Today, we’ve got a guest post from Kayla, who writes for Listen Money Matters. It’s sometimes tough to figure out whether to focus on investing or focus on paying off debt first. When I was in my debt pay off phase, I opted to do a minimal amount of investing compared to the salary I was making. I invested around $5,500 in my first year of debt payoff, around $13,000 in my second year, and then invested around $30,000 in my final year of debt repayment. Now that I’m personally debt free, it’s nice that I can aggressively invest and still have the satisfaction of already having a decently sized investment account. In her post, Kayla shares with us some of the reasons she opted to invest, even as she’s paying off her debt.
As a personal finance blogger, I know that paying off debt is essential to financial success, no matter what your goals are. It doesn’t matter if you want to save aggressively to try and retire years before “normal” retirement age, or if you just want to live a debt-free lifestyle. Either way, the key is to have your debt paid off so you can pursue your other financial goals.
But knowing that and doing that are two different things. Of course, I want to be out of debt and it is something I’m working toward, but I’m nowhere near as “gazelle intense” as some finance experts might suggest I should be.
Even though I’m still in debt, I decided to work on my other financial goals at the same time, like building an emergency fund, and even investing.
Here’s why I decided to start investing even before I’m debt free.
1. I Was Offered Free Money
I had the good fortune to get a job while I was still a college student. It paid much better than the jobs most of my friends had and it also offered a 401(k) plan. This started me off on the path toward investing even though I was accumulating student loan debt I would eventually have to repay.
If your employer offers you a 401(k) match, like mine did, you should probably accept it even if you still have some debt. Sure, your paychecks will be cut a little due to the contributions you make toward your retirement plan, but the trade-off is that in the long run it can provide you with a significant amount of retirement money.
Plus, the matching contributions offered by your employer is free money! If they match you dollar for dollar, that’s a 100% return on your money. There’s nowhere else you’ll get that kind of a return on investment, and even high interest debt doesn’t charge 100% interest.
2. I Had Youth on My Side
Because I was only 19 at the time I began investing, I knew I had the advantage of many years ahead of me to both pay down debt and accumulate greater wealth by investing. The facts are that the longer you can invest money, the greater returns you will see on that investment.
Of course, sometimes you don’t have a choice and must pay the debt first. If that is the situation for you, then by all means pay the debt first, but do it as fast as possible so you can begin investing sooner rather than later.
3. It was Easy
Some people feel investing is complex and takes a lot of time, but it doesn’t have to be. For me, investing while I was still young and in college made sense even though I still had debt. Plus, it was really easy. I was able to choose from a list of funds for my 401(k) contributions, including lifecycle funds based on when you plan to withdraw your retirement money. These make it easy for beginners to invest without a lot of knowledge about individual stocks.
Even if you don’t have access to a 401(k), you can still make investing easy. One way that’s become popular in the past few years is the rise of robo-advisors. The advantage a robo-advisor is that you can automate your investing to make it easy and fast. There are several companies to choose from and they don’t generally require a large minimum to get started. This means you can get started investing with a small amount of money even though you may have debt to pay off.
Having debt can be stressful, so you should obviously pay it off as soon as you can. But as you can see, there are times when it’s smart to work on other financial goals at the same time, like investing or building your savings, even though you’re not completely debt free.
Would you ever think about investing if you weren’t debt free?
Kayla is a personal finance blogger in her mid-20s who loves to write about money topics of all kinds.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the sharing economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the sharing economy and you can see all the ways he makes extra income every month in his side hustle reports. (If you want a quick side hustle win, check out Job Spotter)
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- Personal Capital. One of best apps to monitor your portfolio and track your net worth. Plus, it's free to use and you get $20 for creating an account.
- SoFi Money. A really good 2% interest checking account with absolutely no fees. Even better, you'll get $50 if you open an account and fund it with $100.
- Dobot. This is a great microsaving app that monitors the cashflow in your bank account and saves away small amounts for you each week. It's free and you'll get $5 when you use it.
Feel free to send Kevin a message here.
Thanks for sharing. I think, at the very least, matching up to your employer’s 401K matching should be mandatory for everyone no matter how much debt you have. Because it’s free money!
I totally agree!
Thank you for sharing your story, Kayla! I think there’s no one formula for financial success. I’m glad your strategy worked out for you. I’m a big fan of Dave Ramsey and want to pay off debt before investing. But not everyone is the same. =)
I am investing while still in debt. It helps motivate me and I know that time in the market is so important. The visualization of the returns chart is more concrete than knowing that “investing is good.”
I think building wealth is a multi-pronged approach that should include multiple sources of income, debt reduction and savings…all while being as frugal as possible. I too am in debt repayment, but at 43 felt the need to start saving something for retirement. Most of our retirement “stash” is in rental properties, but investing even in a Roth or Traditional IRA helps me stay on track. And just this year, my employer started a SIMPLE IRA so I can invest in it too and get match 3% of my salary. Cheers to all of us!
Agree with your post. Unless debt is going to be gone in a couple years, there’s no way that someone can afford to lose out on compounded interest benefits. Or! Employer matched contributions. Building wealth should be multi-faceted.