Unconventional Financial Advice

Good morning and Happy Friday!

Welcome to another edition of The Matt Viera Newsletter.

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Shortly after I published last week's article, I stopped my automated investments.

Then, I received an email.

The email was from my former roommate, Iceman, a retired Air Force major and engineer extraordinaire (read my Interview Series with him here).

So, the Iceman read my article, thought about it, and decided to run the numbers.

The thing to know about Iceman (and engineers in general) is that he loves solving problems using hard science and math.

This is the email I received (which will make sense if you're familiar with last week's article):

Interesting article. I've often thought about this but never ran the math on it. On the surface, it would absolutely seem to make sense, but I have a couple of comments:

1. This only makes any sense if you are disciplined enough to immediately return to investing as soon as the debt is paid off, and

2. The downside to this approach is that your long-term investments will suffer.

Investments compound, so the sooner you can put money into them, the more they will grow.

The general rule of thumb is that an investment with a 7% rate of return will double every 10 years.

As an example, say you have $10,000 invested at 7%. In 10 years, it will be $20,000; in 20 years, it will be $40,000.

Similarly, at 10%, investments double about every 7 years.

You are losing out on significant compounding interest by pausing your investing.

Ok, this got me thinking, so I went ahead and ran the numbers at 7% and 10%, respectively.

Here's the setup:

• You are 35 years old

• Your goal is to retire at 65

• You have $10,000 in your investments

• Your investment rate of return is 7% (scenario 1) and 10% (scenario 2)

• You have $750 per month in income that you can put toward debt and/or investments

• You are currently paying $350 per month toward debt (minimum payment) with a pay-off period of ~10 years

• Contributing $750 per month towards your debt will allow you to pay off the debt in ~4 years

Before we get into the numbers, I want to clarify whether, generally speaking, a 7% - 10% rate of return on investments is a reasonable expectation.

Personally, I feel a 10% rate of return (over the long term) to be a bit ambitious but not out of the question.

This article (updated March 10, 2023) states:

I'm more comfortable discussing a 7% rate of return (as I did in a previous article).

The Iceman ran numbers for both.

Scenario 1: Pay the Debt ASAP

You invest $0 for 4 years to pay off the debt, then contribute $750 per month to your investments.

— 7% — — 10% —

At 45: $88,558 $102,322

At 55: $307,259 $423,177

At 65: $737,477 $1,255,393

Scenario 2: Minimum debt payments; Maximum investment focus.

You make the minimum $350 monthly debt payment which takes 10 years to pay off.

However, you invest $450 per month during the same 10 years. Then you pay $750 per month once the debt is eliminated.

— 7% — — 10% —

At 45: $99,503 $120,606

At 55: $328,790 $470,601

At 65: $779,832 $1,378,399

Conclusion: Scenario 2 is the better option.

Ok. Let's try this again:

Now the Iceman is on a roll….

Let's assume you are farther along on your investment growth.

Same scenario, but let's start with a $100,000 balance.

(I realize getting to $100,000 at 35 is quite the achievement; however, this is only to illustrate the impact of your "starting point" for your investments).

Scenario 1B: ($100,000 investment) Pay the Debt ASAP

You invest $0 for 4 years to pay off the debt, then contribute $750 per month to your investments.

— 7% — — 10% —

At 45: $265,602 $335,759

At 55: $655,532 $1,028,652

At 65: $1,422,582 $2,825,840

Scenario 2B: ($100,000 investment) Minimum debt payments; Maximum investment focus.

You make the minimum $350 per month debt payment which takes 10 years to pay off.

However, you invest $450 per month during these 10 years, then $750 monthly once the debt is eliminated.

— 7% — — 10% —

At 45: $276,547 $384,597

At 55: $677,062 $1,155,327

At 65: $1,464,936 $3,154,400

Conclusion: Scenario 2B is the better option.

In summary:

Debt with high interest (e.g., credit card debt) and a lower return rate on investments will impact the returns.

Ultimately, it's better to focus on your investments.

Why?

Because of compounding interest!

This quickly widens the gap (far in the future), but you have to invest early to achieve this return!

The numbers don't lie.

I wouldn't have even thought about crunching the numbers to determine the better course of action for me.

In the long term, I will be in a financially better place if I continue to invest rather than redirect my investment funds to pay off debt.

I want to thank Matt "Iceman" Eyster for his time in putting this together (I'll see you in Vegas brother).

Interesting reads:

For those of you who know me know one of my favorite states to spend time in is Wyoming. Check out this article which discusses the cost of living in Wyoming:Cost of Living in Wyoming

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