Invest or Pay Off Debt? Ramit Sethi's Interest-Rate Framework and the "$50,000 Mistake"
I Will Teach You To Be Rich
Should extra money go toward paying off debt or toward investing? Ramit Sethi argues that this is the wrong question as usually asked, because people lump credit cards, student loans, mortgages, and car payments together under the single label "debt." His position is that the deciding factor isn't how much you owe but the interest rate each debt charges. Once you know that number, he says, every debt falls into one of three buckets, and each bucket calls for a different strategy. He also argues that one common "responsible" move, throwing every spare dollar at low-interest debt, can cost tens of thousands of dollars over time.
The $50,000 Mistake
Sethi describes a familiar pattern. Someone decides to get serious about money, looks at their debt, and wants it gone. They put every extra dollar toward it, stop investing, and stop saving, and they feel responsible for doing so. He grants that sometimes this is the right call, but says it is sometimes a very expensive mistake.
To show why, he compares two people. Both have an $8,000 student loan at 4% interest, and both have an extra $600 a month to allocate. He anticipates objections that $600 is out of reach for many viewers and says the specific figure doesn't matter. If you have $200 or $50, the same principle applies.
Person A pays the minimum on the loan, about $107 a month, and invests the extra $600 each month in a low-cost index fund. Sethi assumes a return of about 7%, which he describes as a "real" return, meaning inflation is already factored in. Person B hates having the loan hanging over them, so they put the $600 a month toward the loan, pay it off in one year, and only then start investing.
By Sethi's numbers, Person B saves almost $2,300 in interest by paying the loan off early, which he calls "pretty amazing." But by delaying investing by just one year, Person B gives up about $50,000 in future returns over a 30-year timeline. He puts it as a deal: would you accept $2,300 today in exchange for handing over $50,000 thirty years from now? Most people would call that crooked, he says, yet they make exactly that trade with student loans and believe they're being responsible.
He adds that he chose this example to be intentionally simple. Most people don't pay off their debt in one year. They pay it aggressively over several years, which by his logic extends the cost. His broader point is that large financial decisions shouldn't rest on feelings alone. If debt charges 4% while investments earn significantly more over the long term, you need to understand that trade-off.
He also warns against overcorrecting. Paying the minimum on everything and investing the rest isn't a universal answer, because a credit card charging 24% changes the math completely. The right answer depends on which bucket the debt falls into.
The One Number That Matters: The Interest Rate
When someone asks Sethi whether to invest or pay off debt, his first question is "What's your interest rate?", not "How much do you owe?" People tend to lead with their balance, whether $20,000, $80,000, or $300,000. He says that isn't the relevant number. As an illustration, he says that with a $450,000 mortgage at 2.3%, he would mathematically pay only the minimum for the rest of his life, because the rate is so low there's no reason to pay it off early.
He compares two people who each owe $10,000. Person A pays 4% interest and Person B pays 24%. Sethi calls the first "a minor inconvenience" and the second "a financial emergency." Paying only the minimum, Person A ends up paying a little over $3,000 in interest. Person B pays more than $19,000.
His practical instruction is to make a simple list of every debt with its balance, interest rate, and minimum payment. Then, he says, stop staring at the balance, because the interest rate determines the strategy.
Bucket 1: High-Interest Debt (Above 7%)
The first bucket covers debt above 7%, and Sethi says it's mainly aimed at anyone carrying a credit card balance. He cites the average credit card interest rate as around 24%. He argues that many people treat that figure as just a number without understanding what it means.
Returning to the $10,000 example at 24%, he says that making only minimum payments would take 29 and a half years to clear the debt, with more than $19,000 in interest on top of the original $10,000. Whatever the original purchase was, whether a used car or a couch, it ends up costing far more than the buyer thought.
He anticipates viewers arguing that their investments made 15% or that beating the S&P 500 is easy. His response is that the card is still charging 24%, so you're losing. He compares this to someone bragging about winning in the first three minutes at a casino and suggests checking back 57 minutes later. He calls high-interest debt "financial quicksand" because, in his view, the stock market won't beat a credit card's interest rate.
