- Wealth = Assets – Debts. Therefore, if you are building your assets by investing or destroying your debt by paying it off more quickly, then you are accumulating wealth.
- The question isn’t which to do. You should be doing both. Aggressively invest AND destroy debt.
- Sometimes the head and the heart don’t agree. Paying off debt versus investing additional money is a very personal decision, and one that isn’t always figured out by doing the math.
- Generally, if you are debt adverse (like me) = pay off the debt; if you don’t mind the debt = put additional money into investment vehicles.
- Regardless, I recommend looking into PSLF or refinancing your loans as soon as possible! You have to make an intentional plan towards debt, ignoring it doesn’t work.
What is Wealth?
I remember the first time I received a quarterly bonus check (yes, this happens for those of you still in training, and it is wonderful). Immediately, I thought, “What should I do with this extra money?”
Well, I could go and spend it on nice things I was neglected during medical school, residency, and fellowship. However, that would go against the tried and true method of living like a resident after residency for a few years. Since I’ve already maxed out my employer 403(B) and my wife’s governmental 457, I could put that money into a backdoor roth. Or I could pay off school loan debt.
Wealth = Assets – Debts
In my situation, paying off debt simply made more sense.
As you may have seen in my previous post on disability insurance, I have been denied personal disability insurance and am having to rely on my group policy.
So, despite the fact that I have earned ~15% on my investments during the bull market we are experiencing and my debt is at a 10 year variable rate of 3.6% after refinancing my loans, I made the decision to put my extra money into destroying debt.
The reason is simple. Sometimes the head and the heart just can’t agree. Paying off my debt provides more peace of mind than making more in the market investing. The math doesn’t make sense, but what is the point of wealth if you aren’t content? Additionally, if I became disabled, it likely wouldn’t matter how much I’d saved at this point. I owe that debt regardless of my condition as long as I am alive.
And once I’ve finished paying off my debt, investing is exactly where that money will go! Either way I am accumulating wealth (Assets – Debts) by adding to my investments or destroying my debt.
What if you aren’t in my boat?
Obviously, I hope most of you learned from my mistake with disability insurance and will not be forced into the same difficult situation. That said, I don’t know if I would feel differently about where to put extra money. There is just something about the peace of mind that comes with being free of debt.
However, if you are a stone cold logician who only looks at the math, it may make more sense to put your additional windfall money into investments earning 6-8% interest than to pay off refinanced loans at 3-4%.
Regardless, upon finishing residency you should make up your mind on whether you are going to pursue PSLF or refinance your loans. This is another way to destroy debt, or at least to make sure that the debt doesn’t destroy you!
What do you think? With extra money, should we be destroying debt or building our investments? What have you done?