LET’S GET READY TO RUMBLLLLLLLLE!
It’s time for another thrilling episode of Investing Deathmatch, in which two forms of investing enter the ring, and only one leaves victorious. Or, more accurately, we decide that investing is a far more complicated affair than wrestling and the outcome of the fight depends on a number of nuanced factors.
But I digress.
TO THE BLOOD SPORT!
This fight has a long and sordid history. We’ll be uncovering old wounds, dredging up arguments long held in stalemate. We’ll be discussing a topic about which every damn personal finance blogger on the Internet has a very firm opinion. And we’ll be demystifying an age-old enigma of financial independence.
Brawlers, take your corners.
The conflict: Debt vs. Investing
Over on our Tumblr—magical land of socially conscious younglings to whom we are proud Tumblr Moms—we’ve been getting a lot of questions about paying off debt. The question is usually some variation on this theme:
“Should I use any extra money I have to pay off my debt faster, or should I invest that extra money in the stock market, my retirement fund, or some other form of long-term investing?”
It’s a great question! For both paying off debt and investing are excellent ways to grow your money and secure a financially independent future. Doing either one is better than doing fuck-all with your money, so really, everybody wins!
Except that this is a vicious and bitter deathmatch and we can’t let our two contestants escape unscathed.
The reigning champion: Paying off debt
It’s no secret that I loathe debt with the fiery passion of a thousand solar flares. I’m the one, after all, who instituted austerity measures and took on multiple extra jobs to kill the last of my student loans in about a year. And I relished those dark times as the crusade I was born to fight!
Paying off your debt ahead of schedule can save you metric fucktons of money. The faster you pay off your debt, the less interest it will accrue. That means interest you don’t have to pay. Like a fiscally conscious Robin Hood, you rob your lender of their interest payment and give it to the poor… which happens to be you, in this flimsy metaphor.
Paying off your debt also means getting a raise. For once you no longer have to sacrifice that chunk of your paycheck at the altar of debt every month, you can use it in other, more productive ways. Like your savings, retirement fund, or investments.
Also you could use it to fund your D&D habit. NO JUDGMENT.
Without a doubt, treating your debt like a house fire that can only be quenched with extra dollars is a great investment.
The upstart challenger: Investing
Investing has the reputation of being mysterious and intimidating. It’s something for older, more worldly, bebuttsticked captains of industry, not lowly millennials trying to make their way in a hostile economy.
But like the president’s reputation as a deal maker, this characterization is a complete myth.
Investing is easy! Start yourself an IRA, buy into your employer’s 401(k) program, set yourself up with a microinvesting account like Acorns or Stash. All of these are investing made easy, for normal earth-humans who have video games to play and dogs to pet. Set it, forget it, and go do your thing. (Especially if your thing is snuggling a doggo whilst playing Wolfenstein II, which is what I intend to do as soon as I’m done dropping this knowledge on y’all.)
Investing your money is a far better use for it than, say, letting it sit around and depreciate. It requires just as much effort as sticking it in the bank and ignoring it. And yet you’ll end up with 7-12% worth of compounding interest at the end of the day (literally, that’s how the stock market works).
That’s some sexy shit right there.
KNOCKOUT… sort of not really
This is no simple grudge match, my bloodthirsty darlings. Each of our fighters is an Andre the Giant of good ideas. They’re evenly matched. They could go punch for punch for days!
How ever will we determine our winner?
With the vicious, coldhearted application of math, of course.
(Get it? He’s throwing a pizza? A pizza pie? Pie? Pi? Get it? Ok nevermind.)
The tenderhearted should avert their eyes.
Our central premise depends on a crucial factor: interest rates. As we all know, interest has the power to work for good or for evil. Interest you earn is good. Interest you pay: evil.
You need to determine which is higher: the interest rate on your debt, or the interest rate on your investments.
If the interest rate on your debt is higher than the interest you earn on your investments, then you should throw your extra money at that debt like it’s Magic Mike and you are one of Jada Pinkett Smith’s Queens (we do not acknowledge the existence of the first movie).
If your interest rate on your investments is higher than the interest you accrue on your debt, then you should absolutely squirrel that extra money away and watch it grow into an oak tree with the Law of Compounding Interest.
This all assumes your priority is making as much money as possible. If, for some reason, you feel emotionally driven to kill your debt regardless of mathematical soundness, then do so! Nothing wrong with a debt-free life. In fact, it comes with all kinds of advantages.
Likewise, if you’re more concerned about building up a giant nest egg, then I suppose you can keep your debt payments on schedule. Socking money away and letting it grow with the market is never a bad idea, even if you’ve got debt on the side.
And the winner is…
You. You are the real winner. For if you’re making a conscious effort to plan for your financial future, you are killing it in all kindsa ways. Look at you, taking an active role in your money management! Grab your money by the throat and throttle it into submission!
You have nothing to lose by making an informed decision about paying off your debt vs. investing. Do the math on the interest—it’s real simple math! It involves looking at two numbers and determining which is bigger. Even I could’ve done that back in my math-averse days!
Exit this deathmatch victorious. You can’t lose.