His instruction for this bucket is simple: pay it down aggressively, with every extra dollar going to the debt. With multiple high-interest debts, he recommends paying the highest rate first, the avalanche method, which he says saves the most money mathematically. He acknowledges that many people dislike it because progress feels slow and they want quicker wins. The alternative is the snowball method, which targets the smallest balance first. Sethi says he doesn't much care which one people choose. He just wants them to pick one, attack the debt aggressively, and move on.
Bucket 2: The Middle Zone (6–7%)
Sethi says the second bucket confuses people because the answer isn't obvious. It's especially relevant to homeowners, prospective homebuyers, and anyone with a car payment. He cites current mortgage rates of around 6.5% and says many auto loans fall into the same range. If the market might return 7% and your loan charges 6.5% or 7%, there is no clean yes-or-no answer.
His general approach here is to "split the difference": pay down debt and invest at the same time, because he doesn't want people to stop building their "rich life" entirely.
His example is a 72-month auto loan, which prompts a digression. He asks why anyone would take a 72-month loan, argues "60 months or bust," and says that if you can't afford a car on a 60-month term, you probably can't afford it. He notes that 72 months isn't far off the U.S. average. Setting that aside, with $1,400 a month available, he would put $700 toward the car loan and invest the other $700 in a low-cost index fund.
His reasoning is that one of the biggest mistakes he sees is treating money as all-or-nothing, with everything going to debt or everything going to investing. He says good financial decisions often need more nuance than that. Investing now lets the numbers start to accumulate. Once the debt is paid off, it's easier to raise an existing investment amount, from $700 to $900 to $1,200 a month and beyond, than to start from nothing. In the middle bucket, he says, pay extra if you can and invest, so you make progress on both fronts.
Bucket 3: Low-Interest Debt (Under 5%)
Sethi says the third bucket surprises people, especially those who have been putting every dollar toward student loans. His examples are student loans at 4% or a mortgage at 3.5%.
He acknowledges that many people tell him they hate debt and want it gone, and he connects this to being told repeatedly that debt is bad, with the implication that having debt makes you a bad person. He rejects that: having debt doesn't make you a bad person, and you can live a rich life while carrying debt. Financially, though, with low-interest debt he would generally rather see people make minimum payments and invest the extra money. He admits this is counterintuitive. Paying the minimum means the debt takes longer to clear, but he argues the invested money grows into far more over time.
He frames the choice this way: twenty years from now, you'll be debt-free either way. The question is whether you're debt-free with nothing invested or debt-free with $180,000 in your portfolio.
He then gives a detailed calculation. Take a $39,500 student loan at 4% over 20 years, with a monthly payment of $239, plus an extra $200 a month.
- Strategy 1: Put the extra $200 toward the loan, pay it off early, and then start investing. After 40 years, investments total about $555,000.
- Strategy 2: Pay only the minimum and invest the $200 a month. When the loan ends after 20 years, add the freed-up $239 to monthly investing. After 40 years, investments total almost $616,000.
By Sethi's calculation, even after accounting for the extra interest paid on the loan over those 20 years, the second strategy comes out ahead by more than $50,000. He says the point isn't to maximize every penny but to understand the math so you can make the right decision for yourself.
"But Ramit, I Hate Debt": Psychology and Conscious Trade-offs
Sethi then addresses the emotional objection. He says money isn't just math and is deeply tied to psychology. Most people aren't calculating interest rates. They see a balance that seems to grow, and it feels bad. He argues that years later, people will wish they had spent ten minutes running the numbers, because the difference could be six figures in a portfolio versus nothing.
He also says paying off debt early can bring real benefits. It might help you sleep better, and seeing a zero balance might bring relief. "We don't always have to do what the math tells us," he says.
