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As I was browsing my money forums early in the morning drinking my coffee, I saw this question posed and found it intriguing that I spent close to an hour thinking and responding to it. I thought it had enough importance that I actually decided to share it here with all of you. It comes from one of my new, favorite money-centered places, the Rockstar Finance Forums. After reading, please comment below and let me know how else we can approach this question or go to the forums and chime in yourself, they’re free to join!
Today, we have a question that I thought would be great to tackle: Should I invest first or pay off student loans?
I’m about to pay off my last consumer debt, my car. This leads me to the age old question:
Should I get really aggressive and pay off my student loans (~$35,000 at an average of 5.3%) or should I start investing?
I make just under $60,000/year pretax, I participate in my company 401(k) up to the match of 6%, and I have approximately $1,000 to put toward debt or investing. I have expenses of $1,000/month and have a three month emergency fund.
Part of me wants to be debt free, and the other part wants to start building wealth.
Here’s how I answered the question:
Great question to be pondering! I can see you going either way, but personally, I’d probably go the pay off the debt first and then start investing. It’s good to see that you have some savings set aside as well. $1,000 a month can make you some great progress either way.
In 2011, we had over $27,000 in student loans. We ended up paying them off over a two year period by throwing everything we had at them. Our mindset was that they had to go. We were so focused on getting out of debt that building wealth wasn’t on our to-do list yet. The combined drive that we had and education we received from taking Dave Ramsey’s FPU really accelerated the payoff.
Also, the one thing that has helped my family succeed more financially than anything else was the fact that we focused on one thing at a time.
We used to put some into retirement, some into savings, some into college funds for our children (then unborn), some towards debt, etc. But we never got the traction to move forward until we decided to focus on doing one thing at a time with ALL of our effort. By putting all of our money towards one loan at a time, we knocked it out much faster than we expected because we got excited and wanted to see it gone. We worked harder on our budgets and tried to make more money to throw at it because we were motivated. When you are intensely focused on something, you WILL make it happen!
If you invest the money, it’s possible you’d reap some compound interest earlier, but would be leaving partial risk on the table as you work through the debt. If you lose your job or something happens, you might leave yourself in a bad position.
However, if your focus is to pay off student loans first, your investing slows for a little while. At the end of the debt, you free up even more cash each month to put towards the debt.
Plus, even when you’re paying off debt, you’re still building wealth. Getting rid of liabilities frees up cash flow and ultimately grows your net worth.
Ultimately, it’s obviously going to be up to you and you have to do what you feel is right. In the process, don’t forget that so many people overlook risk in return for reward. The more free you are from debt, the bigger your shovel becomes to build wealth!
I’d love to know which way you end up going in the process!
To wrap things up
There were many other replies over at the Rockstar Finance Forums telling them to do many other things. Like take a hybrid approach and to do what feels right. I’m don’t have the only right answer here. However, I want to stress that people don’t factor risk into their equation.
I honestly feel that paying off debt will give this person more options. More options than if they were to invest the money and slowly pay off the loans.
How would you advise this reader? Let me know in the comments below.
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