A Visual Breakdown of Why Investing Is Better Than Paying Off Debt

July 24, 2019 posted by

it's Brian Preston the money guy so here look at what tell them what we got here set them up so we're gonna talk about two different savers we're gonna look at two thirty year olds and they're both going to buy a house right they're gonna buy a house for $300,000 and they're going to put 20% down because they don't want to pay PMI primary mortgage insurance what's the good savers this is tale of two good save tale of two good savers they each have a four percent mortgage rate and that seems pretty reasonable given where we are today I think it's interesting the two guys what were the Nate was names you came up for him you you've actually named our two case studies here right well I had one that was um what are those leisure leisure areas your suit later Larry who's the boring saver and then we had um old the old debt crusader also dashi yeah I mean the old stash mother turtle stash key is what I called him okay so this is what's gonna happen the guy with the stash he is gonna pay a hash McGee stash me that grew Seder he's a debt crusader he's gonna pay off his mortgage right in YouTube comments left and right the bronze an idiot for investing anything he is gonna pay off his mortgage in the first ten years as quickly as he can so it's gonna go get him mortgage paid off in ten years and he's gonna pay two thousand four hundred and thirty dollars per month on his mortgage and that's gonna have it paid off after it's paid off starting at ten years and one month he's gonna start investing two thousand four hundred thirty dollars a month and he's gonna do that all the way until he hits age 65 you know so he's gonna be invested he's gonna get that debt paid off he's gonna start saving more just like a lot of our debt Crusaders say he is squeezing every opportunity he's gonna attack that debt that's his game plan to tack that debt and then after he pays off the debt we're just gonna save like no one else and keep that momentum going so then there is boring Leisure Suit Larry so what he's gonna do is he's gonna amortize his mortgage over the ladies man based upon that Leisure Suit here stud for sure he's going to pay off pay one thousand one hundred forty six dollars per month on his mortgage but he's going to invest the difference of one thousand two eighty four so he just add those two up it equals what stashies mortgage payment look I will tell you I don't think the average person is probably going to be in their mortgage for thirty rights but to prove our point we're just gonna say that old Leisure Suit Larry here is going to pay his mortgage not a penny faster than though it is on his amortization schedule so this is gonna be 30 years but then he's and that math works out look at 24 30 a month which is the debt Crusaders gonna pay it off subtract that from the calculated amortization payment of 1146 you'll see that's where we came up with how much it's going to be invested a little under $1,300 a month but remember what we said early is that the dollars you save are not equal early dollars can do more for than later dollars so this is what we assumed they're 30 years old we assume that money they save in their 30s is gonna make nine percent and then the 40s are gonna make eight percent and their fifties are gonna make seven percent and then their 60s are gonna make six percent so we didn't even try to stack the debt deck in our favor we're actually subscribing to exactly what we say is a realistic expertise here yep if we would have pushed this to the 20s a a 25 year old and pushed that rate of return up to 10 percent it doesn't get better for the debt Crusaders I will just go ahead and let that spill the beans on that a little bit Bo go and hit them up with some more details so this is what we see if you look at the top illustration this is the debt crusader after 10 years they are mortgage free every debt free free and clear and then they start investing and they do a great job and because they are fantastic savers because by the time they get to age 65 they would have 1 million nine hundred fifty-four thousand thirty nine dollars yep which is fantastic it's a great it's a healthy portfolio they're going to be alright but if you're someone out there who's trying to optimize what you're doing look at what happens for boring investors so boring investor you can see those lines don't it's not like it takes it to zero on the debt in ten years and then they start investing there's actually you start investing from day one you know the debt slowly coming down so very slowly because this person is not paying a penny extra on their mortgage which I don't recommend that but I'm just trying to prove my point very slowly paying down the debt but look at what happens with that compounding interest is that money has a 30-year old what it's making and and percent right and then 40 year old he's making eight percent and it just keeps compounding go you can see at the end of it and I don't want to give the full revealed until we go the next slide so flip it over one more page look at this so we started this it starts off it after ten years we got the debt Crusader on the left so sure enough ten years