As an example, he plays a clip from his podcast with a couple who put all their extra money into their house. They also paid off their debts and both cars. They bought the house in June 2019 and paid it off about three years later. The wife says they used Sethi's own emphasis on psychology to decide, while acknowledging it wouldn't be his advice. She explains that the world felt uncertain and "like the world was crumbling underneath us." They didn't live together for the first year of their marriage, and at one point she was in Texas. She wanted something concrete, a place where they would be safe, including financially. Her husband, Dan, would have preferred investing and saving but agreed. She describes the choice as "very unconventional," but says that when they defined their rich life at the time, it meant feeling safe and being able to leave their field if that was better for their mental health.
Sethi says he understands this. Security and peace of mind matter, and they're real benefits. If paying off low-interest debt gives you that peace of mind and you've run the numbers, he says, go ahead. It's your money and your decision.
He then names the trade-off, pointing to the moment in the conversation when the couple said they were investing nothing each month. That is what he says people miss. When you focus single-mindedly on eliminating debt, you don't see what it's costing you. His conclusion is that feelings matter but aren't enough for one of the biggest financial decisions of your life. You need both your feelings and the numbers, and then you decide which matters more to you. He personally tends to go with the math, but he accepts someone saying they understand they're giving up $50,000 and want the debt gone anyway, as long as they make that decision consciously.
Handling Debts Across Multiple Buckets
Sethi closes with a scenario he says reflects messy real life, where debts fall into all three buckets:
- An $8,000 credit card balance at 24% (high interest)
- A $20,000, 72-month auto loan at 6% (middle zone)
- A $30,000 student loan at 4% (low interest)
There is $1,300 a month available for debt and investing.
Phase 1: clear the credit card. Pay the $400 minimum on the student loan and the $331 minimum on the auto loan, and put the remaining $569 toward the credit card. Sethi calls this "the fire that's burning in your financial house." He says investing doesn't make sense at this stage because the stock market can't beat that credit card rate. At this pace, the card is paid off in 17 months.
He pauses to address impatience. He says many people find this overwhelming not because it's complicated but because it takes years. His response is that accepting reality is part of being successful. Becoming debt-free can take years, and people need to accept that.
Phase 2: split the difference on the car. With the high-interest debt gone, the auto loan (bucket two) and student loan (bucket three) remain. Sethi would keep paying the $400 student loan minimum, leaving $900. He'd raise the car payment to $450 and invest $450 a month. He adds that someone who prefers to invest more and keep the car payment at its minimum is "totally defensible." In his example, the car loan is paid off in another 40 months, 15 months earlier than the original term, and investments grow to about $20,000 in that time.
Phase 3: prioritize investing over the low-interest loan. With the car paid off, Sethi says it's time to invest aggressively. Because the student loan is low-interest at 4%, he believes investing should take priority if you want to make the most money. Keep paying $400 on the student loan and increase investing to $900 a month. Over the roughly two and a half years it takes to finish the student loan, he says, investments grow to over $53,000.
He links this back to viewers who said they couldn't find $200 a month. His point is that a few key decisions made correctly can add up to five, six, or even seven figures over time. Despite his jokes, he says he wants viewers to take this seriously, because he doesn't want people reaching 40, 50, 60, or 70 and wondering where all their working years went.
The Takeaway: Let the Interest Rate Guide the Decision
Sethi sums up the framework by pointing to what the example did: it didn't treat every debt the same but let the interest rate guide each decision. In his view, the goal isn't necessarily to become debt-free as fast as possible but to build a rich life. He says paying off debt too early may be one of the most common mistakes he hears about.
Should you invest your money or should you pay off debt? This is a common question and it is one of the most misunderstood concepts in personal finance, often because people treat all debt like it's all the same. I'm talking about credit cards, student loans, a mortgage, car payments, they just call it debt. But you've got to go deeper because that's the wrong question.
Today I'm going to show you a framework so you know what to do with your money and by the end of this video, you will know exactly when and in what order to pay off debt and when to invest. By the way, I'll show you the $50,000 mistake that people make when they're trying to be responsible with their money in this video. So let's get into it.
The $50,000 mistake. Here's what happens. Somebody decides they're finally going to get serious about money and they look at their debt and they go, "I just want this gone." So they take every extra dollar they've got and they throw it at the debt. They stop investing, they don't really save. Everything becomes about getting that debt to zero and they actually feel responsible, right? "Hey, I'm doing the right thing. I'm going to be debt-free," and sometimes it is. But sometimes this is a very expensive mistake.
