One of the most common questions I get from my followers is….
“Should I focus on paying down my debt, invest it, or do a little of both?”
How do you know which is right? In this episode, I (Chris Miles) will tell you how to know which one to do and why. Tune in now!
Chris Miles Bio:
Chris Miles, the “Cash Flow Expert,” is a leading authority on how to quickly free up and create cash flow for thousands of his clients, entrepreneurs, and others internationally! He’s an author, speaker, and radio host that has been featured in US News, CNN Money, Bankrate, Entrepreneur on Fire, and has spoken to thousands getting them fast financial results.
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Listen to the podcast here
Should I Pay Down My Debt Or Invest It?
We talked about abundance versus being naive and things like that. In this episode, I want to talk about how to pay down debt or invest. Should you pay down your debt first or should you invest? What is it? There are lots of great resources. There are some great other blogs and podcasts I’ve done. I invite you to check out some of these other topics too that relate to this. Whether it’s on MoneyRipples.com or here on the show.
I want to talk to you about where to know the difference like how I see it. When I look at a client situation, what am I looking for when we address that question? It comes up a lot. A lot of people want to know, “Should I be paying out my debt? Should I do something with this money and make money with it? What should I do?”
There are different philosophies. For example, you have someone like Dave Ramsey who’s going to always say, “Pay down your debt.” That’s going to be your first go-to and then after you’ve done that, you go and invest and save your money. It’s not investing, the way he teaches. It’s saving money. There are people like Suze Orman who might say, “Go invest.” She might talk about, “Do some things with your debt,” but a lot of times she’s saying, “Why don’t you at least go for that 401(k) and put in for that match,” and all that stuff.
Paying down debt isn't always the answer. Click To TweetI’m going to give you neither of that counsel. I don’t agree with saving to get the match on a 401(k) and things like that. There are much better ways to make money that are safer. You could probably make more money doing it than that. Secondly, paying down debt isn’t always the answer. For example, I had a client I was working with where he’s saying, “Chris, maybe I should sell one of my businesses, turn it around and get the profit out of it.” He was debt-free in that business and everything. Still, he was thinking, “Maybe this could help my situation.”
When I look at how much income it’s bringing in, it was bringing in about $80,000 a year of income. That’s the net, not what he made in the business. He made a couple of $100,000 or more in the business, but what he was able to bring home is $80,000 a year. If you were to sell for $375,000, he gets that cash. It’s great, but I looked at his debt and his situation. I said, “If you do that, there’s not anything you could be paying down a whole lot that would equal $80,000 a year. Your best scenario is to keep that business. Don’t get rid of it.”
I’ve seen other things where I’ve told people, “Sell the stuff off. Let’s cash it out.” Sometimes we would cash out retirement plans to pay off debt. I had another guy in his situation, he would have to cash out $120,000 from his 401(k) to then net $70,000 because not only was there a 10% penalty because he was younger than 59 1/2, but there was also a 5% penalty from the company that he had the money with because it was an annuity. There’s a 5% surrender fee plus a 10% penalty plus taxes.
I remember when he talked to my CPA. The CPA said, “Chris, let’s see what’s going on here. Is this going to make sense?” He’s going to lose about $50,000 of that $120,000 to taxes, probably about 40%. That $120,000 that he’s hoping and praying to make 5% or 6% a year on, which is maybe $8,000 a year at most, that money though will guarantee him an extra $40,000 a year if he pays off his debt. It’ll free up that much. It was about $3,300 a month or $3,400 or something like that. He said, “That makes sense. Let’s do it.”
He’s like, “I’m crazy. Normally, I wouldn’t recommend people cash out and get that much penalty in that much tax.” I said, “I know but it makes sense because that money could be making way more.” Think about it, $40,000 a year by paying off debt versus $8,000, if he’s lucky and the market does well. Maybe the market even makes some $10,000 in a year if he’s lucky, but $40,000, it’s not likely.
In his scenario, it was the opposite. We wanted to pay off his debt as opposed to the last guy I told you about. We said, “Don’t you dare pay off your debt. If anything, keep that business running.” I showed him a way to make extra with his entire business. With what we shifted and everything from our meeting, we’ll probably help him increase his income by at least $200,000 a year.
Our best scenario is to keep that business. Don't get rid of it. Click To TweetThat’s way better than him trying to pay down a loan that might free up about a couple thousand dollars a month versus $80,000 plus, maybe even $100,000 or $200,000 range. Does that make sense? Don’t even worry about interest rates and any of that stuff. It doesn’t have anything to do with interest rates so much as it does. What kind of cashflow does it create? That is the determining factor.
I’m looking at the cashflow. What difference is it going to make? What’s the lost opportunity cost of using this money? If we use it this way, will we lose an opportunity to make more money somewhere else? That’s the thing that I’m always looking at. That’s what I challenge you to look at as well. What’s going to give me the biggest bang for my buck?
Even paying down certain loans. The crazy thing is I tell people which loans to pay down because it’s not always what they think. Again, it’s not based on the interest rate. It’s based on cashflow. That’s why I have my cashflow index that I’ve talked about in previous episodes. We’re looking at what’s going to give us the biggest bang for our buck. Guaranteed as much as possible.
I’ve had other clients where we’ve looked at things to say, “Do we pay off this loan? Do we keep this? Do we keep the asset?” Sometimes we sell off assets to get extra cash. Sometimes they can be good. Maybe we pay off a mortgage by selling an asset. There are all kinds of things. What we look at is, does it give you more money?
