My wife and I've been out of consumer debt since January 2002. No credit cards. No car loans. Nothing. In 2007, we paid off our second house. We had a thirty-year mortgage for about $130,000 beginning in 2003. We paid it off in just under 5 years. In 2009, we needed to move, and we went back into debt for our new home. We paid that house off in 2012. Wow! It seems like so long ago, but it's only been nine years. We worked pretty hard to pay off all our debt and those houses early. Fortunately, my income kept going up year after year from 2001 through 2012 which made it a bit easier to accomplish. But for the average person, is working your way out of debt the best way? It's the way I did it. It's the way millions of Americans do it. But is it the best way?
Working your way out of debt is 100% doable and repeatable. It works every time. If you work and use your extra money to pay off debt, your debt goes down and it eventually goes away. But let me present a slightly different way of addressing debt. Have you thought about investing your way out of debt?
Investing Your Way Out of Debt
I'm not going to be one of those financial guys that tells you that investing your way out of debt is the absolute best thing to do. It does carry a bit of risk and there are some potential pitfalls, but I believe it's a viable option for helping you pay off your debt possible faster while still leaving you money. Follow along.
For the average person, working for your money is the primary source of income. If you have $10,000 in debt and you make $10 per hour, You need to work for around 1,000 hours to pay off your debt. If you make $20 per hour, you need to work at least 500 hours. If you make $100 per hour, you need to work 100 hours to pay off $10,000 in debt. Get the picture. You're trading your life, in hours, to pay off your debt no matter how much you get paid. Your life and your time are precious. Protect them.
So, lets look at a different route. Can you invest your way out of debt? Well, the answer isn't super clear. It really depends on quite a few things, but for some, yes. It is an option.
Under a work your way out of debt model, you trade your life in hours for $10,000 to pay off your debt. Once your debt is paid off, you have nothing. Under an invest your way out of debt model, you work for your $10,000, but you will put into an investment account and then you the growth from your investment to pay off your debt. In the end, you still have your $10,000.
Get the picture? Does it sound too good to be true? Well, yes and no.
For the average person, sticking with the simple model of working your way out of debt is the easiest and most sure way to eliminate your debt. But for the adventurous soul who may want to take on a little risk, investing your way out of debt is a viable option. How does it work?
The standard credit card interest rate is going to range anywhere from 5% up to 33%. Yes. 33%. I know that sounds crazy, but it's true. The interest rates are so high that it should be criminal, but we'll avoid that hot topic for now.
What you do with your money is critical to helping you build wealth and transforming your finances. While paying off debt with your hard earned money is a great move, it may not be the best move.
Common wisdom (by financial advisors) says that you can only get 7-10% annual growth from your investments. If you're Dave Ramsey fan, then your familiar with Dave's 12% investment returns. For traditional financial planning, these are relatively safe numbers. However, for the astute investor and during key times in America's economic history, there is the opportunity to exceed these growth rates. Yes. You heard me correctly, and herein is the reason I'm writing this article...because it runs contrary to "traditional financial wisdom"...or at least some of it. Let me give you some examples and how this could apply to you.
Never pay off your house Have you ever heard someone say this? While I don't agree with it completely, mathematically it makes sense. For example: today, interest rates are running 2-4%. Investing growth has been seeing growth of over 10% per year. If you'd paid $10,000 on your house, you would have "earned 4%" on your money by paid down your mortgage. If you'd invested however, you would have gained 10%. That's a next 6% gain or roughly $600 per year which would allow you to pay your mortgage or any other debt down. Over 20 years, that $10,000 invested could beat the early house payment strategy by $20,000! By investing that $10,000 rather than paying it towards your house can create a significant effect on your financial future. Now imagine if you were to invest $10,000 a year instead of making early payments on your house. Yes, it compounds. Every year invest $10,000 rather than making early payments, you could be creating an additional $20,000+ in future wealth over just 20 years. The numbers get even bigger the further out you go. But it's not all about the money. While investing your money instead of paying on your house mortgage down can create more future wealth, it may not offer the most security for your family. My wife and I chose to pay our house off early. It brought us a lot of safety, security and peace of mind. We enjoy not worrying or dealing with house payments. We were 42 when we paid off our house. It feels good.
Try high growth potential investments Investing can be risky, but there are ways to lower your risk. When choosing whether to use your money to pay off debt or invest, consider the risks. For debt with higher interest rates (over 10%), it makes more sense to pay off debt. It's safe and it gets you a return on the money you have. Some credit card debt ranges from 15% up to 36%. 36%! You've got to be kidding! Nope. Credit card lenders are out to make money, and it's your money they are taking. They will take as much of it as you will let them. It's not easy to make 20% annually investing, but some people do it. For the average person, the smart choice is to pay off your debt if the interest rate is 10% or higher. However, there are some investment opportunities that could yield much higher returns. Remember that higher returns often means higher risk. Let's take the cryptocurrency Bitcoin for example. If you had purchased $10,000 in Bitcoin just a year ago, You'd have $50,000 to $75,000 today depending on when you purchased. Bitcoin is just one example and there are many others. Ethereum, Litecoin, Doge, Cardano, and quite a few others. Some of these investments went up 10x in a single year. That's 1,000%. I have several of these investments that enjoyed some growth over the last year. Cryptocurrencies aren't the only investments that have seen huge growth. many stocks have seen growth as well. Tesla, Apple, Amazon, and many more have all seen growth that would help you invest your way out of debt. Land investments can make a good option if you can find the right deal and have the experience to make money, but it's often more time consuming and requires more cash when compared to stocks, cryptocurrencies or gold/silver where you can get started with less than $1,000.
Consider converting your cash We're in a unique time in world economics. China and Russia have been buying up gold since 2010 to stabilize their currencies. Poland has recently been buying up gold. JP Morgan Chase bank has been acquiring massive amounts of silver. Instead of holding cash which is a paper currency and suffers due to inflation, consider converting some of your cash to silver. If you have $10,000-$50,000 in an emergency fund, consider converting 20% into hard silver or gold. Gold and silver are still currency and you can exchange them if you ever need to. By converting some of your cash into gold and silver, you're protecting yourself from being fulling exposed in the US Dollar. At this time, many economists are expecting the US to hit hyper-inflation. If your holding cash, it will rapidly loose its value. In the 1970s, the US experience inflation rates as high as 11%.
I'm not saying that investing your way out of debt is the absolute way to go. It carries some risk with it for sure, but it also carries some opportunities. Whether you choose to work your way out of debt or invest your way out of debt, you need to get out of debt and avoid it if at all possible.