My first full year of self employment in 2010 was great. I exceeded my goal to earn $150,000, I sold my first website in a six figure deal, I successfully launched my first info product (along with several others) and I generally had way more fun facing the challenges of self employment than I did in my old sales job (despite the downsides I’ve mentioned before). Now as we’re almost halfway through 2011 I’m constantly thinking about my goals for this year and doing everything possible to ensure I meet them; however, I made one huge mistake early in 2011 I’d like to share with you.
My $26,000 Mistake Of 2011:
I was riding high, had plenty of money in the bank and because of that I decided to pay off $26,000 worth of student loan debt from my wife’s masters degree back in January. Both loans were around $13,000 each and at 8.9% and 7.9% interest rates or something really high like that (interest rates for loans on post graduate programs are way higher).
Why Was This A Mistake?
I gave up liquid cash that I could have used to invest in my business for a sure thing that my wife and I would be paying roughly $300 a month less in student loan payments over the next 10 years. For years I’ve always been told that paying down debt is the right thing to do, but I believe when you’re trying to build your own business this attitude isn’t always the best. I believe I can always make more than a 8.9% return when I’m buying websites or other web based assets and for me to give up $26k so that I could have less debt was incredibly stupid.
Example 1: I buy a website for $25,000 that’s earning $1,000 – $2,000 per month (1x – 2x earnings multiple).
Even on the worst case scenario of a 2x earnings multiple a website I purchase for $25,000 making $1,000 a month without improvements to the monthly income (there always would be) I’d already be coming out ahead an extra $700 a month. Yes there is risk in any investment like websites, but with such a short payback period I believe I still come out behind by deciding to pay down debt instead of investing in my business.
What Do You Think?
I hate to woulda shoulda coulda because I believe that attitude is for losers, but I wanted to share my mistake because I believe I’ve learned a valuable lesson. Now what I’m not advocating is that you should buy that $1,997 course you’ve seen guru’s promoting because you can earn $50k per month by pushing a big red I’m an idiot button instead of paying your credit card bill. But when it comes to investing, if you know you can make something work (in my case – buying websites) then it’s probably a mistake to pay down debt with cash that could be used for investments instead.
Yes I know this blog is about making money on the internet, but what you do with your money offline can have just as big of an impact of how much you can earn offline. I really do want to hear some feedback on paying down debt vs investing so don’t be lazy and read this without commenting.
See you down in the comments.
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{ 38 comments… read them below or add one }
Interesting perspective. I think you could go either way on that. I was in debt for years, so when I finally paid it all off, I made the decision to never put myself in that position again. Ever since, I’ve taken the position that if I can’t pay cash, I don’t need it (house and car being the only exceptions). Not having any debt is quite liberating and puts you in the position to do other things that you may not have been able to otherwise.
That said, I don’t disagree with your position either. Especially when you’re self employed, using your cash effectively is extremely important and the case can certainly be made that you could have made “better” use of it by investing it back into your business. There’s more risk involved in doing so, but that risk is mitigated by the likelihood of success in that investment, so it’s not a clear-cut decision.
It all comes down to one thing: there’s no right or wrong answer. When it comes to personal finances, the “right” decision is relative to the priorities of the person making it. I probably would have done the same thing you did and paid off my debt. It doesn’t make it the right answer, but look at it this way: Even if it was the wrong decision for you, it’s not really going to hurt you. You no longer have the cash to invest, but you also don’t have the debt anymore.
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Interesting post Chris! Ive never thought about it like that. Without reading this I might have made that mistake too.
Great post. Now I’m really considering this same predicament. I just sold a classic truck and planned on paying off a high interest credit card with it. But investing in the business makes a lot of sense too. I think this credit card really needs to go, but this makes me think a lot. Great point of view!
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I could go either way on it. There is a lot to be said for not having that $26,000 hanging over you. For us, the big value in paying it off would be greater peace of mind for my wife
She knows with her head that the math makes sense, but every other part of her just feels better with no debt. I’m a little bit the same way. $26,000 is a lot of money. It’d be nice just to get that knocked out.
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Paying off 26k of debt has to feel good, even if you think that the money would have been better used in buying an asset.
My question is this: Did the 26k pay off ALL of the student loan debt? If it didn’t, I would lean a bit more towards your idea of investing the money in my business. If the 26k DID pay off all of that debt, that’s great! One less thing to worry about and even less negative interest accruing on your net worth.
