Should You Pay Off Debt or Invest? — Life Lessons Learned

Debt Pay Off

In my about me page, I mentioned that my fiancé and I carried $65,000 student debt since 2011.

In my post, 15 financial goals that you must achieve, and in my most recent net worth report, I had also mentioned that we had plans to pay off our remaining student debt of $20,000 by April 2018.

So, the good news is that we did it!

 

We paid off our $20,000 student debt in ONE shot!

Finally… the day we’ve been waiting for!

On Sunday, we logged online and paid off $20,000 in cash. Screw the goal of April 2018. We just went ahead and killed that sucker ASAP!

 

debt pay off

 

Now, we have to work on increasing our liquidity for 2018.

 

Shout out to Damn Millennial again for the encouragement! Read here for his 3 reasons of why you should pay off your debt before investing. Another great post from him is 7 ways to pay off debt quickly.

 

 

What the hell were we thinking?

Now, you must be wondering what the heck took us so long just to pay off our student loans. You’re also probably wondering why on earth we would be willing to pay the minimum balance for seven years!

The answer: leverage.

I’ll admit that our view of “borrowing” student loans to invest was a bit out of whack compared to most others’ views. I mean, just pay the damn thing off, right?

Seven years ago, we were thinking:

“Yeahhhhhhh… but nah!”

 

The timeline of our lingering student debt

We were young and fearless.

And there’s no right or wrong answer to this. However, I know a majority of the PF community may not be fond of what we did either — acknowledged.

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Anyway, at age 23/24, we took risks and wanted to leverage cheap money while we were still young. We were aware that things could go belly-up, but we had faith in the markets.

With that said, we started investing in both our TFSAs and RRSPs to take advantage of our investment horizon.

At that age, we thought:

“Meh… we still have a long horizon. If we lose, we have potential to earn it back. We may as well start splurging on stocks now. Why start later?”

Not to mention, we were also able to reduce our income using the loans’ interest expense. Hence lowering the effective interest rate at which we borrowed.

Overall, we were aware that market returns are never guaranteed and looking back, I think we had a pretty odd mindset.

 

More cautious today

Despite the rosiness of today’s markets, I think it’s about time we pull back a bit.

Gosh, looking at our most updated net worth, we’re at risk of losing everything should there be a perfect storm!

Tom’s post, Surviving The 2002 -2007 Bull Market Hangover (Part 2), encouraged me to think about how I’ll be able to survive the next bear market.

That’s why I took a step back and wrote a recent post called Fail-proof Ways To Pay Off Our Debt in 2018. In other words, our goal for 2018 is to lower our leverage and build some cash to reduce our risks.

Anddddddddd… that’s why we made our first move to kill the $20,000 student loans, which was also our highest interest debt.

 

Dumb luck

For the past seven years, our single stock picks are up (like, what isn’t up??), and we invested most of our money in low-fee ETFs (exchange-traded funds) that track S&P 500, NASDAQ, financials, and US small caps. Read here to see some of our other holdings.

There was even a time where I was holding a leveraged ETF that tracks S&P 500 X2. That means that each percentage gain in the index would yield me double the return. But the reverse is also true, so it’s a double edge sword, guys!

Note that these ETFs’ fees are higher due to the leverage strategies used. So, it’s something I would stay away from today. Again, I don’t know what I was thinking back then…

We also converted some of our CAD to USD when it was closer to par so that we could buy more US holdings. As a result, we experienced both currency and market returns! Say wha???

Of course, thanks to quantitative easing (QE) during the Ben Bernanke days, we’ve been nothing but lucky with the inflated stock markets.

And more recently, we’ve also been lucky with the overall appreciation of USD against CAD.

HONESTLY, we had faith in the markets, but we didn’t expect it to rise that high and so fast!

I admit that ALL of this was purely dumb luck! 

 

 

And… we also had some bad luck…

We made bad investment choices with two energy stocks by speculating in the short term. But we accepted the loss and moved on.

In hindsight, we were likely better off allocating this $10,000 investment into our student debt.

We lost at least 60% (~$6,000) of its value. And thank goodness we sold it because we would’ve lost over 80% of its value today.

