Invest or Pay Off Debt: Which is best?
It’s a highly debated topic among many financial experts. What should I do with my extra money? Pay off debt or invest it for retirement? Both sides have great points that need to be addressed so that you can make the best decision for you and your situation!
I’ve written about this before, but it’s so important and valuable for millennials to be investing right now. Time and compounding interest are on your side to grow your investment greatly over the next 30-40 years until retirement. Unfortunately, there are many people in their 40s and 50s who are now trying to catch up for their lack of saving in their 20s!
Let’s say you started investing at age 22 and put away $300 into retirement every month from now until you retire at age 67. Making a market average 7% return, you’ll have over $1.1 million by retirement! Now let’s assume the market returns an average of 7% but you didn’t start saving until age 40. Instead of putting away $300, you need to catch up so you put in double. By contributing $600 into retirement each month until age 67, you’ll only have about $570,000. As you can see, it’s so important to start early!
So, yes, you probably know how awesome investing is, but you also have this student debt hanging over your head that needs to be paid off… The mathematical argument for investing rather than paying extra on debt is easy: If the rate of return in the stock market is greater than your interest rate on your loan, then invest. My student loan has an interest rate of about 4.8% but the stock market has an annual return of about 7-8% of growth. Therefore, I am growing more in my investment than I am paying in interest!
Paying Off Debt
The most famous man in favor of paying off debt first is Dave Ramsey. For Dave, it’s basically a sin to be investing while you’re in debt so don’t tell him if you’re contributing to your employer 401K match while paying off your student loan! 🙂
There are many psychological wins that come with paying off debt. It’s a huge relief to be debt free and know that you owe no one anything! While you’ll feel relieved, the biggest argument for paying off debt with your extra money is for the fact that it’s a for sure deal. The stock market is not guaranteed and there is always a possibility that you may lose money, but in paying off debt, your return on investment is guaranteed.
Not to make this a political answer, but it’s true… I think that everyone should be doing both. Both paying off debt and investing for retirement are very important for your future and doing both will greatly impact your financial health. Even though Jacob and I have student loans, we are still investing. Our employers both match contributions into a 401k or 403b so we contribute up to the match (and a little extra) while we’re still paying off debt. We are putting 70% of our income to debt each month and it will be destroyed soon, so we have no problem with also saving for retirement.
All in all, do what’s right for you. If you’re doing either of these, you’re doing the right thing and setting yourself up for a great financial future!