Let's look at some actual math. Take a look at two people. Both have an $8,000 student loan at 4% interest and both people also have an extra $600 every month that they need to decide what to do with.
Now, please, if you're about to leave a comment saying, "$600 must be nice. I don't even have $6 for fries," I'm trying to teach you how to adapt the principle for your own situation. If you don't have 600, maybe you have 200. If you don't have 200, maybe you have 50. It's math. It's not about the number itself. It's about the principle. Keep watching now.
Person A decides to pay the minimum on their student loan, about $107 a month, and they invest the extra $600 each month in a low-cost index fund, earning about 7% real return. That means we already factored inflation in the stock market.
Person B hates debt. They hate having that student loan balance hanging over their heads, so they decide they're gonna take that extra $600 a month and aggressively pay off the loan in one year. Once that's clear, they'll start investing. Now, by paying off the loan early, they do save almost $2,300 that would have gone into interest. That's actually pretty amazing. But by waiting just one year to invest, Person B loses out on $50,000 of future returns over a 30-year timeline.
Let me say that again because the math is so shocking. This person saved $2,300 in the short term, but lost $50,000 in the long term. If I said to you right now, "I'm gonna give you $2,300, but you have to give me $50,000 30 years from now," would you do it? Most people be like, "What the (beep) kind of crooked deal is this?" And yet you do the very same thing with student loan debt, and you think you are making the right decision.
And guess what? This is actually an intentionally simple example because most people don't pay off their debt in one year. They actually do it aggressively, but over multiple years. This is why I don't want you making huge financial decisions based on your feelings alone. My feelings tell me that I wanna eat a fat burger right now 10 times a day. Do you think that's the right decision? It might be.
If your debt is charging you 4%, but your investments are earning significantly more over the long term, then you need to understand this trade-off. Also, if you don't understand any of the words I just said in the last sentence, then you need to read my book, "I Will Teach You To Be Rich," because this is important.
Now, before you run into the comments and say, "Hey, Ramit, are you telling me that I should just pay the minimum on my debt and invest the rest?" Which almost nobody ever says, but you should be asking that. The answer is not so fast. Because if you have a credit card charging 24%, then your answer is gonna be quite different. So that's why the answer for what to do with your debt really depends on the bucket that your debt falls into. And to figure that out, we need to look at the one number that matters.
When somebody wonders whether they should invest or pay off debt, the first thing I ask them is, "What's your interest rate?" Notice I didn't ask, "How much do you owe?" I asked, "What's the interest rate?" Because a lot of people are not focusing on the right number. So they'll say, "I owe $20,000 or $80,000 or $300,000." Okay, I like pens. That's not really relevant to the discussion.
I wanna know your interest rate because if I have a $450,000 mortgage at 2.3%, mathematically speaking, I'm paying the minimum on that for the rest of my life. Let's go. Why would I pay it off early? It's such a low interest rate. But let me show you some math to really hammer home the example.
Imagine two people again. Person A owes $10,000. Person B also owes $10,000. Same balance. But Person A is paying 4% interest. Person B is paying 24%. These are completely different situations. One is a minor inconvenience. The other is a financial emergency. Just paying the minimum, Person A ends up paying a little over $3,000 in interest on their debt. Sucks, but okay, it's manageable. Person B, they end up paying more than $19,000.
This is why before you do anything else, I want you to make a simple list. Write down each debt you have, the balance, the interest rate, and the minimum payment. And once you've done that, I want you to stop staring at the balance because the interest rate is actually gonna determine your strategy. In fact, once you know the interest rate, every debt falls into one of three buckets. And that one number can help you decide whether to pay down debt, invest, or do both, and potentially leave you with tens of thousands of dollars more over time.
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These are data brokers and people search sites that collect and sell your personal information. And when your information is out there, you're exposed to more spam calls, phishing attempts, scams, harassment, identity theft, which can wreck your finances and take years to untangle. It's also just personally annoying.