You do make a great point with this post, Chris. It’s made me even think about how to change my approach to some things in regards to paying off debt and building money making assets.
Great info Guthrie, I’m thinking through the same scenario right now. The issue being time and effort needed to achieve that 10% return rate. Also known vs unknown. Still great advice.
I think the decision to buy a website that produces income would have been a better choice then paying off the student loan, but I would not do the same if I had credit card debt like Randy noted. There is just something nasty about having credit card debt.
I did some similar calculations, but purchased real estate because that’s what I know best right now, but websites are on my list as well.
The other thing is how much longevity does the site have?
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You could’ve bought the website for 25k and then used that money it earned each month to pay off the debt and hopefully even have some extra income
But the thing is, with 25k websites thats pretty risky to go into, lots of Flippa users are lieing about stats and income reports so its not always this easy..
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I think you did the right thing. Folding money back into the business is a great idea but keeping debt low and under control is a great mindset to have. Leveraging debt can cause more problems than it solves, just look at recent economic history. So Bravo. By the way, paying off student loans to the gov is great for your credit score rating. So when you go to get financing for a home or a business, your credit will look great. ( I was a loan officer for 4 years in a prior life)
Now all you have to do is go back and run your business and teach guys like us to go out there and do the same.
Stay well!
You could have taken a homeowners loan (if you own) or a small business loan at a lower rate and paid it off. Or just refinanced. Or paid off part and used the rest for a site. Personally I wouldn’t spend 25k to get rid of 300/mo debt but a lot depends on how much cash you have in the bank; if you have a lot then def pay off debt but dont spend all of your savings.
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Its 26.000 dollars less to worry about.
Also you don’t have to “work” to make a return on that 26,000 investment into your business.
But nice going! If you want to know how it feels like to pay it off slowly, i’ve got another 30k worth of University Debt for you if you are interested
As you said Chris, it all depends on the person, most people don’t have the business acumen to do better with their money than paying off debts.
For most people if they get some kind of pay out, it’s generally smarter to just pay of high interest debt, unless they know they can turn it into more.
I agree from what I know about you, that you could have turned it into a lot more.
Hey Chris,
I like your numbers!! I think I need to sell websites…Oh I gues I would have to be able to build them first. But anyways if you pay off the loan early don’t you save a bunch of money even if for now your a little short?
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Hey Chris,
It takes time to set up a “good” website. We bought a couple a few weeks ago, and the day seems to just start and it is time to go to bed that I still haven’t been able to get to a few. In the end, building websites is a slow process. So is debt in some ways, but it costs you more in interest. Building quality sites is what counts these days, than slap stick sites. In tough economic times, it is best to get out of debt because you do not know what the future may hold. Many people think we will dig ourselves out of this hole we Americans are in, but I think there are rough times ahead. Paying off debt and getting into the position where you have enough food on hand or in storage will be just as good as gold. I think you made the right decision. Huge Blessings my friend! Meranda
Chris, I really like this post and definitely see where you are going with this.
I don’t really agree that this was a “wrong” decision on your part. One of my main reasons for getting into IM is to get rid of that debt.
The thing with this type of business is that you can probably make that money back relatively quickly, so you can always come up with more money to reinvest even if it takes a little longer.
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Regarding debt, the idea I like best is that describe in “Rich Dad, Poor Dad”
There are good debt and bad debt.
If you have enough skill and knowledge to make more $ than interest you are paying, you better use your skill to the fullest extent.
Moreover the value of $ is declining. $100 last year is worth more than $100 today, and the next year trend seems similar. It means savers lose and borrowers profit. (borrowers in this case is those borrow and invest, not borrow and spend)
Have a look at following data. It is gold price in this last decade.
Date Gold AM Closing Price
29-Dec-00 $272.65
31-Dec-01 $276.50
31-Dec-02 $342.75
31-Dec-03 $417.25
30-Dec-04 $435.15
30-Dec-05 $513.00
29-Dec-06 $635.70
31-Dec-07 $836.50
31-Dec-08 $865.00
31-Dec-09 $1,104.00
31-Dec-10 $1,410
today $1,526
So what I am doing is borrow money and buy gold.
Interest we pay for is far less than appreciation of gold.
