Should You Stop Investing to Pay off Debt?

Hey, what's up everyone and welcome to the School of Personal Finance. In this week's video, we're going to talk about if now is a good time to focus on paying off debt and getting on that stable financial footing, or if it's a good time to push the investment piece and to try to invest as much as you can this year while the market is down. So the economy, it still feels terrible. Inflation still very high, cost of living very high, uncertainty, volatility, all these words. You turn on the TV, you watch YouTube, everybody's all doom and gloom. It's a crazy time right now and everybody's really feeling it. So I've been getting this question a lot. Should I dial back on my investments and really just focus on building up my emergency fund, getting out of all of my debt, things that are certain, that are guaranteed, instead of me continuing to put money in the stock market and losing it? So in this video, I'm going to show you my framework around this, try to come up with some ideas that will hopefully help you decide what is right for you. All right, let's get to it. All right, so real quick. If you feel uncertain or you're not confident about your personal finances, about your money, you're not sure if you're saving in the right types of accounts, if you're saving enough for retirement, if you're saving for your children's college education the right way, if you're living paycheck to paycheck, if you have credit card debt, any of these things, I would love for you to come join me over at the School of Personal Finance. So I have prerecorded courses like Master Your Family's Finances in 30 Days, where I walk you through 10 steps to creating your own financial plan and getting very organized. Then above and beyond that, I have live classes as well, where we dig in deeper on a topic like 529 plans and how they work, or getting out of credit card debt. Then beyond that, I have office hours as well, where you could come in and you could ask me anything. I have monthly live accountability meetings, where I talk about things that you should be doing throughout the month to make sure that you stay on top of your personal finances. I also have monthly meetings where we talk about market updates and just things going on in the economy, and just overall keeping you in the loop on things so that you feel very comfortable and confident with your personal finances. So all for a one-time enrollment fee, come join the community and be a part of the School of Personal Finance. Thanks. All right, so what should we be focused on in this crappy economy? It totally depends on your life stage and your current situation where you should really be focused, but it all really does start with a framework. The first piece of that framework, no matter how young you are, how old you are, how much money you have, the first thing is you need to have a very good handle on your cash flow and how much money you have coming in every month versus how much money you have going out every month. So now, I use a budget template. I have it on my website. If you'd like to go download it for free, just go over to schoolofpersonalfinance.com, enter your email address, and I will send it to you. It's just an Excel file for you to be able to track your monthly spending every month. You can start with your projected expenses and then track how you actually compare it to what was projected each month. And then you can put in your income as well and see if you're in the surplus or a deficit. That really is the first step with all of this stuff, is really understanding your cash flow. I mean, then what if you're at risk at losing your job, right? How does that change things? If you're somebody who's commission-based or if you're self-employed, then things, priorities, they're very different than somebody who might be a teacher or a police officer or a firefighter where you feel very safe and secure in your job and you know exactly what your income is going to be going forward, not to mention that you will have a pension also. It just changes the parameters, it changes the goals of what you might be trying to achieve compared to somebody who might be all over the place or at risk of losing their job. But you have to know your numbers, you have to know your cash flow very tight before you can really start to make these decisions on where you should be flowing your extra money every month. So now once you have a good feel for your cash flow, and no doubt it's a lot higher than it was a year ago with gas, with oil, electricity, groceries, everything up significantly from where it used to be. Then you start flowing over and you look at what your debts are. So the decision to pay off debt or to invest, it really depends on what kind of debt you have. So the next step is to list out your debt. Any money that you owe to anybody, what does it look like? And the interest rate that I will typically use where I look at it like emergency situation is if I'm at 8% or more, then I know that I need to prioritize that debt over pretty much anything else. And there might be different levels of emergency situation. So number one, if you have credit card debt, then that takes priority over anything else, right? That would take priority over saving in a 401k plan or Roth IRAs or investing in any way. I need to get out of that credit card debt before I can move on because in no world does it make sense to pay 20% interest to a credit card company. So if you have any of that, you have to prioritize that over anything else that is going on in your life. And now once I have all that credit card debt done or all those bad loans, anything above really 8%, then it comes down to the fight between your emergency fund and getting the match on a 401k plan if it is available to you. Because that's free money and I want to make sure that I'm saving for retirement and taking advantage of that. Now for an emergency fund, you have to decide what number is right for you. So there are rules of thumb that are thrown out there all the time, like three times your monthly expenses, six times your monthly expenses. It depends if you are a one income household compared to a two income household. It depends if you have a very stable job or if you're self-employed or you're commissioned and you have income that's all over the place. All those things play a role. Maybe that number is going to be like $20,000. If you have $20,000 in the bank, then you feel pretty comfortable that you could handle any emergency that comes up and that you'll be okay. But that number is different for everybody. And I don't want you to put everything else on hold while you build up to 20 grand because you don't want to miss out on the time of investing, especially in a down market like this. So you have to spread the priorities, right? You have to start splitting these dollars in a couple of different directions so you can take advantage of different things. But that's the second thing on my pecking order is building up that emergency fund and getting the match on the 401k. So now when we're in an economy like this, where there's a lot of risk, a lot of uncertainty, nobody really knows what's going to happen. We have high inflation, which we haven't experienced in 40 years, then I do want you to be safe and secure. But at the same point, it's a great time to try to push it a little bit in your retirement accounts. So for me, I would prioritize investing in Roth IRAs or traditional IRAs or HSA accounts or 529 plans, 401ks. I would