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Bucket number one, high interest debt, which is above 7%. If you have a credit card balance right now, this section is for you. That's because the average credit card interest rate today is around 24%. 24%? A lot of people are just like, "Okay, 24%, yeah, whatever, it's a number." I'm like, "Oh, (beep) it. You're about to get buried. You just don't know math so you don't understand it." Allow me.
Let's use that earlier example. Suppose you have $10,000 on a credit card charging you 24%. If you are just making the minimum payments, do you know how long that debt's gonna take you? It's gonna take you 29 and a half years. And over those decades, as you age, because you also don't use sunscreen, remember that you're gonna pay more than $19,000 in interest on top of the original $10,000 you owed.
So whatever $10,000 purchase you all made, some used car or some freaking couch, I don't know, is a couch $10,000? That couch cost you a (beep) load of money. That used car, way more than you thought.
Now listen, people, this is not the time to get clever. I don't want a bunch of you writing, "My investments made 15%. It's actually quite easy to beat the S&P 500." That's nice. Your credit card is charging 24%. Your (beep) is getting chewed up. You're losing. It's like somebody bragging to me, "Oh, I won in the casino. I went to the Wynn and I actually won over the first three minutes." Yeah, okay, let me check back with you in 57 minutes and see how things are going. This is really the equivalent to financial quicksand because the stock market is not going to beat the high interest rate that your credit card is charging you.
If you have debt in this bucket, your mission is really simple. Pay it down aggressively. Every extra dollar attacks that debt. And if you have multiple debts in this category, prioritize the one with the highest interest rate first. This is called the avalanche method. And mathematically, it saves you the most money.
A lot of people don't love this because it feels slow and they want quicker wins. They want to feel like they are making progress, which I can understand. You can also choose the snowball method, which attacks the smallest balance first. Personally, I don't really care which method you choose. I want you to just choose one, attack the debt aggressively, and move on with your life. Next, let's look at the category of debt that confuses people because the answer for this one is not that obvious.
Bucket number two, the middle zone, 6 to 7%. If you are thinking about buying a house, if you already own a house, if you have a car payment, pay special attention to this section. As you know, mortgage rates today are around 6.5%. A lot of auto loans fall into that number right now as well. And this is where I see people start looking for a simple yes or no answer, but it's actually not simple because if you can make 7% in the market and your interest rate on your loan is 6.5 or 7%, what are you supposed to do?
Here's my general approach here, split the difference. Pay down debt and invest at the same time. Why? Because I don't want you to stop building your rich life entirely.
Let me show you some math. Let's say you have a 72-month auto loan. First of all, why the (beep) did you take a 72-month loan? 60 months or bust. If you can't afford it at 60 months, you probably can't afford that car. 72 months, what the hell is going on? What's crazy is this is not that far off from the US average, but that's for a different video, which you can check out here.
Let's say that you have $1,400 each month to work with. What would you do? I would throw $700 at the car loan every month and then invest the remaining 700 in a low-cost index fund. That's because one of the biggest mistakes I see people doing with money is turning it into an all-or-nothing approach. Everything goes to debt or everything goes to investing. Life doesn't really work that way and good financial decisions often have to become more nuanced than that.
Personally, it is very important to me that you keep investing specifically because if you start investing now, you're gonna see those numbers accumulate. And once that debt is paid off, it's gonna be easier for you to take the existing investment amount and just turn that number up from 700 to 900 a month to 1,200 a month and on and on and on. So in this middle bucket, pay extra if you can and start investing. That way you make progress on both fronts.
Now this next bucket surprises a lot of people, especially if you have student loans and you've been throwing every dollar at them. Bucket number three, low interest debt under 5%. Let's say you have student loans at 4% or maybe you have a mortgage at 3.5%. A lot of people tell me, "I hate debt. I just want it gone." And I get that. Many of us were raised being told over and over, "Debt is bad." The implication being, "You're bad if you have debt."
First off, just because you have debt does not mean you're a bad person. Next, you can live a rich life even if you have debt. But from a financial perspective, if you're in this situation with low interest debt, I would generally rather see you investing while making minimum payments on low interest debt.
