That’s the dangerous headline of a recent CNNMoney article. A 2009 Drexel College graduate wrote it. He graduated school that year jobless, $50,000 in debt, and with $200 in his bank account. But unlike the student we featured in the December 10 Daily—who extinguished $13,000 in student loans in under a year by slashing expenses and increasing income—this “smart guy” says he was dumb to try to pay off his loans quickly. Here’s what he wrote…
I asked myself: Why am I rushing to pay off loans with 3-6% interest rates when the S&P has historically returned 11%?
Game changer: I changed my entire philosophy on debt. I started making minimum payments on my student loans, picked up a “Stock Investing for Dummies” book, and put whatever extra money I made into the stock market.
When I turned 26, I noticed something astonishing: My student loan debt and the money in my investment account had converged to the same amount — $35,000. It was a really good feeling knowing that I could wipe away my entire student loan debt with just a few mouse clicks, but I opted to continue making minimum payments [emphasis added].
It’s clear this man has never heard of the Palm Beach Wealth Builders Club. Otherwise, he would never have made such a risky, wealth-destroying decision. Wealth Builders Club members enjoy a benefit called “Debt and Credit Solutions.” In this essay series, Mark shares his approach to using debt safely. And Mark would never advocate doing what this graduate did…
The graduate entered the stock market in 2010. He was fortunate to enjoy the market’s post-financial crisis move higher. But here’s the real issue: His expected stock market returns are not guaranteed… they could dry up overnight in a new crash. But his loan repayment bills are constant. He still owes them, no matter what the market does.
The lesson is clear: Never borrow money unless you know—with a high degree of certainty—the asset you buy with borrowed money will yield a return far in excess of your debt service payments. This way your debt service is covered, and you get to enjoy the “spread” between your levered (i.e., debt-based) returns and your payments.
The stock market does not meet this requirement. It’s too volatile. So while this guy may seem smart right now—after all, he earned enough to pay off his loans while the other student was scrimping and saving—the next major market correction will expose his poor decision in a big way. He’ll wind up with stock losses stacked on top of continued loan payments.
Do what the other student did: Reduce your expenses, increase your income, and pay off those bad debts as soon as possible. That is a proven method for wealth-building success.