In your case, you are paying 8.9% and 7.9% for loans, let’s look at gold’s appreciation
between 2008-2009 gold appreciate about 27%
between 2009-2010 gold appreciate about 28%
between 2010-now it already appreciate 8%
So, why does gold price increase?
Because Government around the world are printing more and more paper money.
But they can’t print gold. Gold is a store of value since ancient time.
So to pay back or to invest, it is personal choice.
As for me I will stay in debt (not to spend) but to invest.
For better understanding, I recommend two books
1) rich dad, poor dad
2) conspiracy of the rich
Good luck all,
Ye
Yes, you made the mistake of the average man. A lot can be said for the “I’m Debt Free” feeling. However, smart people are always in debt. Why? Student loans and mortgages PAY you money!
After graduation, you can take interest from your student loans off of your income tax (you can do so for up to 10 years). Also, I first hand reduced my student loan to around 4-5% interest. Putting the money you would normally pay off the loan into a 3% yield means that you are only paying 1-2% which is below inflation. Couple that with getting 20-30% of that money back on your income tax and you can see that it pays to not pay off your student loans.
Mortgages are pretty much the same as long as you have 20% of your house paid for. The interest comes off of your taxes. Furthermore if you have a home office, you can deduct a portion of your office from your mortgage (based on square footage so make your office the biggest room).
So if you think you could have made more than 3% on that money, you definitely made the wrong choice. But!!!! (and this is a big BUT) Doesn’t it feel SOOOO good to be debt free?
Hey Chris, I fight this one a lot myself. We did the Dave Ramsey thing and paid off six figures of debt, and it’s a great feeling.
However, I know that growing my business takes investment, so I’m allowing my business to take on some debt, as I feel pretty confident in the returns and I wouldn’t be able to grow it otherwise.
You can run the numbers all day, but being debt free is a great feeling! I wouldn’t classify what you did as a mistake.
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Interesting post. I think if you could’ve handled the monthly payments on the student loans, the reinvesting into the business would have been the better idea.
Or a possible split, pay down some and use the other to invest.
Chris,
I’m a huge fan of no debt at all. My wife and I recently payed off both our cars, have no credit card debt and are only left with a mortgage. Talk about freeing up cash! Just think about how you can invest the $300 a month you saved and you’ll get your 26k back really quick and then some. Plus you’ll have the added bonus of not having to every worry about paying off the school loans again. That’s a win win in my book.
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I personally would have done same thing as you – pay off debt.. While financial calculation might make it looks like other options more valuable – reality is – being debt free gives you sense of personal accomplishement and you can’t buy this!
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I think you made the right decision. Anyhow, you have to pay that loan and you did it at one short. You should feel happy that you did it at once.
Now you can concentrate more on your business.
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Thanks for sharing this, Chris. It’s tempting to think there’s a “right” way to make money (or avoid losing money) on the internet, but you’ve very elegantly pointed out that sometimes the received wisdom isn’t the best.
The important thing is to do what feels right at the time – based on all the information we have. From that perspective, you probably *did* do the right thing, although with hindsight you can see there may have been a better way.
But hey – all learning is good, right? ;0)
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I think you’ve got a bit of “buyers remorse” going. I had the same thing happen to me. I paid off a very similar amount. I save up with my first job out of college to pay off my debt as fast as possible. And I did. It felt AWFUL losing that much money with one click of a button, but the further I go in time away from that click the better it feels. You are not only gaining freedom from debt but peace of mind that you don’t owe anyone anything (especially the government).
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It’s all about personal preference. I’d never pay back a larger loan at once instead invest into business that will generate passive income.
However if you or your wife sleep better at night knowing that some of the debt is paid back, then I think it was worth it. You have and will make a lot more money than $25k, don’t worry about this one transaction too much. Cheers
Yeah good lesson, always count if you can earn more then they want for debt!
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First time visitor. I found the website via iTunes Podcasts on business. Love it so far and hope it doesn’t pod-fade.
I’m hoping to go back into business for myself in the next two years. I’ll start part time while keeping the Corporate-America-makes-me-die-a-little-on the-inside-each-day job until I can transition full time. I’ve been successfully self employed before in the IT field. I’m running in the opposite direction this time. I can say that having debt can lead to making bad business choices because you owe money that MUST BE PAID. My ex and I couldn’t tough out the rough times because of previous debt and ended up selling the business for a steal.