Now this is quite counterintuitive because most people have been taught that debt is bad and you should get rid of it as quickly as possible. Sure, you could pay off more, but if you have low interest debt, maybe it doesn't make sense. Maybe you pay the minimum, even though it will take you a while, and you take the extra money you might have and you invest it because over time, that will turn into way more.
What I'm begging you to do here is to look ahead and not simply make decisions based on your short-term feelings. Think about it. What would you rather end up doing? 20 years from now, you're debt-free and you have nothing invested, or 20 years from now, you're debt-free and you have $180,000 in your portfolio. One way or another, you're gonna be debt-free. You choose, but if it were up to me, I'd rather run the numbers.
Let's say you have a $39,500 student loan at 4% to be paid over 20 years. So your monthly payment on that loan is $239. Let's also assume that you have an extra $200 a month that you could use to either pay more towards the loan or invest. Now, if you put that extra money towards your loan to pay it off early and then start investing, after 40 years, you'll end up with about $555,000 in your investments.
But let's say instead you invest that extra $200 while you are paying the minimum on your loan. And then after your loan is paid off in 20 years, you take that minimum payment, $239, and add that to your investments each month. After 40 years, that second strategy will have made you almost $616,000. And even accounting for the extra interest you paid on your loan over that 20 years, you still come out ahead by more than $50,000.
It's not just about maximizing every penny. This is about you understanding the math so you can make the right decision for yourself.
Now, if you're listening to this and you realize, "Hey, this is actually a little bit more complicated than I thought. Gosh, I sure would like to end up with tens of thousands of dollars more," then you're wondering, "How do I figure this out myself?" Maybe you're trying to pay off debt and invest at the same time. Maybe you're wondering if you're actually investing enough.
That is why we created the Road to $100K. Because for most people, reaching your first $100,000 is when things really start to change. It's when you see six figures. It's when those numbers start to accumulate faster than you thought possible. It's where you stop wondering if you are making progress and you can see it month to month.
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But Ramit, I hate debt. Well, I hate corned beef hash, but people still eat it.
So let's talk about this. Money is not just math. It is deeply embedded in psychology. And I can understand why you'd wanna pay off your low-interest debt early. Most of us are not sitting here calculating interest rates. We just see a number, it seems to be growing, and that feels bad.
But years from now, you are going to wish that you spent 10 minutes calculating these numbers because it could be the difference between six figures in your portfolio or nothing. But this takes you deciding, "I'm gonna take this seriously. I'm going to respect money."
Maybe paying off your student loans would help you sleep better. Maybe seeing a zero balance would make you feel relieved. Those are real benefits. I respect that. We don't always have to do what the math tells us. In fact, I talked to a couple on my podcast who did exactly this.
We put it all at the house, paid off any debts we had. We paid off both our cars.
You paid off your house? How fast?
We bought it in 2019, June of 2019, and we paid it off two months ago.
So three years. Why'd you do that?
Ironically, we used your psychology, which I know this wouldn't be your advice, but we used your psychology.
Okay, tell me.
What is your rich life? For us, with how uncertain everything was and how it just felt like the world was crumbling underneath us, and we didn't even live together for the first year of our marriage. I wanted to just feel like that we had something concrete, that if the whole world crumbled beneath us, that we had some place to go to that we could be safe at and financially safe at.
And so Dan very graciously agreed to work with me on that because he would have preferred to put it into investments and savings, but given our background and the fact, I think at this point I was in Texas, so we still weren't living together. And we just decided to put all of our extra funds into the house.
It was very unconventional, but when we sat down and looked at what does our rich life right now look like, that was our rich life, is just to feel safe and to feel like we could transition out of our field if we both felt like it was better for our mental health.
And I get this. Security matters, peace of mind matters. Those are real benefits. If paying off your low-interest debt gives you that peace of mind and you have run the numbers, go ahead. It's your money, it's your decision. But here is the trade-off.
How much do you invest per month right now? Is the answer zero?
Nothing.
Okay. The answer is zero.
