll on this article for Saturday, and I would be interested in hearing your opinion on what we should do.
Excellent article. I agree with you 100% and this is exactly my way of thinking.
I knocked off a 30-year $294,000 mortgage in 7 years. Just like you I put every single penny I could into paying off the mortgage while also setting some aside for retirement investing. Some would say that I could have a better return should I invested the money instead, however I wanted the peace of mind of being debt free and not to depend on a specific job.
Granted, I am a physician and probably wouldn’t have been able to pay it off fast without my “high” salary; but just like you know a lot lawyers that blow their money in luxuries, I know a lot of physicians in the same boat as well.
This article was great. I saved up 3 months worth of expenses for emergencies, now I’m currently attacking my car loan. I can’t wait till I pay it off for good!!
Thanks Bo! Glad you got that emergency fund saved up. Keep trucking along!
It’s always a tough one. I totally understand that when it comes to your primary home, own student loan etc., the emotional part can be much stronger than the math part. It’s fine like that, and right now I can only imagine how great feeling it is to live debt free.
Just one thought: if you invest instead of pay of your debt, if you really want to get rid of your debt, you can always sell your investment and do that.
I’ve thought a bit about investing and earmarking that money solely for paying back your debt. It’s a strategy I could see working with debt that would probably take a long time to pay off, such as a mortgage. Assuming solid returns, at some point, you’d have enough money in investments that you could just pay it off all at once. But that assumes the market cooperates. You never know what the future might hold. And during that time, you have to pay your debt, no matter what, right?
With something like student loans, those can be paid off in a year or two. I feel like its worth it just to buckle down and get them gone really fast. Once they’re gone, I think you can just play catchup later, and you at least no longer have that baggage weighing you down. Just my thought anyway.
I totally agree about student loans. Those have higher interest rates and less in value, so it’s doable and worthwhile to pay them off. My comment mainly related to mortgages which are harder to pay off in a few years, and the longer the period is, the less you need to rely on short term moves on the stock market.
That’s true. I’m still a bit up in the air on the mortgage issue.
Great article, Panther! And great comment, Biglaw! I hadn’t thought about it, but I think you’re right that we lawyers probably skew more toward pessimism than the average person because we’re trained to always plan for the worst with clients. Actually, I’ve probably always skewed toward doomsday planning myself, but it was definitely reinforced in and after law school.
The primary reason I’ve always paid off debt as fast as possible is because of that “worst case scenario” planning. But I will say that it’s definitely been a good approach for me, because it gave me financial flexibility that I wouldn’t otherwise have had when the stock and housing markets crashed. I had more equity in my condo than most folks, which enabled me to refi for a lower rate/payment and rent it out and still be able to afford to buy a house. If I had paid the minimum and invested the difference in the stock market, I would have been locked into my condo because I wouldn’t have had enough equity to refi, and my stock portfolio dropped by almost 50%, so I couldn’t have pulled out any meaningful cash to make up the difference.
By being able to make that move, I was able to buy my current house at market lows ($435k), and I’ve ridden the tide back up to about a $625k value or so. So at the end of the day, ironically, my measly rate of return by paying my lower interest rate mortgage instead of investing in the market caused me to make far more money in housing appreciation by giving me the flexibility to buy when I wanted to buy.
That’s awesome Yetisaurus! You’re right about the doomsday planning scenario. I think I have also fallen into that kind of thinking because I entered law school in 2010. This was right after the financial crisis when biglaw firms were cutting class sizes down to nothing and no-offering people, as well as doing stealth layoffs. At the same time, law school class sizes were getting huge because everyone was trying to go to law school. The idea that law school was a risky investment wasn’t quite mainstream yet, although there were a lot of people making it clear that if you didn’t get big law, you would have a ton of trouble paying off your loans. Because of this, I went into law school with that doomsday scenario in mind. Do as good as I can, and pay my loans off as fast as possible.