 

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But instead of viewing $6,000 as a loss, we view it as another form of investment. That is, we paid $6,000 to learn a real-life lesson.

From that lesson, we learned to:

– Minimize single stock picks
– Avoid speculation
– Automate some investments (DCA approach)
– Only buy single stocks that we can see ourselves holding forever
– Get over FOMO (fear of missing out) because there will always be future opportunities

 

 

From 2014 to 2017, we STILL didn’t pay off our student loans! WTH??

Fast forward few years, we STILL never thought about paying off our student loans. We could’ve, probably should’ve, but didn’t.

Instead, we continued to dump money into index funds and stocks. For goodness sake, we even bought a house and an investment property before paying off our student loans!

*shamefully hiding my face*

 

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In addition to that, we were still somewhat mindlessly spending on stuff (a bit of a YOLO mindset). As the usual, we were throwing only 35% to 40% of our income into the markets.

So, we weren’t living above our means, and we were pretty frugal to a degree. We also thought that we were good at saving money because we would look for deals and price match.

But compared to the stories we started reading on the FIRE (financial freedom retire early) community, we realized that we weren’t as frugal as we thought. We also realized that we totally sucked at saving compared to these folks (see our next point). Shame on us!

We did not have a mindset of “FIRE” nor did we know what that was. At that time, we were just working, living, spending normally, and investing hoping we could be financially independent by maybe mid-40s?

 

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To be honest, we don’t know what was going on in our minds. We were just too focused on thinking about business ideas, and at the same time, pouring more money into the markets…

 

 

During the last quarter of 2016, we learned how to save more thanks to the FIRE community

Between ages 23 to 28, all we did was spend and invest. Living in a busy city like Toronto, it’s hard not to spend!

To be honest, although we were investing and trying to increase our salaries, we should’ve allocated some of our spending money towards student debt.

Again, we weren’t spending more than we make, nor did we have any credit card debt. We just enjoyed buying experience, treating friends and family, buying finer things, eating out, and hanging out with people. In other words, we just wanted to have fun!

 

Photo by Jay Wennington on Unsplash

 

Lesson learned — this “fun at the moment” costs you a $hit load of money in the future. Not to say you shouldn’t have fun (and yes, at the very least we were saving and investing), but I think we could’ve managed our money better.

Sadly, our net worth would’ve been better if we were a little smarter with our spending.

Overall, we learned from this mistake so we started saving smartly. And that means no more LV bags!

The sad part is a few of my handbags could have been my student loan payments…

 

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Related: 10 Lessons Learned From a No Spend Challenge — #6 is a MUST read!

 

 

Emergency Fund? What Emergency Fund??

piggy bank / money / emergency fund

In regards to an emergency fund, we barely had one. All we had was a few thousand dollars in each of our checking accounts (and maybe a protein tub of “emergency” money in nickels and dimes) because everything went into investing or spending.

In other words, most of our money was tied to the house and our investments. Sad, but true.

So, yeah… if we weren’t even thinking about an “emergency fund” then there’s no way we were thinking about paying off our student loans! But fortunately, we took action at the beginning of this year. As we started to build more cash in our accounts, the thought of paying off our student debt crossed our minds.

Man, it feels good that we just paid it off two days ago, haha!

 

Lesson learned — always have a sizable emergency fund in case $hit happens! As a result, we started building more emergency money for the year, and we’re still working at it.

 

 

Too much leverage?

In addition to homeownership, we mentioned that we also invested in an investment property. Overall, we wanted to test the water to see if real estate investing was a right fit for us.

With all that said, the idea of paying off our student debt just wasn’t our priority. At that time, we believed that the interest cost was worth the potential gains of real estate investing (yes, yes… a lot of risks involved).

It sounds crazy, right? Instead of paying off our student loans, we decided to take on more debt hoping to generate assets.

 

Photo by Cosmic Timetraveler on Unsplash

 

Overall, we got spoiled seeing the bulls run year after year — particularly in 2013 when the S&P 500 was up by a whopping 30%!

We also experienced a crazy housing market in Toronto where we saw double-digit increases each year up until April 2017.