This is the part that people miss because when you are so focused on unilaterally eliminating debt that you are not thinking about what it's costing you, you don't realize the game being played. Your feelings matter, but when it comes to making one of the biggest financial decisions of your life, feelings are not enough. You've got to have your feelings and you've got to have the numbers, and then you can decide which one is more important to you.
Personally, I tend to go with the math, but some people go, "Hey, I understand that I'm giving up $50,000 and I really don't care because I want this debt off my back." Okay, you've got to make that decision consciously though.
What if, like many Americans, you have debts that fall into multiple buckets? Guess what? That's okay because real life is a little messy. Let's say that you have an $8,000 balance on a credit card at 24%, that's high interest. A 72-month auto loan of $20,000 at 6%, which we could consider the middle zone, and a $30,000 student loan at 4%, which we would consider low interest.
Each month you have $1,300 to invest or pay off debt. What do you do? Let's break it down. Pay the minimum on your student loan, 400 bucks. Pay the minimum on your auto loan, $331. And to your credit card, you put all the remaining money towards that, $569. That is the fire that's burning in your financial house right now.
At this point, it doesn't really make sense to invest when the stock market could never beat your credit card interest rate. At that rate, your credit card will be paid off in 17 months. You've now cleared bucket number one's debt.
Let me pause you here because a lot of people find this really overwhelming, not because it's particularly complicated, but because they are impatient. As you are watching this, are you going, "That seems like it'll take forever. We're talking about years now." Yeah, that's life. Part of being successful in life is accepting reality. So you may wish that it happened tomorrow, but that's not gonna happen.
And sometimes we need somebody as direct as Ramit Sethi to just say, "Hey, this is what it's gonna take. So sit down, get comfortable, drink a glass of water." I can't believe I'm burning airtime just drinking water, but it's my channel. And accept reality with what it's gonna take. Sometimes in order to be debt-free, it's gonna take you years. Yes, let's (beep) go.
Okay, now it's time to reassess. You're left with the auto loan, which falls into bucket two, and your student loan, which falls into bucket three. Personally, at that point, I would likely split the difference between paying off the debt and investing. So here's how I'd break down that $1,300 a month.
I would keep paying the minimum on my student loan, that's 400 bucks. That leaves me with $900 to split. Here's what I would do. I would increase the car loan payment to $450, then I would start investing, $450 per month. Now, stylistically, you could go, "Hey, Ramit, I actually wanna invest more, and I wanna keep the car loan where it is." Totally defensible, that's up to you.
But in this example, your car loan would be paid off in another 40 months, which is 15 months earlier than your original term. And in that time, your investments will have grown to about $20,000. You are starting to see how making these conscious decisions can be worth tens of thousands, even hundreds of thousands of dollars.
Let's keep going. Now that your car is paid off, and bucket two is cleared, it is time to get really aggressive with your investing. Remember, your student loan is in bucket three. That's low-interest debt at 4%, which means, in my opinion, you should prioritize investing over paying that off if you wanna make the most money.
So keep paying off your student loan, 400 bucks, then increase the investing to $900 per month. In the next two and a half years it will take you to pay off your student loan, your investments will have grown to over $53,000.
You remember the people at the beginning of this video who I was yelling at, "Oh, boo-hoo, I can't find $200 a month, and I (beep) adapt it?" Do you see how by making a few key decisions correctly, you can end up with five figures, six figures, even seven figures over time? This is important.
So for all the jokes I make, I actually expect you to take this seriously, because the last thing I want is for you to end up 40, 50, 60, 70, going, "Where did it all go? All those years working, what do I have to show for it?" This is why these videos are not just entertainment. You should actually be following what I am talking about.
Now notice what we are doing. We're not treating every debt the same. We are letting the interest rate guide our decisions, and that framework is gonna make you a lot of money in the long term.
If you wanna get better at making decisions like this with your money, hit subscribe, because the goal may not be to become debt-free as quickly as possible. The goal is actually to build a rich life, and paying off debt too early might actually be one of the most common mistakes that I hear. But the second and third most common mistakes are just as brutal, and to avoid those ones, watch this video next.
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