IFB123: Investing vs Paying off Student Loan Debt

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern to decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:36                     All right folks, we’ll welcome to Investing for Beginners podcast, this is episode 123 tonight. Andrew and I are going to answer some of our listener questions. We’ve got some great ones recently, and we wanted to take a stab at answering them for you on the air. So I’m going to go ahead and read the first question and then Andrew and I will do our little thing. So our first question is, hi Andrew. I currently make over six figures,  and my wife stays at home with our 20-month-old twins. Wow. We have a few school loans left, roughly 15,000. I am still balling the payments as well as to pay off quicker. My question is, should I continue to dollar cost average and invest or take that amount and put it towards the loans? I also put a little bit aside for my paychecks for my daughters. I also have a 401k with my company. I get a fully vested 3% than 100% of my first 3% and 50% of the following 3%. So I don’t want to lose out on the free money. Does it make sense? I just turned 34 last week, as well. Thank you to you and Dave for all the advice constantly. Andrew, what are your thoughts?

Andrew:                              01:46                     Hmm. So this kind of hits home a little bit because like I can relate with it and I think it’s something that more and more people who are a little, I’ll say like coming up, but you know, starting their careers, starting to look into investing. A lot of younger people have student loans. And so this is one of those things where, you know, not only are you trying to figure out, you know, how do I make a budget? And then it’s like, well, how does the stock market work? How does investing work? And then now it’s like, well, should I invest or should I pay off that? And there’s get millions of different answers. So let’s tackle that back half first. And I want to see what you think about the 401k to Dave. So basically, basically, I look at a 401k matches free money, and I think that takes priority over anything.

Andrew:                              02:42                     So when we talk about the stock market and getting returns from the stock market, 10% would be average. I would say if you’re getting 11% a year, that’d be great. So obviously that can compound over the years, and as time goes on, that little 1% can make a huge difference in your total returns. A match, you can kind of think of that as a hundred percent return. You know, where else are you going to be able to put $2, get $2 from somebody else, right? From the company that’s matching? Granted, yeah, it’s not 100% a hundred percent like, I can spend this tomorrow, it’s going to a 401k, and you have to wait until retirement to take that out. But you know, if you’re listening to a show about investing and you’re talking about the future building income streams retirement is a part of that as well.

Andrew:                              03:32                     And so I think it makes sense. What’re fantastic benefits, right? Fully vested, 3%, 100% of his first 3% and 50% of the following, 3%. So even the second 3%, you’re talking about the 50% return, essentially if they’re going to match 50 cents on the dollar. So pros and cons, I’m trying to think of any cons. Like tax, like maybe taxes, if, if the for forever reason you want to pay taxes now and then maybe then that would deter you from going towards the 401k. But you know, I think, I think 401ks match whether you’re doing the traditional or Roth anyways. I guess it depends on the employer, depends on if they even offer a Roth 401k versus a regular 401k. But, you know, he’s asking, it sounds like he has student loans. I don’t know what other kinds of debt he has, but just off the 401k part, I think you utilize matches as best you can because that’s instant return.

Andrew:                              04:37                     That’s a big return compared to what you could earn in any other investment. Yeah, absolutely. You know, as far as the 401k goes, that for me would be, like you said, priority number one. If, if they’re going to match your, your investments in there, then you gotta at least put in the amount to get the match because that’s, that’s free money that you will get to use at some point in your retirement. Whether you stay with this company or whether you go on to something else, you obviously can roll that money into something else and kind of go from there. So anytime that you can take advantage of free money, you have to do it. And I think that’s a no brainer as far as the wound permeate. Let me ask you this. Let me ask you again because I think this hits the little dear to your heart. So he talked about setting aside some money for his daughters now or where do you put that in the priority list between I’m saving for my retirement versus putting stuff away for your kids because I know you have a little girl you’d like to talk about every once in a while.

investing verses debt

Dave:                                    05:48                     Yeah. So I guess for me, I guess I’m at a different place so I can’t speak to, you know, what would feel, but I am going to put as much as I can away for my daughter to give her that, that chance. You know, I, I, unfortunately, started later. It doesn’t mean that I’m behind the eight ball. I’m not, but it also means that you know, I don’t have the same time horizon that you do, for example. And he does. You guys are much younger than I am and so you guys have a longer time horizon to shoot for, but if you can start throwing a little bit of money aside for your daughters now to get them, to get the process started, I mean, that’s going to be huge. Even if it’s only $50 a month between the two of them or even a 50 for each kind of thing would be a huge head headstart you get for them, for their colleges or anything that you wanted to do.

