Pay off debt or start investing? The best and proven tips to decide!

In 2016, I started to get really serious with my debt payoff and I abandoned the idea of investing completely. Should I pay off debt and not invest? Or should I invest and pay off debt at the same time ? Talk about making a hard decision. I have come up with tips to help you decide!

Key factors to help you decide to invest or pay off debt

There are a couple of factors that you can look into that will help you in making your decision. One of the key points that you have to pay attention to is what kind of debt do you have? There are two sides of the spectrum. Do you have high interest credit card debt and high interest personal loans? Do you have low interest debt such as a house, or low interest student loans that can’t compare to high interest student loans, high interest personal loans, or high interest credit cards.

When deciding if you should you pay off debt first or start investing? there’s a second factor. How old are you? Do you have a lot more time on your hands if you did make the decision to stop investing and focus on your debt payoff, you would have more time to hit your investing goals, or are you a little bit older on the spectrum and you don’t have much time to stop investing and pay off your debt and maybe investing and paying off debt at the same time makes more sense to you. That’s something very important to pay attention to the closer you are to retirement, your situation and your decision-making may change drastically compared to a 18 year old person who has a lot more years ahead of them before their retirement.

Always remember that you are the only person able to make this decision for yourself. No one else can do it for you. It’s important to weigh out your options, your circumstances at the present moment, your debt compared to your investment goals, your age, the income you’re currently getting, weigh every single possibility to make this decision for yourself.

Key Information if you want to invest while paying down debt

The number one thing I want to point out is compound interest. Compound interest is something that you want to take advantage of while you are younger. You don’t have many years to take advantage of compound interest if you are closer to retirement.

Per Nerdwallet’s retirement calculator, person A is a 30 years old making $50,000 a year with a current retirement savings of $0, this person will need 1.59 million dollars to survive to age 95, only needing $2,000 every single month in retirement from the age of 67 to 95. If person A saves $400 every month from the age of 30 to the age of 67, their retirement will reach $1.29 million dollars. That is $300,000 less than what NerdWallet is suggesting in order to survive the life expectancy of 95 years old.

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My personal opinion

I do have a car loan, one balance transfer credit card, and a student loan. My car loan has very low interest and my student loan generates between four to six dollars a month in interest. We have the funds for the balance transfer credit card but we are waiting for the current pandemic to reside. I do plan on paying it off soon however, the credit card has a 0% interest rate until next year.

 If my situation were a lot different, if I had a lot more high interest debt or owed a lot more money, I would definitely still invest. That’s my personal opinion for my personal circumstance. The reason to invest is to take advantage of compound interest like I said earlier, sooner rather than later. If that means I’m investing a hundred dollars here, two hundred dollars there, then that’s what I would do. I wouldn’t invest hundreds of dollars every single month because I can use that money to pay off my debt, but I would definitely not stop investing completely.

Different ways to start Investing

There are different ways that you can start investing. If you’re interested in investing while in debt, the way I recommend anyone to start with is their employer match through a 401k. Take a look at your employers benefit package for a 401k match, I recommend that you take advantage of that regardless if you have debt or not. If they match your 401k contribution, then that’s basically free money that your company has given you. Your 401k is pre-taxed which means that the money will be taxed when you retire and when you withdraw your money. If you happen to withdraw the money before you retire, for whatever reason, (which we don’t want to do), then it will be taxed at that moment as well.

An example of a company match

A previous company I used to work for gave us a 3% match on our 401k contributions. If we put 3% of our income into the 401k, than the company matched 3% as well, resulting in 6% contribution into the 401k. Now, if I only decided to put 1% in, the company only put 1%. If I put 2%, they put 2%, up to 3%. Ummmm can someone say FREE MONEY?!! So if you’re new to retirement savings, contributions, investing 401ks, then this is the first thing you should look into. See if your employer has a company match first, before you start reaching out into other investment strategies.

If your employer does not participate in a 401k or you are self-employed, there are different ways you can save for retirement. You can enroll in a:

• Traditional IRA
• Roth IRA
• SEP for the self employed

There are many options out there for you to go ahead and start saving for retirement. My personal favorite is the Roth IRA. I love it because all the money that you contribute has already been taxed. You would take your income from your job (after tax) then turn around and put money into your Roth IRA. A traditional IRA is not taxed upon withdrawal. You can save up to $6,000 a year right now in 2020. There’s so much more to get into with IRAs So I’m going to save that for a completely different video, but it’s worth mentioning so you can go ahead and start doing your research.

Tools to start investing

If you are just starting to dabble into retirement and investing, I recommend that you start reading about it first. If you’re unsure, just know that there are other people on the same boat, especially not knowing how to start or what to invest in.

Books

The first book I recommend is the little book of common sense investing https://amzn.to/3mo9yUa I absolutely love this book and it’s a great starter book for anyone trying to learn investing.

The second one is the simple path to wealth. I personally have not read this book, but I hear so many good things about it. https://amzn.to/3e4sbtj

Another one that you can start looking into is I will teach you to be rich by Ramit Sethi https://amzn.to/2G6J3D8 His book is amazing. I love that he has a lot of beginner information for investing that you can dabble into as well.

Investing applications

I personally use the betterment app on my phone. I enjoy this app primarily because it tells you how you’re doing, how far you’ve reached, and how much longer you have to go. Betterment gives a breakdown on your phone and you don’t have to pay a financial advisor to put your investments where you want them or where they should go, Betterment is a Robo-advisor that diversifies your portfolio depending on your risk level and your financial situation. The fees on betterment are very low whereas a financial advisor could cost you thousands.

Start investing with Betterment. Use my invite link to get started with a special offer today! https://www.betterment.com/?referral_key=jennifertoledo3

Final thoughts

If you start making small steps to learning how to invest, your future self with thank you. You can invest with as little as fifty dollars, or a hundred dollars. You don’t need thousands of dollars to start investing. No one is perfect and we are not all Warren Buffett’s here. Always, always do your research. Do as much research as you possibly can. I have read so many investing articles, books, and blogs to learn investing. Investing isn’t taught in schools, you must teach yourself.

I hope this post sheds light on what to pay attention to when deciding to pay off debt or invest

Should you pay off debt first or start investing?

Video version

Below is a video version of this blog post if you prefer to watch and listen!

Posted By: Jennifer · In: Building Wealth