This time I will go into it debt free except for mortgage. Trying something online will be different than the brick-n-mortar business I help to build before but I think no debt and cash on hand to invest is best.
Congrats on being in the position to be able to pay down $26k in debt. Personally, I don’t think you can ever call that an outright ‘mistake’ — though perhaps a balance of paying down some debt, while reinvesting some of the money into your business would have been the best path — I struggle with trying to find the appropriate balance.
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Chris,
Originally read some of your comments and insights you provided on another blog: http://flippingawesome.com/how-to-steal-a-website-a-true-story-part-2
I’m glad you realized your $26,000 “mistake” from a business and investing standpoint.
Don’t you hate when you realize it AFTER the fact
You seem like a smart guy, and you are right.
Would be very easy for you to out-perform the monthly payment on the debt, especially doing it buying and selling websites or even even developing $300+ or more in affiliate income from a particular website.
Although I’m sure your wife is happy and appreciative you paid off the student loans.
Don’t let it eat away at you.
You generated the income to be able to pay off that chunk of debt all at once, you can do it again!
Marty
DomainNameStaffing.com
P.S. Is your wife actually using her Masters Degree in the real world?
Meaning, is she earning a “return on investment” in the same profession she spent all the years, time, money and effort going to college studying for?
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Great post. In my opinion, it depends. Paying off a debt right away may entail losing investment opportunities in the meantime, but in return it frees you of having to take care of any future financial obligations. Since nothing is certain (but death, and taxes) this should be considered a good thing. However, the ROI on the current investment is, again, a huge factor in making a decision. I’d say if you get your investment back in less than a year, go for it. Anything more than that, and it’s a gamble. just my two cents.
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Hello Chris,
‘What I think….?’
First of all there seem to be two sides to it and both,
do seem to have their own logic to it…,
An other thing that your post made me think of is about what you wrote about the Hypothetical idea for buying a website that Hypothetically would have a certain kind of Hypothetical monthly earnings.
That idea reminds me of something I once read about Pop Star David Bowie, that he used his Reputation for being known as somebody with Potential for possible hit record successes to attract money for financing the recording of a new album, by promissing people a percentage in case of possible future profits. That way like ‘Making Money Out of Thin Air’ based on Hypothetical Future Profits.
Also in the Movie Business some Movies are being made based on Possible Future Profits. In a recent post on my – Home Business Lifestyle Blog - I also wrote about it.
All the Best,
To your Happy – Home Business – Inspiration,
HP
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I think it’s interesting that you essentially had “buyer’s remorse” after paying off the debt. Most people have this struggle before paying off the loan, but afterwords feel like they made the right decision when they feel a physiological “weight” lifted off their shoulders.
Like others have said, the right answer is different for everyone. Personally, I’m a debt free kind of guy. I don’t want to be obligated to make payments on anything, just in case I ever wanted to pick up and explore new opportunities.
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Debt vs. investment is a tough decision. I always fall back to what will make you sleep better at night the knowledge you have less debt or the knowledge that you have the cash to make and investment if the opportuinity come around.
Really valid input. I currently have a student loan and I am in the same position. I like how you look at the rate of return you’re getting, because those are the investments that can really put you ahead. Great post! Keep them coming
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Warren Buffett used to say something similar about buying an automobile.
He reckoned that the automobile cost him more than $100,000 because by not investing the cash in an appreciating asset, in the long run his decision would prove to be mega-expensive
Chris, there sure are a lot of different opinions on whether or not you made the right move, paying off the student loan.
But only Eugene (slightly) touched on the real biggie – “owing money to the government”! Uncle SAM was your business partner in this student loan relationship, and that’s a partner you don’t want to owe money to. The government’s powers of collection and intrusion into your life are “unprecedented”.
It’s really not all about “opportunity cost”. You did the right thing by getting “that” monkey off your back.
I made sure to pay off my student loan and that’s why I’m no longer “sleepless in Olympia”!
I really love this blog. I love how open you are with all the information that you write about.
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to me these mistakes adumbrated here are not considered too costly, for instance the mistakes buying a site for 25k usd and doing 1-2k monthly with it. being an investment, it will take time to grow.
Well I dont know the perspective you are seeing this from. Maybe its because you have got big dreams and big big plans to have a secured viable financial future.
I have really gained from all of these your 2011 mistakes. Thumb up
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