Building Wealth from Zero Part 3: Debt and Investing

Wealth Building Aug 20, 2020

Everyone deserves to retire, but not everyone has the financial knowledge or resources to achieve retirement. There are many people who made enough money over their lifetime to retire; unfortunately they did not have the opportunity to learn save and invest to retire. For many Millennials and Zoomers, financial literacy is a daunting topic because they are already saddled with student debt and low starting salaries with impossible home goals.

Despite all of these financial setbacks, it is still possible to retire. We just have to confront the numbers and our financial fears. Most importantly, we need to start investing.

To recap Part 2, we discussed taxes and the approach to paying off student debt.

Age: 25
Starting Salary: $50,000
Monthly Take Home Pay:  $3,096
Assets: $0
Student Debt: $30,000 with 5% fixed interest rate over 10 year period
Student Debt Monthly Payment: $318.20
Net Worth: -$30,000

The number we care about the most is Net Worth, which is assets minus debt. The goal is to have Net Worth as high as possible.

For the sake of argument, we have an extra $100 that we could either invest for retirement or pay off debt. There are two scenarios to consider:
1. Pay off debt and invest remainder over a the entire life of the loan
2. Pay off debt as quickly as possible then invest after the loan has been paid off early

After we consider the two scenarios over a 10 year time frame, we will discover the most optimal path to building wealth with debt.

Option 1: Pay Off Debt and Invest Remainder over a the Entire Life of the Loan

We will continue using the Student Loan Calculator from Part 2.

Student Loan Calculator

We continue to pay $318.20 until we pay off the loans in 10 years. We will invest the remaining $100 in the stock market and assume an average 7% return.

Based on calculations from, we would end up with $17,105.17 from a monthly investment of $100 at the end of 10 years.

Once those 10 years are over, the following key areas have changed:
Age: 35
Assets: $17,105.17
Student Debt: $0
Net Worth: $17,105.17

This is a very simplistic view of what happened over 10 years. Chances are we will have accumulated more assets such as a home, retirement accounts, maybe even a business.

On to the next scenario!

Option 2: Pay Off Debt ASAP then Invest after the Loan has been Paid Off Early

If we took our extra $100 and put it toward our student debt then we will pay off our debt much earlier and save on interest payments.

According to the calculator, we would pay off the debt almost three years earlier than the original date and saving $2,467.96 ($8,183.59 - $5,715.63) in interest payments.

After paying off this debt, not only has an immense weight been lifted from our shoulders, but we now also have $418.20 to invest for the remaining 2 years and 10 months.

Before I dive into the recap of the 10 years, we should take a look at the breakdown above. Our investments over the 2 years and 10 months period did not grow as much. This time around, we invested more money each month in a shorter time period.

In the ending balance, interest only makes up 9% versus the previous 30%. This is a demonstration of how important time is when it comes to investing. The earlier you start investing, the more money you can potentially earn.

It is almost always a good idea to start early when it comes to investing. (The case where it is not is when your debt grows faster than your investments.)

Now to recap and compare to the previous method:
Age: 35
Assets: $15,636.00
Student Debt: $0
Net Worth: $15,636.00

In exchange for paying our debt off earlier, we would have $1,469.17 ($17,105.17 - $15,636.00) less in Net Worth. For context, that is 9 AirPods or 1 Macbook Pro.

Optimal Path for Wealth Building with Debt

In this case, the path to building wealth is starting early. There are nuances, such as if your debt is growing faster than your investments (think credit card debt) then it is a no-brainer to pay off your debt first before investing.

The optimal path to build the most wealth is not always the best path. The best path depends on many factors and one of those happens to be mental health. A lot of people love the peace of mind of not having debt. Debt is considered a risk and it is one of those tools that can do exponential harm in a recession or if you lose your job.

I know many people who would rather pay off their student debt as quickly as possible before investing and it is not wrong to do so. There is no single right answer. You need to crunch your own numbers and feel comfortable with the outcome.

What matters is that you get started: pay off debt and build wealth!

Cover Image Credit: Michael Longmire on Unsplash

DISCLAIMER: This blog references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. This blog makes no representations as to accuracy, completeness, currentness, suitability, or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis. Please do your own comprehensive research before investing in anything.


Alan Chen

Hi! One day, I will build a technology company that will change the world. Right now my focus is teaching personal finance. Now that you know a little about me, feel free to reach out and chat!

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