 

Guys, after so many years of gains, when’s our next bear market??

Now we’re also seeing rate hikes everywhere. The US hiked three times this year while Canada hiked twice — another reason why we’re aiming to reduce our leverage ratio by 10% for next year.

 

Be prepared because more hawkish moves may come…

Photo by Roland Seifert on Unsplash

 

Soooooooooo, I think it’s about time that my fiance and I adjust our expectations. Having said that, we want to reduce our debt to asset ratio to ~38-40% and build more cash for 2018.

We don’t know how much cash we should save, but it’s something we’ll have to think about over the next few months.

Note, however, that we will continue to invest in the markets, but limited to only our automatic monthly contributions.

So far, we accomplished our first baby step, and that is paying off $20,000 of our student loans before 2018!

Again, thanks, Damn Millennial for the encouragement!

 

 

Summary

Overall, our lingering student loans brought us some luck, but it also taught us valuable life lessons that you don’t learn in school.

And here’s a recap of those lessons.

 

should you pay off your debt or invest / student debt

 

1) It’s okay to take risks, but be smart about it:

The younger you start, the more volatility you can withstand. But I admit that we were nuts for prioritizing investing over everything else, such as building a sizable emergency fund, and paying off some student debt when we had the option to.

Overall, you can have it all. You just need to find the right balance. But we went overboard with investing and got lucky that the markets didn’t tank.

So, it’s okay to take risks. Just have some cushion to fall back on by taking calculated risks.

 

2) Spend less:

Despite using student debt as a leverage, had we spent less, we could’ve allocated that money towards our student loans. Yes, I’m also talking to you, handbags!! (I admit that I still love ya though!)

Now we can see that spending too much has delayed our student loan payment. It also probably robbed a chunk of our future. I’m sure we would’ve been just as happy even if we reduced our spending by as little as 10%.

 

3) Understand your investments:

Instead of investing $10,000 into some speculative stocks and losing $6,000, we could’ve paid off part of our student loans.

But at the very least, we view this $6,000 as another form of investment. We paid this amount to learn NOT to speculate on short-term gains. And we also learned that we should only buy single stocks that we understand. Not to mention, this event encouraged us to look into dollar cost averaging as well.

So, was this experience worth $6,000??

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4) Avoid FOMO (fear of missing out)

Our $6,000 lesson above taught us to avoid the fear of missing out. We jumped in without researching what the heck we were “investing” (ahem, I mean speculating) in.

There will always be plenty of opportunities, so don’t rush into anything!

 

5) Reduce our leverage:

We’re still firm believers of using leverage to your advantage, but with caution.

It has almost been a decade since the 2008 financial crisis. No one can predict what will happen, but it doesn’t hurt to start reducing our leverage and build more cash aside. In other words, the bulls were fun to hang out with, but I think it’s time for us to reduce our risks.

 

Over to you

I hope you guys learned something from our experience of delaying our student loans. Feel free to share any mistakes you’ve made in the past. It’s fun to hear and learn from your stories!

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23 Comments

  1. Hey Ms. Panda, I think you did the right thing. I’m very debt averse. I like taking the sure thing. Leverage is great on the way up, but who needs the stress? I checked your net worth link for the first time. Totally impressive, especially at such a young age. It’s good to play a little defense with that much dough in the bank! Thanks for the link. Tom
    Tom @Dividends Diversify recently posted…I’d Like to Introduce You to the JohnsonsMy Profile

    1. Hello Tom!

      Thanks for the encouragement! Your article really got me second thinking, haha. I also enjoy reading your other articles related to investing.

      And yes, debt may be seen as stressful and causes sleepless nights for many people. My fiance and I completely understand and we don’t believe people should take on debt to invest if they don’t feel comfortable!

      But we feel fine w/ it because at the end of the day, we will look at overall net worth, debt relative to assets, and whether our income is sufficient to cover any payments. Oh yeah, and we will look at liquidity as well…

      Still, it looks like we have many areas that we need to improve on. So there’s lots that we need to work in for 2018 onward!