That reminds me of a situation where we’re talking about refinancing to get money out of a house. I said, “We’re looking to make more money with this.” They’re like, “Chris, what if we bought some investment properties?” I said, “If the money you’re looking to get out, you could probably easily buy two investment properties.” They’re like, “Cool.” I said, “Here’s the deal though with refinancing your house because we’re pulling out a significant amount of cash. The good news is it’s cheap cash, but we have to be aware that it will increase your mortgage payment by about $150 a month. If you do that, we got to make sure that whatever you’re making, it’s going to make at least that much. We got to at least offset that cost.”
We looked at a couple of rental properties, it would probably be about $750 to $800 a month. I was like, “Cool. That would make sense.” After everything was considered, we’re like, “Cool. We’ll net about $400 or $500 a month easily. That makes sense.” You still have to factor in what it is. It always comes back to cashflow. What kind of difference does that make in your cashflow? Does it either reduce expenses or increase your income? If so, by how much?” Sometimes it’s a gamble because maybe you don’t know. Maybe you were talking about investing in your business. You’re like, “I hope it would do better but I don’t know.”
A determining factor for your decision is what kind of cash flow it can create for you. Click To TweetFor example, I had a situation where I could either use my cash or I could get a loan from the bank to start my previous business before this one. I wanted to get a $25,000 line of credit. That line of credit was going to cost me $126 a month. If $126 a month for $25,000, I can put that into my business and make more than $126 a month. That makes sense, doesn’t it? If it can at least make my payment and then some, that makes sense. If not, I’m not going to get a loan. I’m not going to do that. I did the best investment ever.
I was getting that bank loan. It’s an SBA loan that I got from the bank. It was awesome because it was cheap money. I was able to make thousands of dollars a month, but only pay $126 a month. I was able to keep my other cash intact. I didn’t have to spend it all and then worry about, “What am I going to do now?” I had a little bit of a buffer. That’s the thing we look at.
When you’re asking the question, “Do I pay down my loans? Do I invest this money? What can I do?” The reality is it depends on you and your situation. Every situation is so different, that’s why we have to weigh it back and forth. That’s why even I’ll weigh it back and forth and sometimes look at different options. It might take me several minutes to figure that out before I say, “We know a possible solution to this.”
Some of you might be saying, “I don’t have that lump sum of cash sitting around. I have some extra money every month. Do I put it towards a loan or do I invest it?” It depends. I get that question all the time. Some people say, “Chris, I’ve been putting in a 401(k), I got a few hundred dollars a month. Do I keep putting it there or where do I put it?”
Sometimes I’ve noticed that the best place to put it is in savings. I had to tell somebody that after looking at their situation a little bit. I said, “Even though we could take this money and make a little bit of money with it, it wouldn’t be significant, especially in the short term.” I said, “Paying down all your debt and having no savings is bad because they might haven’t had any savings.” “I got a few hundred dollars a month, but no savings.” “Cool. Step number one, build up some savings.” Even if it’s in a savings account, that makes a point something percent. I’ve had people do things with whole life insurance and build money there so they can still access it.
That has to be done very specifically because the way that most people do life insurance, you don’t have the cash right off the bat. I make sure that people have cash from day one, so that is the actual savings account that’s getting tax-free dividends or tax-free money earnings, and there’s no loss, which is awesome.
There are so many options and ways to do it, but it always comes back to your situation. It depends on what works best for you. The thing I look for is, “What’s going to create the best scenario?” It could be putting into savings because if you have an emergency, you have to put on the high-interest credit card and there could be sense there. It could be paying out a loan because that could free up some good cash flow. I’ve seen that.
People have asked me, “Chris, what did you do to free up so much cash?” I said, “One, I paid off a ton of loans.” That helped me a ton and I paid off the right ones. There are certain loans I didn’t pay off immediately because they wouldn’t free up that much cashflow, but I did that. I would invest in my business, but I was very particular about where I invest. I was very frugal in a way, but not frugal to the point where I wouldn’t pay for things. I would still pay for coaches all the time like I still do. I would still pay for things to help build my business, but I had to make sure I was getting a return on my investment. I would do that. There are all kinds of ways.
I have one client who found out that we’re increasing her cashflow by $2,000 a month by using the money that she got from a settlement in a divorce. That was awesome because her whole goal was to replace the income. She was getting alimony so whenever he passes away because he was older, she could replace that income. We’re already within the first tier and we’re able to do 2/3 of that, which is sweet to be able to increase that cashflow and help her out that way. In the next few years, she’ll be able to more than replace his income. Even if he dies, she’ll be fine. That’s the magic of cashflow. That’s why cashflow is so important.
That’s why I say, “Cashflow creates freedom,” because when you have more cashflow, you have more options. When you have more options, you have more choices. When you feel like you have a choice in the matter and you have different things you can do, that’s when you have real freedom. Not when you feel like you’re stuck with only one option. When you have multiple options, that is freedom.
Everybody, whether you pay off your debt, invest it or a little of both, it depends. If you’ve got questions and you want to know more about what we’ve got in your situation, reach out to me. Email me at Chris@MoneyRipples.com. We’re going to take a look at that. I or my team can take a look at that and say, “Here’s what things we might recommend. Here are some things that might be a good option.” In some cases, it might be, “We’ve got some good work to do. Let’s see about how we can play together a little bit more.” Anyways, email me and we’ll talk to you. Everybody, have a great prosperous week. We’ll see you.