Dave:                                    06:53                     And there are so many advantages that, and you know another guest contributor on Andrew’s blog Andy Schuller wrote this great article about this very thing that was posted on his site a few days ago, and he talked a lot about that. And I, you know, everything that Andy said in that article was spot on was perfect for what Constantine is looking for as far as the kids go. I think that is, you know, anything that you can start, you know, the process, whether it’s through a five 29 plan or whether it’s, you know, starting a custodial IRA for them, you know, there are different options you could go for, even if it’s just a savings account and just start putting money aside at some point because you know, with what he’s trying to do at some point that that student loan is going to be gone.

Dave:                                    07:43                     And like Andrew said, there are other debts that he may or may not have that we don’t know about, but once that 15,000 is gone, the money he’s using to pay those off can either go towards the other debts or it can go towards increasing his retirement or splitting it between he and what he’s trying to do for his daughters. I mean, there are so many other different options that he could use to do that. And it doesn’t have to all be right now you can kind of step into those things as some of those other deaths go away. That frees up other money for you and you know, two or three years down the road, once that debt is paid off, you know, he may be in a better place with his job as well. He may get a raise, get bonuses, all those things you can use towards either paying off the debt or you know, adding is, you know, a bulk into an investment account. So, you know, if you get a bonus every year, why not take that bonus and invest it for your daughters every year. And that could be something, instead of using it for yourself, you could use that as something that you could kind of use for your kids to jumpstart them getting a head start on their investing or their retirement or schools. You know, it is what you want to do. I guess that’s my thought.

Andrew:                              08:59                     That’s cool. What is the core you were talking about? It’s called how that opened an investment account for a child. You can go on the website and search for it; it should pop up. He put on some cool like there’s like a spreadsheet on here that does some hypotheticals with some different numbers. And so really highlighting how you could make a big impact for your kids. Even just putting a little bit away, start them when they’re babies. You know, we can, maybe we can start when we were young, but you could get your kids started, and we’re big on compound interest when, when it comes to the student loan. I think that’s interesting because um I think the discussion behind do you pay off debt or do you invest? I think that’s such a highly emotionally charged debate because now that we have the internet and everybody has a keyboard, and everybody wants to share their own opinions I think you can find so many different ideas behind that.

Andrew:                              10:01                     And I think it’s important to consider because on the one hand you have I don’t know if you’ve heard this before where somebody says you know, I don’t remember if they’re talking about paying off a home early or paying off, let’s say the student loan early. So I don’t know what the interest rate would be. Let’s say like 6% on the student loan. People say that if you have a ton of money you should pay it on the loan because if you’re not, if you’re taking that money and you’re using it in the stock market, then it’s the same as borrowing that 6% to invest in the stock market. Do you know? So they kind of make that leap where it’s like, well, if you’re not going to pay off the student, the student loan early then you’re, then you’re essentially saying that you would borrow the money at 6% to invest in the stock where I don’t necessarily agree with that.

Dave:                                    11:05                     I guess my thought on the student loan part of it, I keep coming back to something that a mortgage banker told me when I was at Wells Fargo. When you think about either paying off a mortgage or investing sooner, one of the big advantages, especially for somebody that’s younger time spent in the, in a market is almost as important as the price you pay when you invest. Right? And so if you, let’s say that, let’s say that you’re investing in your ma, you’re earning eight to 12% on your money and the interest rate on your student loan is coming in at four and a half percent where you’re going to be ahead by, you know, anywhere from four and a half to 6% on the investments. And you have the advantage of that money is in there. An additional three or four years, which

Dave:                                    12:07                     Time spent is going to increase the compounding effect, and you’re still going to pay off the student loan, and you can start investing more of that money theoretically in the stock market. And I just, I just feel like that that is something that I have done and would do because I feel like that I need to have the money in the stock market for it to do the work that it needs to do and every month or year that I do not invest in the stock market is one West year I have four, the compounding effect. And so if I’m able to do both then I would do both. Is it as much as I would ideally want to do? Probably not. But the flip side of that is that you can still get that money in the market and still have it working for you even while you’re sleeping.