      And I definitely agree w/ you that it’s good to play a little defense in case anything happens. It’s good to protect yourself 😉

  2. Great write up! We’ve all made mistakes, that is part of living. Right out of college we focused on building up the emergency fund and school loan payback. Didn’t really do much investing. We missed out on a lot of those gains but we were successful in paying off the loans pretty quickly.

    By the way, we featured your last post on our site. I mentioned the others on Twitter but I don’t think you are on there yet??? Anyways, check it out!

    1. Either way, you still did an awesome job! Don’t feel like you missed out those gains because there’s always opportunities elsewhere to make more money. Not to mention, we all still have a lot of time by our side 🙂

      Again, thanks so much for the shout on your page! I checked it out and enjoyed the read! I definitely need to get on Twitter and FB, after I figure out this Pinterest… *big sigh* one step at a time!

  3. Good job! Yeah, 5.5% is pretty high! If you were interested in leveraged investing, another idea is to use the HELOC for a Smith Maneuvre, not sure if you’ve heard of it.
    It turns mortgage debt into debt that you can write off during tax time.
    I have been thinking I might do that with the next market correction (depending on what Prime is) if I am strapped for liquid cash.
    GYM recently posted…How Maternity Leave is Like a Mini-RetirementMy Profile

    1. Hey GYM!

      Yep, 5.50% is pretty high. It was under 5% before the rate hikes, but we were just letting it be for almost the entire year because we were irresponsible that way (also a bit lazy… really bad of us and there’s no excuse) LOL.

      And yes, my fiance read about the Smith Manoeuvre last year and he thought this approach is pretty smart. For us to do it now, we’d have to sell all of our investments, pay down part of our mortgage with the investments that we sold, and then buy back the investments back again.

      He also mentioned that it’s something he’d want to do if markets ever take a major dip (but who knows when that will be…) we’ll see… :/

  4. That’s not a baby step, it’ll go a long way towards de-leveraging and adjusting your personal balance sheet. One thing to consider is that you are freeing up a very nice chunk of monthly cash flow by paying your student loans off. Now, you can either re-allocate the capital towards paying down other debt faster (which may be appealing based on your recent realizations) or you can invest and turn that negative cash flow into an income producing asset. Either way, you unlocked a source of cash that you did not have before that you can now use monthly to keep building on your momentum. Sure you could have done the same with the $20k and just thrown it in the market and called it a day. But you now have more piece of mind and are in a much more tolerable debt range. Piece of mind has a price on it, that’s for damn sure. Glad you stumbled on frugality and nice job kicking some ass here!

    Bert

    1. Hey Bert!

      Thanks for dropping by!!

      You’re right. Maybe I shouldn’t have called it a baby step. I’m totally sorry, didn’t mean it that way.

      I meant to say that it was our first step in de-leveraging some of our debt in our balance sheet. And because it was the highest interest rate, paying it all off felt like we were taking our first step, lol). Now tackling some mortgage debt in 2018 will be a bigger challenge. But hopefully nothing goes wrong next year *knocks on wood* haha!

      And yes! we will have unlocked ~$700 more cash flow, which some of it can be allocated towards our debt repayment next year. Overall, we’ll plan as much as we can. But if something unexpected happens, we’ll have to adapt and just tackle it on the spot. *crosses fingers*

  5. I was going through a similar phase when I was young. I wanted to invest and took advantage of the stock market with new money. I didn’t want to pay off my debt so quickly because I can use the interest cost to lower my tax bills.

    I ended up using my extra cash to pay off my higher student loan, refinanced my Mortgage (the interest rate was lower) and use the proceeds to invest.

    The end result is the same, but I pay less interest, which in turn lowers my investment risk and increases my return.

    When I use leverage to invest, I have two main goals, lower my risk and my cost. Always look for ways to improve. When the cost is too high, I will start to deleverage.
    Leo T. Ly recently posted…The Right Ways To Time The MarketMy Profile

    1. Hey Leo!

      Looks like we are on the same page!

      And yes, it always makes sense to find hacks and ways to improve our overall net returns! Less tax and paying less interest makes a huge difference.