prioritize that over attacking my low rate fixed interest debt. So if I have student loans, for example, where I'm paying 5% or if I have a car loan that I'm paying 3% on, I'm not prioritizing those payments. I'm not looking to double down on those payments and forfeiting the chance to put that money into investment accounts when the market is down 25%. I do want to be safe. I do want to have money in cash. I want to have money in my emergency fund. I don't want to skimp on that because of the uncertainty of going into a recession and asset values continuing to go down. I would like to have cash on hand where I could maybe get a little bit more aggressive. But I want to make sure that I'm not going to lose my job and that nothing terrible is going to happen where I really might need to rely on that cash and live on that cash. But aggressively paying down student loans or car loans, you can't get that money back out once you send it in. So it's not going to help you if we do go into a recession. Like yeah, if you could eliminate the loan and get rid of that payment, then that is a nice thing. But I'm not in a rush to do that as long as my rates are fixed. If you have variable rate debt, like home equity lines of credit, that is something that I have been very focused on paying off in my own life because I use my HELOC for different investments and to move money around and I carry a balance on it a lot of times. So that is something that I have wanted to get down to zero because as the Fed increases rates, then that's a variable rate. That will go up with the prime rate and the cost of borrowing that money goes up. So I want to eliminate that. But like car loans, student loans, those things, mortgages, I am not focused on paying those things off right now. So now with that said, I still do think that there is a plan, that you should have a plan of attack for all of these things. And maybe you are somebody who really wants to get rid of all of their debt and be debt free. I always joke around saying nobody ever went broke paying off their debt. So it's not like it's a terrible decision to pay off your debt. But being able to invest, especially when the market's down and have that money compound for you for years and years and years and grow in the stock market, you're going to be happier if you don't hold off on that and you get that going and you just go the normal course of paying your monthly payment on those loans until you get to zero on them. So when we're in an economy like this, it's almost like you have to think the opposite of what your gut is telling you. When you feel like you're losing money and everything's going down, asset values are dropping, it's a great year for you to dollar cost average and max out your 401k, max out your HSA account, max out your Roth IRA, put money into your brokerage account to do it slowly throughout the year with the knowledge that yes, it might go down in value and it might take years for things to recover and it might be ugly over these next few years. But then you can do it again next year and the year after that and what you're doing is you're building out this base, the launchpad for when we do have the next economic boom and you have all these shares of all these different index funds and the S&P 500 and the total stock market index and all these things. As we recover and go up, you'll have more and more shares to participate in that where your investments will really begin to grow at that point. So you can't look at these down markets as times to hold back and not really invest because you're scared and because your gut is telling you, I just want to pay off debt and be done with it and be on solid financial ground and not have to worry about any of that stuff. These end up being great years to put money in those markets. So don't ignore them. There might be a happy medium between the two. As far as the future goes, nobody knows what it looks like. This next year, it could be very ugly, the year after that, it could be ugly. It might take four years, five years, six years before we see new highs in the stock market. Who knows? Nobody knows. It could be 10 years. It could be 20 years. I talk about all the time how I had the lost decade when I graduated college in 2000. From 2000 to 2010, even though there were a lot of roller coasters, the market basically went nowhere. But it was a great time to invest during that period because then we went into a boom and all those shares you accumulated during that lost decade, they all went up tremendously in value. At least I had more shares because I had more time to accumulate. So don't let these years pass you by without investing. It's important to continue investing. But this economy, it does feel terrible. So you want to make sure that you have all your bases covered and you have a financial plan, that you have a plan in place that dictates to you exactly what you should be doing, how much money you're spending, how much you're bringing in, where you should put in the cash flow, where your emergency money is. Everybody's protected, that you're doing the right thing, making smart decisions and planning for your future. Right? That's what a financial plan is all about. But I know that we live in the real world and that things are ugly and tough out there right now. So if you're in a situation where you just don't have any money left over, and maybe you are going into credit card debt, maybe your income, your expenses are more than what your income is every month and it's just a time that you have to get through and tough out for a while, then in that case, it's like, what do you do? You try to just be as smart as possible and maybe have some 0% credit cards to float you for a little while. But if you have no emergency funds and you're negative every month, then you really just have to dig in and focus on your cash flow and on reducing your expenses and living on less right now to kind of get through this period. So I speak to people all the time who are going through these tough situations and they're just not sure how to prioritize everything. And if you're living in that world, then yeah, then you got to stop contributing to your 401k, right? Or to your IRAs, your retirement plans. You need to give up on that for a little while until you get yourself back in a position of strength. And you can't feel bad about it. It's like we all go through different times in our lives where sometimes we're on top and sometimes we're not, and we need to figure it out for ourselves. But you don't want to put yourself, you know, in financial ruin just to be able to get the match on your 401k. You have to be smart about it. You don't want to pay credit card debt at any cost. So that's really what you need to focus on and just reducing those expenses and getting through this tough time. But you know, I'm afraid that it's going to get worse before it gets better out there. So you also want to have the mindset and the frame of mind that I need to be prepared for worse times ahead just in case we do go through them. If this economy really gets bad, if inflation just doesn't come down at all, or if you do lose your job or something happens, you just want to be on solid ground. So don't put yourself at risk just to get the 401k match also. All right, everyone. That is it for this one. I hope that you found that helpful. Please make sure to hit that like button if you enjoyed this, hit the subscribe button if you are not subscribed already, and I will see you again in the next video. Thanks.