Dave:                                    13:08                     And a student loan is every time you pay it down, you’re paying, you’re paying it down. And you know, some of the things with student loans to help you pay it off faster is you can make extra payments. Even if it’s, let’s say your monthly payment is 200 bucks, we’ll throw in an extra a hundred dollars on there. But one of the things that I was advised to do by a student loan counselor when I worked at Wells Fargo, as he said that you could contact your student loan and ask them to apply that to the principal. And that helps reduce the amount of interest that you have to pay over the term of the loan. So even though you’re paying $300, you can request how they divide that money up. And not all of them were going to do that, but most of them will because they have to.

Dave:                                    13:58                     And so that would help you in the long run, pay off the loan a little bit faster. So those are some things like the kind of pop into my head when I think about debt versus investing. You know, I feel like that time in a market is so, so important that I’m willing to give up. Having that debt paid off a little faster than getting the money in the market. For me, it’s very tough question for me to answer because I’m highly passionate about both sides. On the one side to me I am high risk-averse and I don’t like the idea of debt whatsoever. I think there is a Bible verse, the borrower is slave to the lender, and I think there’s a lot of truth in that. And even if you look at my investment style, I don’t like to buy, you know, you take two companies and one be growing faster

Andrew:                              14:52                     Than the other, but if it has a lot more debt than the other, I would rather have the company that’s maybe a slower grower but has no debt or very little debt, very conservative. So on the that’s like the one part where it’s like, yeah, I get like, I 100% get the idea of wanting to attack the debt and then if you can attack it quickly, I’m like, Constantine said, then you can snowball the payment. And so now you have a much larger chunk of your income. They used to be expensive, and now you can funnel that towards something else, and they can get kind of like compound interest works like a snowball. You can get like your debt, what Dave Ramsey calls like a debt snowball, and you can kind of turn the interesting game around for you and gain momentum on what you’re paying off.

Andrew:                              15:36                     And then that can help a lot with getting out of debt. On the flip side, I also think that, you know, if you’re, if you’re aggressive, I think everybody, you know, kind of to Dave’s point, I think everybody should be putting something in the market because I think you take two people, one person putting nothing in the market for 10 years and just let’s, let’s take like a seven-year time period, right? Cause student loans like ten years. So let’s say they took their extra money, they paid off their student loan and that’s seven years later versus somebody who maybe took 10 years to pay off their student loan, but they put a small amount of money in the market for those first seven years rather than paying off extra on the student loan. I think the second person who’s at least putting something into the market; they’re most times going to win, you know so many different factors.

Andrew:                              16:31                     But I think as a general kind of concept, and that goes back to tie, like you said, time in the market and starting in that compound interest early. So, you know, from a mathematical perspective, I get it. Like, if you can achieve 10% return per year and you’re still loans at four and a half percent, obviously you’re looking at a big difference, and that should be like an obvious profit. The real-world results fluctuate a lot more, and so it’s not going to be as, as nice as our little theories, but I think it’s a big reason why I’ve been so passionate about justice, small amount, just a $150 a month. And I tried to pound that on the table over and over and over again because I think that’s something we can do. I don’t think you know; it depends on everybody’s situation and, you know, there’s such a wide range of student loan debts and, and payments that people are making and then coming out and, and working in a career and having such a range in income.

Andrew:                              17:32                     So it’s really hard. You know, what might work for one person with one career, with one type of student loan, with one student loan at an interest rate. Like I’ve had student loans that range an interest from, I don’t know. I think from like four to 8%, just depending on, and that was just in like a four to five year time. So a lot of these things can really fluctuate, and it can really change the numbers and the calculations, and maybe you can drive yourself crazy trying to overanalyze it all. But at the end of the day, if you have money, I think most people probably don’t have gobs of cash to be like, well, I’m going to Chuck this, the student loan away in like six months. And then you know, aggressively invest next six months. So you want to make sure that, yeah, you’re maybe attacking Deborah at the same time.