into it he's debt free but his investment balance is zero because he used every bit of his resources to get out of debt from age thirty to forty years of age I've had ten years he was attacking that debt that boring investor after ten years his mortgage balance it started at two hundred and forty thousand dollars was now paid down to a hundred and eighty nine thousand but he still got debt he still he does have debt but his investments is worth two hundred and fifty grand if you look at the difference between the debt he has outstanding the mortgage balance and what the investments are worth he's sixty one thousand dollars net worth if you take your assets minus your liabilities you see your net worth that's sixty one thousand dollars ahead of the debt crusader what I love about this illustration is after ten years if boring investor said you know what I'm just ready to be doing this mortgage he actually has enough and his investment account that he could write a check to pay off the mortgage well that's a good because I had some people one of those comments you posted up there somebody said I'm paying off my mortgage early so in case I lost my job I would I would you know I'm gonna be on an easy street because I'm debt-free I will tell you you're gonna feel better if you lose your job if you have a tank of money over here or that you can go pull off of to pay bills with because the problem with mortgage debt is I hate that it's hard to get it out it's a one-way street unless you go open up a home equity line you got to go get more debt to get the money back out it's it goes in and then you basically have an army of dollar bills that instead of out there working for you and compounding and growing there once again disassembling their their other gun they're cleaning their guns they're polishing their boots and they're going why am i locked up here in this house when I could be out there growing because remember the house that you bought there's three hundred thousand dollars with two hundred forty thousand dollars of debt if it's appreciating at three or four percent they're both appreciating it through your money matter how much mortgage debt is on there the houses still appreciate him so let's go ahead and look at twenty years into it twenty years into it the debt crusader I give him credit he is saving and he's saving just like he said he was going to be he's very disciplined and now his his hard work has created a portfolio that's worth close to a little under half a million dollar it's four hundred forty seven thousand dollars but look at that boring investor twenty years into this he still has a hundred and thirteen thousand dollars a credit card I mean of mortgage but now his investments are worth seven hundred and ninety two thousand dollars if you took the difference between those two things you can see we come out ahead if you take the differ between seven ninety two the one thirteen and then subtract that from the four forty-seven the guy who is the boring investor is still two hundred and thirty one thousand dollars ahead of schedule here's what I think you're still just absolutely wonderful if after 20 years this boring investor said you know what I'm done with my mortgage debt I'm gonna write a check for one hundred and thirteen thousand dollars and pay it off he would still have more in his investment account balance and zero debt than the debt Crusader note this is the flexibility on his side so thirty years I thought this was interesting a year thirty and thirty years into it we know what happened thirty years now the boring investor he's paid off his 30-year mortgage so his investments are worth one point eight million dollars at this point the debt Crusader is worth one point three we're looking at a four hundred and ninety three thousand dollar difference oh that's a that's a huge percentage of what we're talking about then weak fast forward to full retirement age of 65 thirty-five years into it you can see the debt Crusaders at 1.9 million the boring investors two point six this does not get better why does this matter you can just do some really simple math pull out your phone pull your calculator we talk about all the time that when you retire you can think about a healthy withdrawal rate depending on your age somewhere between three and a half to five percent three and a half to five percent of one point nine million dollars is very different than three and a half to five persistence of 2.6 million dollars it could be a $30,000 a year difference on your cash flow retire that's huge if you just did a five percent withdrawal rate so guys I want you to be debt-free I just want you to respect when you're in your 20s and 30s you're in a special period of your life from the army of dollar bills the potential for them is tremendous I mean this works another way to if you're wasteful with your spending if you're not paying attention to set that army of dollar bills to save 10 15 20 25 percent of your money to work for you you're missing out on a huge opportunity to invest and let that money work for you so you can live like no one else while you're young but then live like no one else when you're older because you have true financial independence that's great


