When it comes to trying to improve our cash flow position and trying to achieve financial freedom is it better to pay off debt or invest money? Which is going to be the better option for you?
0:00 – Introduction
0:28 – I love love love talking about money
0:55 – This is something I’m wrestling with in my life
1:50 – How does paying off debt vs investing affect our cash flow?
3:14 – Thought experiment using $100 to pay off debt vs investing
5:45 – Investments have potential unforeseen upside, but debt doesn’t
7:48 – What I’m focusing on this year
8:50 – The bigger the numbers get the more significant the decision is
10:24 – Don’t only think about money logically
10:57 – What do you think you’re going to do?
Saving Money vs Making More Money – https://www.youtube.com/watch?v=NFXMGtscAyo
When it comes to trying to improve our cashflow position and achieve financial freedom, often we still have some debt in our lives. So we want to invest, we want to grow our wealth, grow our passive income, but we also want to pay off our debt. So it’s a better to invest our money or is it better to pay off our debt? That’s what we’re gonna be talking about in today’s quick money Monday episode. Hey, I’m Ryan from on-property, helping you achieve financial freedom. And every Monday we sit down and talk about a new money concept because I love talking about money and there’s a lot of people out there who love talking about money, but there’s a lot of people who don’t and you might not have anyone in your life that you can talk about this stuff with. So just feel like we’re having a chat today to talk about these concepts around, is it better to invest or is it better to go ahead and pay off your debt?
And this is something that I’m wrestling with and thinking about in my life as 2019 is going to be a big year of getting Alison debt that I accumulated through some stuff I went through last year. So getting out of debt and getting in a position where I can really begin to build my wealth again and work towards a financial freedom. So we then do some thought experiments today, look at the pros and cons of paying off debt versus investing. Look at how can it, how it can affect our cashflow. And there’s some really interesting things in there that you might not have thought about or might not expect and how dramatically different scenarios can basically double your cash flow benefit. So we’re going to look at that and then obviously you can decide what’s going to be best for your life. This is for general educational purposes only and not a financial advisor.
So you do what’s best for you. Speak to professional if you want to about this sort of stuff. So let’s get into the thought experiment about the benefits in terms of our cashflow for paying off debt versus actually investing the money. And for me, when it comes to making financial decisions, I’m all about the cash flow effect that financial decision has. I think this comes from listening and reading so much Robert Kiyosaki and understanding that in order to be financially free, you need more passive income coming in than you have expenses going out. So the way to move towards financial freedom is to grow the passive income, but at the same time, reducing those liabilities and reducing those fixed costs in your life so that you have less than you need to pay for. So for me, when it comes to thinking about debt reduction versus investing, it’s a lot less about my net worth or about like how much money I have in the bank or how much equity I have or how valued I am.
I achieved pseudo financial freedom. I had a couple of years where I didn’t need to work and I basically didn’t have assets like a big chunk of cash or anything like that. I had businesses that were spinning off money, but I didn’t. Yeah, so I’m not all about that net equity position sort of thing. I’m all about the cashflow of effect. So that’s how I make decisions. That’s going to tint how I look at things. So just take all that with a grain of salt. If you prefer more about growing your net worth, they are. I like to look at the cashflow effects. So let’s have a think about this. So let’s say we have a hundred dollars spare that we could use to invest or we could use to pay off debt. Well, let’s have a look at how that’s going to affect our cash flow. So let’s say we take that hundred dollars and we use it to pay off debt.
For this circumstance. I’m going to say that the debt is costing us 5% per annum. I know a lot of you out there, we’ll have credit card debt. You’re talking 1318 22% or maybe personal lines where you’re being charged more than 5% but for this example, we’re going to say the debt is costing us 5% per year in interest. And we’re going to say if we invest, we’re going to get 5% per year just so we can compare apples to apples. So let’s say we take that hundred dollars and we pay off $100 worth of debt that’s effectively saving us $5 per year that we won’t have to pay in interest. But here’s where it gets really interesting, because in order to pay that $5 per year in interest, we first need to earn money through our jobs. And chances are you’re paying tax and you’re earning enough money to pay tax.
So let’s say you’re in that threshold of around 30% and you’re paying 30% tax on your money. So in order to earn enough money to have $5 leftover, to pay that $5 interest, you actually need to earn $7 and 15 cents approximately. So you need to earn $7 and 15 cents to have $5 to then pay the interest on that debt. Now let’s flip it and say, let’s say we take that hundred dollars and we invest that hundred dollars into something that pays us 5% per annum. Well, we’re going to earn $5 per year, but then the way the tax system works is that we’re then going to have to pay tax on that money we earn. So let’s say we’re in that 30% threshold. Again, we are in $5 we’ve got to pay 30% tax. That’s going to leave us with $3 50 leftover. So in one circumstance, um, if we pay off the debt, we actually need to earn $7 and 15 cents less per year.
That’s how I guess, improvement in cashflow. And if we invest that money, we’re going to have an improvement in cashflow for $3 50 per year. So even though both of them are 5% we’re actually like twice as better off $7 and 15 cents versus $3 50 paying off debt versus investing. So obviously when you invest, it’s not going to be exactly 5% and that’s one of the things that when it comes to choosing whether you’re going to pay off debt versus choosing to invest investment does have potential unforeseen upside. So maybe you invest in dividend paying stocks that are paying 5% per annum, but you could get capital growth on those stocks over the long term that you don’t foresee. So it could go from 5% and it could grow exponentially from there. Whereas debt, if you pay it off, it’s just fixed. Like you know how much you’re paying off, you know, how much interest you would have paid that’s fixed in place.
