How do millionaires become millionaires? It is a question that has been asked for centuries. If the answer was simple, we’d all be millionaires! The truth is, for most millionaires, it took years of hard work, financial wherewithal, and probably a little bit of luck. But there is also some strategy to it. Avoiding high-interest debt has been a hallmark of wealthy people. So too is investing their money to help it grow. But which strategy is better? Do millionaires pay off debt or invest? I looked into it and here’s what I found.
It’s a combination of the two! Millionaires have been known to take on low-interest debt to invest their money. Both paying down debt and investing are great ways to grow your wealth. There are several different types of debt, some of which are better than others. People who become millionaires are typically savvy with how they balance debt and investments in their portfolios.
If that seems counterintuitive, it is. It is also probably why most people cannot grasp the idea of how to become rich. In the end, it is all about more money coming in than going out. Let’s take a look at how millionaires take on both debt and investments to grow their wealth.
Do Millionaires Pay Off Debt or Invest?
Now, obviously, this depends on each individual millionaire and their wealth strategy. Not every millionaire is going to like taking on debt, even if it helps grow their money. Wealthy people generally have a very strict set of principles and the discipline to stick to those is one reason they become as successful as they are.
It is extremely hard to become a millionaire without some form of investing though. Whether it is in stocks, funds, or even businesses, millionaires make their money work for them. So if I was going to pick between the two, I would say investing plays a much larger role in growing their fortunes.
Are You a Millionaire If You Have Debt?
It is an interesting question! If your mortgage is for $1 million, are you still considered a millionaire? Once you pay that debt off you own the house and as an asset, it is worth $1 million. This logic does take on the assumption that you will be able to pay off the mortgage in full.
To answer the original question, a millionaire is usually determined by their net worth. This means that if they sold their assets and paid off their debts, they would have more than $1 million. So even though you have debt, you can still be considered a millionaire.
And let’s be honest: most millionaires still carry some debt. Whether it is a mortgage or a loan, or some other form of debt, millionaires are not immune to it. The difference is how they utilize this debt to their advantage. Using debt to invest and grow your wealth even more? This could be the true hack to becoming a millionaire!
Related Financial Geek Article: Is it Normal to Be in Debt? Good Debt vs. Bad Debt
Is it Smarter to Pay Off Debt Before Investing?
If you aspire to be a millionaire one day, this is a great way to start. Paying off debt, especially high-interest debt, is your fastest path to becoming wealthy. You won’t see Warren Buffett carrying around a bunch of credit card debt. As a general rule of thumb, it helps to pay off your high-interest debt first.
What is high-interest debt? Credit cards are obviously at the top of this list. Other forms of high-interest debt include personal loans, auto loans, and student loans. It is definitely in your best interest, no pun intended, to pay these off first before you dedicate yourself to investing.
If you still want to pay off debt and invest, then it’s time to make a plan for yourself. Dedicate a certain amount of your income to paying off your debt each month, or even each week if you can afford it. Then, set aside a small amount of your income for investing. Eventually, the amount of debt will shrink and the amount of investment will rise. This is when you are on the right track to becoming a millionaire.
Is it Better to Invest or Pay Off Debt?
There is a fast way to determine whether you should begin by investing or paying off your debt. If you can earn a return from investing that is larger than the interest on your debt, then you should think about starting to invest. This only applies to low-interest debt though. Since the typical credit card interest rate is more than 20%, it seems unlikely you will be returning more than that from your investments.
They say the earlier you start investing, the larger your gain will be in the future. While this is true, there is no point in having a large investment portfolio if you are burdened with never-ending debt.
So which is better? In the end, it will always depend on your personal financial situation. Most millionaires will likely advise you to get rid of your high-interest debt first. From there, securing low-interest debt and loans to invest for high returns is the recipe for getting rich. This is how a majority of millionaires and billionaires continue to grow their wealth over time.
The Bottom Line: Do Millionaires Pay Off Debt or Invest?
The simple answer is both. To get to the point of being a millionaire you have likely already paid off most of your debt. Holding debt can sap your wealth but getting rid of it can supercharge your investment returns. This is especially true for high-interest debt. Investing is the best way for anyone to grow their wealth. Not paying off debt is one of the best ways to stop your wealth from growing.
Thanks for reading this! I hope it helped!