42 Replies to “A Visual Breakdown of Why Investing Is Better Than Paying Off Debt”

  1. Yutube SuspendedMyAccount says:

    You forgot to mention the " WHAT IF " factor. Say if you lose your job due to economy down turn or some serious health issue. Also you are paying extra interest on that mortgage for 20 more years. Hey , each to his/her own.

  2. Oahu Guy says:

    So how do you apply this to college graduates with depth like mortgages?? Does Dave Ramsey’s baby steps work if your stuck in baby step 2 for years?

  3. Dennis Gerber says:

    I’m trying to find where Dave says to not invest until you pay off your mortgage. Oh yeah, he doesn’t. Let’s try an example where a guy is paying a 15 year mortgage that’s less than 25% of his net income while funding 15% of his gross income towards retirement. These happen simultaneously.

    So, if you make 120k a year, that is about 90k net without state tax. Mortgage payment could be up to $1875 per month and Investment per month would be $1500. Your disingenuous scenario does not accurately reflect Dave’s advice. You may sucker some people into debt, but not me.

  4. MrEnergyCzar says:

    risk carries a price. the debt crusader got rid of risk and guaranteed a 4% return by paying off mort. would much rather be him.

  5. Chris Reynolds says:

    I what world are you getting 9% interest?

  6. Chris Reynolds says:

    dude on the left talks too much

  7. Aaron Ramsden says:

    I'm in my late 20's and this show is a godsend

  8. CindyYZ says:

    Gents – what about factoring in debt crusader throwing the mortgage dollars after 10 years all towards investment? Good video, but you’re assuming the investment amount between the two remains equal. If debt crusader finishes paying off the house in 10 years and throws all the money in investments he has 20+ years of wealth-building. Thanks

  9. davincicodedanbrown says:

    Is there a Nobel prize in finance? If yes these guys should get one!

  10. jamie t says:

    It is so simple. If you can earn more by investing than you can save by paying off debt, then you invest. If not, you pay off debt.

    If I told you could borrow $10,000 at 4%, and invest that 10k and make 5%, your only question should be "can I borrow $1,000,000"?

  11. AJ Rantz says:

    This is a great breakdown awesome job guys! I definitely think that putting your money where it can get the best ROI is always the best option. But if your debt is high interest Rates, you MUST pay those down. I just did a video of how to invest money wisely if you check it out!

  12. Justin Bone says:

    Great analysis as always fellas- gives folks responsible with money better options for long term wealth building. I like how you guys always hammer the importance of early savings and the amazing compounding effect

  13. Nils Johansson says:

    Brian's approach is targeted to those of us already with money iQ. The Ramsey approach is more for the masses. Neither is wrong, but I'd probably follow the guy with a few million to his name. No offence Brian, because your plan is totally plausible.

  14. Matthew Spicer says:

    Have you looked at a lax factor that comes when investing vs paying off debt. Because the debt is a concrete number it's easier to stop the lifestyle inflation if you have a concrete benchmark where you can see your impact. So if you run the senarios where the saver only saves at 90, 80, or 70% of the rate (thus accounting for human tendanices) would they still come out on top?

  15. Miller Medeiros says:

    Here in Brazil mortgage rates are so high (~10%) that IMO it doesn't even make sense to borrow the money in the first place – stock market average return above inflation is about the same 10% (past 26yrs)… – even tho I have enough money to pay in cash for the apartment I live in, I still prefer to rent, and invest the money elsewhere…

    Will likely only buy a house if it represents <50% of my net worth (paid in less than 5yrs, maybe even in cash), and if it's way nicer than where I currently live in… Don't want to have the majority of my money tied to a single illiquid asset.

  16. Hannkg says:

    What about the interest paid in the mortgage over 30 years? that's lost money? This was interesting using 30yo's as an example, do your opinions change for 45+ year olds?

  17. Jason D says:

    If you live below your means, it's not too difficult to max out investments and pay extra to mortgage. Also, these numbers don't represent risk; which is a big factor why many focus on mortgage. Purely by the numbers, you are right.

  18. Nick Ade says:

    These guys are not factoring risk into these two scenarios. Eg. Job loss, health problems etc. One is always better off by having no debts.

  19. Kevin says:

    Raise your hands if you're disciplined enough to invest the difference in the stock market every month, without fail, until the mortgage is fully paid off.

  20. Ford ST says:

    Peace of mind is the most important thing in the world. Not having a house payment is a beautiful thing.

  21. Steve Morelli says:

    So this goes to show that Dave Ramsey's method is good but not the best idea

  22. Brad Barber says:

    Gap gets closer if you factor in the extra $100k+ in interest the Boring Investor pays on his mortgage. Also, 7-9% real growth rate year after year is probably unlikely, there will be fees, down years during recessions, etc…Don't get me wrong, no matter how you spin it the math almost always favors investing over paying off low interest debt, but there is def some peace of mind that goes along with living a debt free life style.

  23. Blazerelf says:

    Dave ramsey wouldn’t like this advice

  24. Stop Trippin says:

    DR NEVER has recommended not investing until the mortgage is paid. He recommends not investing until ALL consumer debt (sans mortgage) is paid. Then he recommends 15%.

    Personally, I'd do just the match while in consumer debt (sans mortgage) and then increase after.

  25. Kelvin Reyes says:

    You never considered the risk factor. Life isn’t a smooth sail. You can guarantee that Murphy’s law will appear.

  26. jeepcherokee24 says:

    Hmm interesting. However, this is also assuming that the debt crusader is not participating in any sort of employer match into a 401k or something? this sounds like straight up mutual fund/index/stock market investments?

    In a real world situation, the debt crusader would have been putting enough towards his 401k to get a company match (free money, although this is against what Mr Ramsey says to do). A typical scenario of that is a 5% investment for a 4% match. So 9% of his salary could have been going into retirement from the beginning, which means from age 30 to 40 @7% that's $100k balance after 10 years and not $0.