But when you’re investing, you have more potential upside as well. Paying off debt, even if you pay off all your debt, that’s not going to make you financially free because you still need some passive income in your life in order to achieve financial freedom. Whereas investing, you could effectively earn enough passive income that you can be financially free while still having debt. So there’s definitely, it’s not that paying off debt is always the right decision. Um, there can be pros and cons to both, but it’s just really interesting to look at that cash flow scenario of paying off debt versus saving or investing money and how that can affect your cash flow. Now obviously it depends on how much tax you’re paying. Um, you know, and it gets even more complicated if you have investment properties and then you’re talking about um, like negative gearing and being able to claim tax deductions on interest that you’re paying and things like that.
So it can get a lot more complicated there. But this was just a really simple example. Often we don’t think about it, we don’t think about that in order to earn money to pay the interest on the debt that we have, we actually have to earn extra because we go ahead and pay tax first before we can pay the interest on our debt. And the next door neighbor has just decided to start out the whippersnappers right. Writers, I’m recording. Thank you very much. Hopefully that’s not too loud for you out there. But yeah, it’s just like a really interesting thought experiment of, of paying off debt versus investing. So for me this year I wasn’t a really good cashflow position. I’m currently in, not where I want to be in a cashflow position and paying off debt just makes it a heck of a lot of sense to quickly improve my cashflow.
But at the same time I’m trying to grow my income as well. So I’m not just focused on paying off debt because I’m not like investing. I’m not growing my income, so I’m still trying to grow my passive income, but I’m doing it through the work that I do through creating assets through creating online assets that generate income. So I’m actually, I guess I’m doing both, like I’m not technically investing money, but I’m investing my time and my effort into assets that will generate passive income. So I’m growing that side of things. But then any money that gets any extra money that gets spinned off from that, I’m using that to pay off debt. Once the debt is paid off, then I will use that extra money from the passive income to then focus on investing into assets as well. So it’s up to you whether you decide to reduce your liabilities, are you fixed costs in your life to reduce your debt?
Or if you go ahead and try to invest, but go ahead and do that little cashflow example that we did that was just over a hundred dollars right? But let’s say that was not $100 that was not $1,000 that was $10,000 so instead of being in a position where it’s like $3 50 versus $7 15 if we go up to $10,000 then we’re looking at $350 versus $715 and then all of a sudden you know a difference of what’s at $365 per year. That’s, that’s a decent amount of money. That’s like $30 per month difference between those two scenarios. And so that’s, that’s a big difference if you work things out. So obviously these examples might be perfect, but if you’ve got credit card debt and you’re paying 13% 18% 22% instead of 5% maybe it will make more sense to pay off that debt first. Or there’s a fly right there, fruit quiet.
Maybe it will make sense to pay off that debt first before you go ahead and invest in something that might not pay as well. Or maybe you’re okay with the debt in your life and you really want to grow your passive income because that’s going to be a better longterm decision for you. You could do that or you could do both of it. Whatever you decide is up to you. But it’s really interesting to think about what’s going to be better off saving money versus paying off debt. And, and we’ll finish on the idea that don’t always think about money and the decisions you make logically, because when it comes to finances, were not logical humans, we don’t make perfect decisions. We don’t make perfect logical decisions. So you also need to decide what’s gonna be best for you emotionally. And if you can get really excited about investing, if you can get really excited about being frugal to invest in stocks or property or whatever it is you decide to invest in and that you’re going to be frugal, you’re going to work hard so that you can invest and you really get behind that, then the effort you’re going to put in is going to give you a better net result.
Then it’d be just focused on paying off debt and if you’re not excited about that, so you also have to think about the human effort that’s going to go into it. Whether you’re going to be excited, whether you’re going to be passionate to do this because it’s not going to be something that’s going to happen overnight. It’s something that’s going to take a long period of time. So even though investing on paper and logically might not sound like the best thing because you’ve got credit card debt, if you can get really excited about that, if you can put a lot of passion and energy and effort, you’re going to come up with amazing ideas to make more money or to save money, then you might end up in a better position because you tapped in to the power of your emotions rather than just try to make a logical decision.
So don’t just try and do logically like admit that yes, we are emotional humans, that we are driven by emotions. That’s not a bad thing, but try harness those emotions to get you the best result at the end of the day. All right, so that finishes this quick money Monday, investing versus paying off debt. Let me know in the comments down below what you think you’re going to do. You’re going to focus on paying off debt. You’re going to focus on investing. Are you going to try and do both at the same time? I would love to hear it. Leave your comments down below. That’s it for me today. Why here, go and check out my last quick money Monday where I talked about saving money versus making money. And should you be more focused on being frugal and saving money in your life or should you be more focused on actually growing your income? So that’s really interesting, one to think about as well. Check that out. Links or being in the description down below. Or you can go to on property.com dot a u four dash six one six which is that episode number. You can check that out over there and until next time, stay positive.