Whether it’s mathematically right or not, it was right for me because of the flexibility it gave me. Just like with you, paying off that debt opened up doors and gave you some breathing room that you might otherwise not have had. I know that’s what happened for me. If I still had those loans, even if I had a pile of cash sitting in retirement accounts, I’d still be stuck at the biglaw firm just hoping to find a different job that paid me as well or praying I don’t get fired one day.
Nice work, Panther. As you know, my feeling tends to be that, for big financial decisions like debt repayment v. investment, the numbers have to have the final say. (And I’m no robot!)
Personal factors certainly are fair for consideration, but they have a way of feeling like a smokescreen or ex post justification for doing the mathematically “wrong” thing sometimes.
One point you make that I’ll touch on regards people having a tendency to overestimate the likelihood of positive future events. Although it’s clear some people wildly underestimate the likelihood of really bad events, it’s also evident some wildly overestimate the likelihood of bad stuff – such as stock market crashes. I’d say there’s not definitive evidence showing people tend to systematically over- or under-discount future bad or good stuff. Rather, it would appear people tend to just not give it much thought at all. Which leads to inconsistent risk discounting that tends to harm planning and outcomes.
Just my quick thoughts on a nice post. Thanks!
Well, one thing is, you’re definitely much better at math then I am. That’s why I became a lawyer after all!
I knew the invest vs. payoff debate is one that will trigger some strong sides. Maybe I just hate having debt that isn’t tied to any specific asset. If I get tired of my student loans, I can’t sell my degree and make the money back.
Or maybe it’s just because I hated my job so much and wanted to get out of there. I just feel like having that student loan debt gone gives a bunch of flexibility in what I have to earn. I could probably survive if I needed to doing nothing but Airbnb, dogsitting, Postmates, and selling trash if I had to do it. But I don’t think I could do it if I needed to pay back my student loans too.
I guess one thing I could say, is it really “bad” to pay off debt? At least it’s increasing your net worth. Much better then spending it on something else anyway. I feel like a common thing a lot of folks say is that they’re letting their debt ride because they’re investing the surplus. But really, the surplus is getting spent on stuff, rather than actually getting invested.
Absolutely! If the surplus is getting spent rather than invested, that gets a big thumbs down!!
By the way, if you figure out how to turn trash to cash, please give me the details… I think we could make a killing with all the dirty diapers my baby generates these days!
Oh man, I don’t know how to turn actual trash into cash!
I actually think you have it backwards for lawyers. We underestimate the likelihood of positive events and overestimate the likelihood of negative events. It’s one of the reasons why we often choose a fixed interest rate vs a variable interest rate or why lawyers hoard cash rather than make investment decisions. When you’re trained to see risk everywhere, you often think the worst is right around the corner.
Unfortunately, the flip side of that is lawyers decide to be “risky” by betting on penny stocks or other get rich quick schemes. Like a kid who gets ahold of his own sugar supply, there’s a tendency for wild swings between being conservative and gambling money away. I think lawyers have a hard time taking on the appropriate amount of risk because they have a warped view of it.
I suppose I’m probably guilty of overestimating risk in some aspects. Not so much in terms of investing, but I might overestimate risk when it comes to job loss and/or income loss.
But, here’s why I think about risk this way, at least when it comes to your traditional biglaw associate. Most things we read just sort of assume that your income always goes up and that you’ll get promoted each step of the way. In my experience, biglaw doesn’t work this way. It’s an up or out system, and no guarantee that you’ll make partner.
Then, there’s the fact that being partner isn’t the goal for many people. We know how miserable alot of us lawyers are. I know I was pretty miserable when I was in biglaw. And I had no intention at all of trying to get to partner.
So if you can’t get to partner, what’s going to happen to your income? If you go the government route or try to take a job with better work life balance, your income will simply have to decrease. I don’t really know of many good jobs with decent work life balance that pay the same as biglaw salaries.
This is why I think that paying off debt makes sense for the biglaw associate. I took a big paycut going into government. I did it for a number of reasons, most of all better work-life balance. But I never could have done it if I still had high five figures of student loans weighing me down. (or if I had let my lifestyle creep up).