      Another goal of mine for 2018 is to see where I can find “free” money haha…

  6. Well done! It’s a great step towards a debt free life! We are planning to pay off 1/3 of our outstanding mortgage balance in January and this post definitely reinforced my idea! Interest rates are still low, but they will definitely be going up and up, and like you, I don’t like the idea of having too much debt. And yes, we’ll probably be losing off on other investment opportunities, but hey, I am pretty sure I will sleep better at night!

    1. Thanks, Sara!

      My fiance and I may not want to be debt-free yet, but we are definitely going to lower our leverage next year to protect ourselves.

      And yes, I agree with you. If the debt is robbing someone from sleep, I wouldn’t recommend them taking on any debt to invest.

      At the end of the day, I think everyone has their views. And despite my view for borrowing to invest, I still respect those who want to be debt free. Having to worry about debt isn’t worth losing sleep over, so I completely understand why they are so against the idea, lol.

      Also, way to go! I hope you and Dan achieve your goal of paying off 1/3rd of your mortgage. That would be so awesome! Looks like we’re on a similar journey for 2018 😉

  7. You hear all the arguments from the “stay in low % debt and invest that money instead”, but it’s not for me. At most I am fine with a reasonable mortgage – but the rest of debt? Heck no! Get rid of that sh!t!

    I don’t need no debts hanging over me like chains on the ghost of A Christmas Carol.

    It’s all about cash-flow anyways 😀
    MrDoublingDollars recently posted…Forget About The TrashMy Profile

    1. Hey Mr. DD!

      I totally hear ya! Borrowing to invest is definitely not everyone’s cup of tea, and I can totally understand it from your view.

      I know everyone has their different views and ways to achieve financial independence (the most important part is that they have this mindset of FI haha).

      In the end, as long as the person is comfortable and happy with their financial progression, I think that’s all that matters! So I am still very supportive of the debt-free community and their views!

      And yes, cash flow is always great! It gives you a peace of mind and stability. 😀

  8. Boooom! Congratulations what a way to end 2017!I think you are positioning yourself in a great way.

    You are wise to realize that the bulls might not run forever and to take the opportunity now to get yourself in a better position. Such an awesome write up. I really think between the emergency fund and paying down the debt you will be more comfortable if the markets do turn.

    Additionally you will be able to take advantage with the new cash flow! Really great moves and I am grateful that you heard me out.

    I know that it is not for everyone to pay off the loans early in life but I have no regrets and am on to exciting things as well in 2018 because of it! Here is to a great 2018.
    Damn Millennial recently posted…The Early Retirement Blog Movement Is A Big MistakeMy Profile

    1. Thanks DM!

      Oh yeah, markets will never go up forever… what goes up, must come down at some point… so instead of building up leverage, I think it’s safer to reduce it for now, especially after a decade of a bull market!

      Like what Tom from DD said, “Partying like it’s 2007!” haha I just wonder when everything will come to an end…

  9. Congrats on paying off your student loans!! I had the same experience too when I started to pay off my student loans. I invested in mutual funds in hopes of using that to pay off my loans earlier. It was my first investment account so I didn’t really have any experience with the stock market beforehand. What I learned was that mutual funds as high fees and my capital gains wasn’t what I expected.
    It took me about 5 and a half years to pay off student loans but was hoping to pay it in 4 with the mutual fund account. Lesson learned, do not depend on a mutual fund account to pay off loans.
    Kris recently posted…How Do We Spend (or Not Spend) on Our Holiday ShoppingMy Profile

    1. Hey Kris!

      Thank you!

      Yes, a lot of mutual funds will rob your wallet! Majority of their fee structure is insane! And it’s great that you learned this lesson — better now than never, so don’t ever feel like it was a loss 🙂

  10. Paying down your debt saves you on the amount that you pay in interest. Therefore, if your debt-to-income ratio is too high, focus on paying down debt before you invest. If you have a good credit score, your after-tax return on investments will probably be higher than your after-tax cost of debt on your mortgage.

  11. Hi Challis Capital,

    I agree with your point. If someone’s debt to income is too high, it’s better to focus paying off that debt. It’s a great point! 🙂

    Thanks for dropping by!

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