Andrew:                              18:26                     Make sure you’re putting money in the market because I think that can be such a huge source of regret if you’re not starting that compounding interest and who knows what stock it could be. Whether you’re just doing it in an index fund and letting those dividends reinvest and then you’re dripping. Or if it’s like a stock and maybe you pick ten stocks one year, and one of them took off, and that one gets your compound interest ball going and outpaces what you would have made by, you know, paying off a student loan early. So it’s, it’s a really tough thing. I think you have to gauge your risk tolerance, and you have to gauge what you’re more comfortable with. I understand there’s a lot of the trepidation about putting money in the stock market, and it’s hard to see that your balances go up and down, whereas with a student loan that’s a guaranteed return on your money.

Andrew:                              19:25                     So I get both sides, trust me, and I don’t think you’ll be wrong going one way or the other depending on what’s right for you. But I think the overall takeaway is to make sure you’re putting in something. So in this case, if that’s, you know, I’m, I’m Matt, I’m putting in that match, and I’m getting that 401k match. That’s great. You know, now you have money in the market that is working for you, and that’s, that’s building up great compound interest. And you started as soon as you could. Whether that’s, you know, I, I don’t have great 401k options at my job, but maybe I can, I can put away a 150 bucks, 200 bucks a month, and then I have a little IRA I’m doing and I’m letting that compound and I’m also staying current on my payments. Or maybe I’m doing 150 a month in the stock market, and I’m doing an extra $50 to my student loan and on top of what I’m paying on the student loan, whatever that is.

Andrew:                              20:21                     I think those are the type of conceptual kind of big-picture ideas that somebody needs to have. And then you, you know, you can get deep into the numbers as, as much as you want and as much as it makes you comfortable. But at the end of the day, you know, you have to go with what makes you comfortable with the caveat. Don’t let yourself miss out. And trust me. I’ve heard every excuse in the book between this is the year the market’s going to crash. How many years have we heard that? And we’re hearing it today, and I heard that last year and the year before in the year before. So you know, it’s, it’s not so much trying to get into the market at the right time, just putting even a little bit of way that’s, it’s that consistency. It’s that habit. You’re building the habits that will create wealth over the longterm, and it’s not, it’s not the extra 3% we’re making in the market every year. That’s not a big deal here. The big deal is setting that habit, letting the compound interest do its magic and making sure that whether you’re striking a good balance or you’re doing something you’ve, you’ve thought it through, and it’s a proven approach so that you can maximize what you have and then maybe leverage that towards bigger and better things as time goes on.

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Dave:                                    21:53                     Yeah, that’s very good advice. All right, so next question. Hey Andrew and Dave, I’m a 22-year-old finance grad who’s been into investing for a few years now, and it’s great to see two guys giving wholesome advice without some hidden agenda. Most of the stuff you guys teach is a great fundamental investing principle that every investor should be cognizant of. And that many who do grow up in finance simply aren’t aware of. My question revolves around how you both add to your current positions. Let’s say you have 15 to 20 of them. How do you consistently add to all of them? If you’ve got a few hundred bucks a month to invest many theories, ideas on this, just getting your guys’ take to see how it compares with mine. Thanks, Charles. Andrew, what are your thoughts?

Andrew:                              22:39                     Yeah, so obviously, you know, the 15 to 20 number, we’ve talked about that before. That’s an ideal portfolio size, and so it gives you enough diversification where one stock that might die won’t kill you. But at the same time, you’re still if you pick a good stock, you’re, you’ll still see good returns from it, and you’re not just going to mimic the market. So when I look, if I’m, if I’m close to that, basically every month I’m looking over my portfolio, and I see where are the stocks that I own now and how do I feel about the valuations verses before and the gross stories versus before. So, you know, I might, I might look at a company that just released the new annual report. And so that might change how I feel about kind of the health of the company or the growth of the company.

Andrew:                              23:33                     But you know, from day to day basis and a month to month basis, the stock prices on some of these companies are going up and down. And so some of the stocks, it’s like, it’s like a gray irony because, and trust me, I experienced this just as bad as anybody else where the stocks, you have stocks in your portfolio that go up. And so you feel really good about those. And those are the ones you want to put more money in. And then you have the stocks that go down, and then you feel bad about those stocks. And then like, it’s like the makeup comes off of those and then you see all warts and all the negativity around. Some of the stock picks when their stock prices go down. And so instead of, you know, we always talk about, well, if a stock gets beaten up, you on the buy more and more, it can get really hard to do that.