I can tell you it feels great to have our student loan and auto loans paid off. Paying off debt is definitely a guaranteed rate of return, provides peace of mind and, eventually, boosts cash flow.
That said, my husband and I have gone back and forth about aggressively paying off the mortgage. We’re have a rate of 3.25%, plus we have a good deal of equity. If we were in an emergency situation, we could (hopefully) sell it and buy something smaller and cheaper with the proceeds. We are in a high demand area right now. The only problem would be if we weren’t able to sell it (we could take the $$ out of our retirement accounts and suffer the penalty – but this would ONLY happen in an absolute, desperate situation).
Mortgage is one of those things I’m never quite sure what to do. Eventually, we’ll hit that point in our own financial journey and have to make a decision as to whether we want to try to pay it all off or just invest it. One thing that I’ve thought about doing is setting up an investment account earmarked only for mortgage payments. Throw all the extra money into that, and over time, it’ll eventually grow to be as much as your mortgage balance. Then you could make the decision on whether you want to just write a check and pay it all off at once, or wait to pay it back.
I’m a huge fan of paying off debt. Not having that baggage hanging around is such an amazing feeling and it’s by far the best thing that I have done in my financial life. Thanks for sharing!!!
It’s really awesome not having to worry about it. I think a lot of people underestimate the type of flexibility you can get when your debt is gone. It’s something like a step below financial independence.
I live in a fairly expensive state for real estate. As a result I don’t feel bad throwing extra payments at my mortgage. The math seems simple. Buy a stock and the ROI could be anything. A payment towards my house is 4.25% I don’t have to pay and the value of my money still has potential to climb!
I still diversify by investing in both, but it is nice to do and isn’t something I shy away from. My wife and I aggressively paid off a home equity line of credit used to purchase a house in advance of her leaving the military. That reduction in monthly expenses was critical in making our lives easier and keeping the house.
Keep spreading the good word FP, I love your tactics!
Thanks Jack! Doing both is a great thing to do as well if you’ve got the income. That’s what I was able to do at the end when my income was at its highest. I put myself on pace to max out my 401k, but still was able to throw a ton into loans.
Like Abandoned Cubicle, I have a good amount of student loans at ultra low interest rates. Sometimes I feel like I should just get rid of them, but another part of me thinks it’s better to invest that amount instead since I feel like I can make a better return than 2%. I still do qualify for the student loan interest deduction so that’s another factor in keeping the ultra low interest loans .
It’s a tough choice. If you’re looking just from a money perspective, then sure, investing the difference is the way to go to have the most amount of money. But that assumes a lot of things go right. One potential tactic to get the best of both worlds is to set up an investment account just for the surplus money that would otherwise go to loans. Earmark it just for paying off loans, and once you have enough money, you can at least rest easy knowing that you could pay off all your debt with one payment, if you wanted to. And if you decide you don’t want to pay off the loans and let it ride, you can just keep the money invested.
Makes sense to me! We have about 60k left in student loans but the rate is 2% and payments are 175 a month. Still, just don’t like that little cloud over our head. Barely putting a dent in principal at the current schedule ????
Wow, are you on a 30 year payment plan for those loans? At 175 per month, it seems like that debt will never go away. It sounds like you’ve got 100 dollars each month going to interest and 75 going to principle?
Of course, 2% is really low, so I can see why you might be hesitant to pay off those loans. But I guess I could say that even at 2%, it’s still costing you $1200 in interest per year, and around $3 per day. That’s a pretty nice cup of coffee going towards interest, every single day.
Paying off debt has another advantages also, above “possibly” investing. Debt payoff is money that is somewhat “protected”. As a lawyer I know you know about this more than I do but some states protect your primary residence against litigation. If someone sues you they can use investment accounts but your home and money used to pay off your student loans are “safe”. Safe because you dint have it, but it still went toward increasing your net worth. Also when applying for college aid they don’t care if you have your own student loan of 200K but they do care if you have a million dollars in assets.
That’s a great point in the risk analysis portion. You are increasing your net worth and at the same time, you’re getting that money somewhere where you can’t lose it.