A recent Get Rich Slowly post asked whether one should stop investing for retirement in order to pay off debt. It’s an important question, and one that I’ve attempted to tackle before. But what I really want to talk about are the comments that were left on the GRS post.

They’re frightening. And I’m not saying this just to be snarky (though, admittedly, I do partake in a little snark from time to time).

Some people were attempting to mathematically justify paying down debt rather than taking advantage of a fully vested, 100% employer match. Now, if you gain a valuable psychological benefit from paying down debt, that’s fine. Go for it. But how somebody could argue that a 20% return is *mathematically* superior to a 100% return escapes me.

Other commenters argued that, if an investor is young, it’s better mathematically to invest for retirement, rather than to pay down debt–even if there’s no employer match to be gained, and even if the interest rate on the debt is higher than the rate of return from investing for retirement.

### “The Horsepower to Do the Math”

This all reminded me of an article William Bernstein wrote a few months back, where he argues that most people just aren’t qualified to invest on their own. Bernstein estimates that less than 10% of the population has “the horsepower to do the math.” He elaborates,

“Fractions are a stretch for 90% of the population. The Discounted Dividend Model, or at least the Gordon Equation? Geometric versus arithmetic return? Standard deviation?

Correlation, for God’s sake? Fuggedaboudit!”

I’m inclined to think that his estimate is overly pessimistic. (Is it really *that* hard to explain correlation?) And I’ve always thought investing mistakes aren’t caused by a lack of math skills so much as by a decision process that’s not based on math at all. (“I’ll just hold this stock until it gets back to where I bought it,” for example.)

But I may be wrong. Thoughts?

I didnt see the entry in question at get rich slowly and I maybe missing something but a high interest credit card payment seems a mathematically better gamble because it is a sure thing.

With a 401k 100% matching there are a lot more factors involved that maybe the get rich slowly posters were thinking but not saying.

When does the matching get vested?

Are their 401k holdings dropping in value so they are losing money (in the short term)?

Are they near retirement so that their holdings are all bonds getting a mid single digit % return vs a potential 25% credit card debt?

Short term stopping of retirement payments to pay off high debt is good if its short and a person quickly gets back to retirement. Its easy to forget or put off getting back to retirement saving or choosing low interest debt over saving.

Could you give more context in the comments you are disagreeing with?

Brad: I’d rather not point out the particular comments in question. I don’t want to “name names” as such, as my goal isn’t to make fun of a particular person but rather to make an observation that people sometimes use some iffy math to make financial decisions.

You bring up a great point about vesting. The commenter arguing that paying down credit card debt beats a 100% match didn’t mention vesting either way. (Given that he didn’t mention it but did mention other figures he used, I’d guess that he was assuming 100% vested rather than using an unnamed vesting schedule. But I could be wrong.)

You’re obviously right about there being no risk involved in paying off a credit card. I think a lot of people misunderstand though that the employer match is also risk-free (if vested, as you mentioned). I’ve never seen a 401k that didn’t offer a very low-risk option (a money market, for instance).

Losing the match is a really bad thing- it’s worse than just missing the 100% gain- you also lose all the compound interest too. If you have a lot of time that will be a huge difference… If the CC is paid off in a few years it won’t amount to a huge difference. OK I know what my next post is going to be… Compare paying off debt to investing in 401K.

As for the math- I don’t think it takes a huge amount of math to understand the basics of good investing. I would say you could get 90% from addition, multiplication and subtraction. I calculated out compound interest with those basic operations on spreadsheet but you could do it with just pen and paper.

A lot of investing is knowing facts- like most actively mutual funds fail to beat their indexes and have higher fees as well. I find most people are pretty good with the greater than and less than concept.

Finally, a LOT of results you can just look up- I suspect correlation coefficients are somewhere on the web… but if they aren’t that’s another post I could do. Now, if I only had time to make all of these useful posts!

-Rick Francis

agree – it’s not just the math. math is just a tool that can be manipulated to say what you want. math, like most analytical tools, has assumptions. change the assumptions and the math works out differently. we are therefore biased on what assumptions we choose. “assume it is 100% matched and vested and getting 8% annualized return”, “assume the CC debt interest remains the same”, “assume i will be gainfully employed…”…..obviously we have to start somewhere, but reality often shoots holes in our assumptions which is why i think it pays to “assume” a conservative approach to account for things unaccounted for.

Everyone goes through their own process. I suppose if someone is reading PF posts, they are learning – or want to learn.

Some will get it….others won’t. Over time, we all unfold.

admittedly, I do partake in a little snark from time to time.Not so. I hate snark. So I would notice. I have never seen you engage in snark, Mike. It’s not in you. The material at the link you provide evidences a modest and gentle sarcasm. That’s as close to snark as you get. It’s one of the things I like about your blog.

I’ve always thought investing mistakes aren’t caused by a lack of math skills so much as by a decision process that’s not based on math at all.That’s exactly it. 90 percent of the math that you see put forward by “experts” serves as

rationalizationsfor strategies that are being promoted and adopted for emotional reasons. We are not using math to arrive at good decisions. We are using math to justify decisions elected for emotional (bad) reasons.I do not share Bernstein’s pessimism. I believe that if we stopped pretending that we are 100 percent rational creatures, we could escape the circular logic that dooms us today. We are capable of rationality. But only if we first acknowledge the influence that emotion exerts on our decision-making process and make serious efforts to overcome it.

We cannot escape emotion by living in denial of it. Denial empowers emotion. We escape the negative influence of emotion by coming to terms with it.

The math is easy once there is a willingness to accept what it says. The willingness is not there today. But the market has a way of forcing on us realities that we very much do not want to face. So I see grounds for hope here (with a lot of pain coming before we reach the promised land).

Note:The ones who say thatothersdon’t get the math (like Bernstein) are often the worst offenders when the math tellsthemsomething that they do not want to accept. Bernstein and all the other “experts” are human too.Rob

I don’t understand why someone would not take full advantage of a contribution match from their employer. At my job, I do get an option to contribute extra to my pension, but my employer does not match any more than the original base amount, so I don’t contribute beyond that point. I’m not even happy with how my employer invests, but I will take advantage of the immediate doubling of my money!

Mike,

I read the GRS post and the comments. My initial reaction was the same as yours. You could almost see the preztel logic from the Ramsey-ites as all answers pointed to debt reduction. I follow several PF blogs/boards and if there’s one thing missing from the Total Money Makeover folks, it’s math.

Then something funny happend. I did the math. Paying off debt (post tax) is often a pretty good option, versus a pretax 401k.

I looked at a specific scenario. $1000 pretax per month, 25% tax rate, 100% match, $10,000 balance on a 29% card, 3% minimum payments, 8% investment return. In this example, focusing entirely on the card was the best option.

Then again, my math could be wrong 😉