    And then also with the house, the boring investor is also paying an additional $170kish in interest (240k @ 4% for 30 years) , so that brings the spread even closer. At the end, if we're assuming that the house appreciates at 4% over 30 years, a $240k purchase p rice house would sell for around $779,000. The boring investor would have paid 240 + 170 = $410k for the house, so he makes $369k on his investment. The debt crusader pays off at 10 years, paying $51k in interest. So he paid 240 + 51 = 291k for the home. 779-291 is $488k, so he made an additional $119,000 on his investment over the steady investor.

    Then if we wanted to go a step further, that $119,000 extra cash could be living expenses for 2 full years, allowing the debt crusader to let his 401k appreciate even further (1.95million * 7% for 2 years) brings the totalup to 2,232,555, while the steady investor removes $60k per year for living expenses . If we took this a step further and said the debt crusader was actually doing what i said and putting the 5% with 4% match into his 401k, everything else the same, he would be 65 with 2.3 million in the 401k, and then 67 (to account for the 2 additional years of not withdrawing) with 2.65million. The SAVER at 67 would have 2.7million. So while these numbers can be convincing to some, realistically it's a wash at the end.

    Overall moral should be to just pick a path and then dont stray from it…in the end you end up very close to one another and then at that point you pick a withdrawal rate for the lifestyle that you want.

  27. Michael040 says:

    I have a good topic idea, I'm going to be a college freshmen this fall and I have 10k invested. Should I take out a loan to pay for the first year or should I take it out of my investment portfolio?

  28. Rhett VanScoter says:

    Why don't you apply the same philosophy to car loans, where the interest rates can be pretty close to zero? Curious because I'm in the market to get another car towards the end of the year.

  29. Chevy Nation19 says:

    Lol y'all are gonna have Dave Ramsey head blow off

  30. Jokeasterfe says:

    Leisure Suit Larry is an old adult video game where you’d get girls naked. Freudian slip?

  31. Curtis Davis says:

    Great video!! Credit Debt grows @20%, while Investment Account grows @10% per year.. So, Debt crusader thinks he/she wins.. . but..they do not take in account compound iterest.. Hence, the Investors wins b/c money multiplies x2 every 7-10 years conservatively..Thanks

  32. Dan Radkay says:

    Is the additional interest paid over the full 30 years vs the interest saved when paying it off early factored into the net of each scenario. If that was covered I may have missed that.

  33. No Debt But Love says:

    Interesting perspective.

  34. Scott Stewart says:

    When the next recession hits, which will likely be soon, I'd rather not be invested in the market

  35. Arie Fraiser says:

    Uh uh…..the clash of philosophies. Money guy vs. Dave Ramsey

  36. RWG RWG says:

    I know you two will choke and shake your heads, I'm debt free have been since 2009 I do not invest in counter party risk items, here's a kicker I have twice my body weight in pounds of physical silver I'm all in on dollar cost averaging under $10.00 an ounce. A few shows back you two talked about gaining 7% on your investments everything I found that paid that well or better had a lot of risk involved my idea of of making some money is when I buy a 20 K vehicle for $2,500, $25 K boat for $5,000 or a $50/60 K aircraft for $10,000 from the owners that are in over their head in debt and have become desperate there is always someone that will get in over their head in debt I always keep cash on the ready. It's not how much you make it's how you spend it, i'm also a blue collar worker and a tenth grade dropout

  37. selena cope says:

    You made it to 30k! Congrats!

  38. Chris Invests - Personal Finance Videos says:

    The main thing to consider is risk. Otherwise, I like to invest more 😀👍

  39. William Pabon says:

    Hi Brian amd Bo thank you for your channel, I love you guys. I need some advice I'm 31 years old, my wife and I are going to purchase a townhouse next year(pre construction). I'm selling another property and getting the 10% for the downpayment for the new one.

    Should I take part of my investments to get the 20% down and avoid PMI or stick to 10% or 5% down and invest the difference?

  40. Tall Queen says:

    What if you can do both?. Pay off your house in 10 years but also max out your Roth IRA or 401K? That is my goal

  41. John E says:

    The guy who paid his home off in 30 years at 4 % interest at a 300,000 dollar loan with 20% down : paid 150,000 dollars in interest.

    The guy who paid his home off in 10 years at 4% interest at a 300,000 dollar loan with 20% down : paid 30,500 dollars in interest.

    So we are just going to act like the 120,000 dollars in savings, doesn’t factor in to the 10 year guy’s investment potential, which is now increased because of extra cash flow after 10 years and the savings of 120,000 dollars over the life of his loan?

    Not to mention the guy who paid his home off in 30 years, would need to sell his home for 150,000 dollars over his purchase price before he got neutral on the transaction.

    The real error here, don’t be in a house you can’t pay off in 10 years and still invest at least 8 percent of your income during the 10 year pay off period.


  42. Stanley Parrales says:

    Assume 9% average ppl make 4% or less, how does someone make 9%

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