Andrew:                              24:27                     And so it’s like the stocks that drop that you should be adding more money to are the ones that you, you don’t want to look at and the, you look at the other parts of the portfolio. So if you can try to flip that and use a stock that’s dropping in price as an opportunity to like dive deep into what’s up with this company, and you know, we’ve talked before how if a stock is beaten up, like severely beaten up, there’s probably a good reason for it. So you should find out what that reason is and then figure out for yourself whether that’s something that the market’s overreacting to or is it like a real problem that may be warranted staying away from.

Andrew:                              25:17                     You know, you probably want to add to your positions, there’s probably a reason why you picked them in the first place. I’m always looking at new opportunities, too, and weighing those in with what I have. But you know, sometimes it might mean I’m holding off on the stock that’s on your watch list because you still have some great stocks that are at great deals because the market hasn’t recognized them yet. And so maybe you should be adding to them. And so that keeps your diversification while also furthering your conviction about the stock and, and challenging your beliefs on the stock and challenging. Okay. W why, why at this valuation is, is this valuation a good discount to its intrinsic value? Right. So you’re starting to think about the margin of safety and insurance, like value, how, what’s the company worth and why is wall street not recognizing that?

Andrew:                              26:15                     So I think being at a spa where you at 15 to 20 stocks is a great opportunity because it really forces you to look at your position’s really, really closely with a keen eye and really you can be pretty strict on your standards and making sure that is anything I’m adding now really needs to be better than what’s in there already or the positions I have now be so good that I’m buying, even though it’s down 20%. And that’s super hard, and I’m not great at it. But I can say at least with the last issue I released; I did exactly that. I have a stock pick that’s down 10%, and I just, I added way more. So really testing the conviction. But you know, that going through that process forced me to take deeper and deeper dives into the company. And I think that’s very helpful. And so if anything, it should make you a better investor and make you hope to have this endurance of really holding that stock through thick and thin and, and laying that compounding and the drip take effect. And that’s all fantastic advice. And I echo

Dave:                                    27:35                     Everything that Andrew was saying. I think the, the key takeaway from that is thinking about what the position is and why is it going down. And if you can’t, you know, if, if your investment thesis is still widgets and this is why keeping a journal or a diary about why you buy a company is important. Because when you go back and analyze the stock like Andrew was saying and kind of seeing what’s causing it to go down, if it’s just the market being the market and Mr market is going, ha having fun then you know, put more money into it because it’s going to be, you know, a great way to increase that position and help you down down the road. If there is, you know as Andrew said has beaten up, and there’s a reason why GameStop wise that this is like, Hey, I have to get out of here, then that’s also a great opportunity as well.

Dave:                                    28:29                     The, the, I guess the one thing that I wanted to throw out there is one of the things that I do is if, if I w when I’m looking at my portfolio, and I’m, it’s time for me to pull the trigger on investing the money, one of the things that I will do is if, if all the companies are kind of at a stable point and I can’t really find something new to put into it, I will pick one of my better dividend payers, and I will put money into that. So I’ll kind of dollar cost average into that company. So that I’m continually trying to add to J P Morgan, for example, because it’s a great company and they’re doing well and are doing all the right things, and they pay a great dividend. So I will keep trying to add money to that position to take advantage of that. Is that always going to be the lowest position or something that is going to bring me the greatest return? Not always, but again, kind of having time served, having that money in there for me is going to help me that much more down the road.

Andrew:                              29:33                     I guess that’s my thought. Yeah, I think it’s always critical to kind of look at what you have, and they always think about are you going to add

Dave:                                    29:42                     Whether you’re at 15 to 10 well, I guess, yeah, when you’re at 15 and 20 cause I guess anything less than that you probably want to focus on getting the 15 to 20, but it’s a great spot to be as an investor. All right folks. Well that is going to wrap up our discussion for this evening. I want to thank Constantine and Charles for taking a moment to write to us. We appreciate that and hope you guys got some good info from all of our answers. So without any further ado, I’m going to go ahead and sign this off. You guys go out there, and if that’s what the margin of safety, emphasis on the safety, have a great weekend. We’ll talk to y’all next week.

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