Hey, folks! This is a sweet guest post from Kayla over at Frugal Rules. I’ve gotten a lot of questions about investing while in debt and whether or not to do it. Everyone’s situation is different, but I wanted to give you another person to compare when you’re trying to answer this question. So listen to Kayla and see why she has decided to invest AND pay down debt, instead of just focusing on the debt. Hope you enjoy 🙂 -Nick
For some people, the idea of investing when you are still in debt may seem silly. After all, if you are choosing between the two you would pay off debt first, wouldn’t you?
Your first thought may be that paying off debt leaves you financially free to then invest more money toward your future. But in reality, it may not be the wisest move you could make for your finances.
Here are a few reasons why I’ve decided to continue investing even though I’m in debt, and why you might want to as well.
You Should Never Turn Down Free Money
If your employer offers the benefit of a 401(k) plan, you should take advantage no matter what. Most of these plans allow you to contribute a portion of your earnings pre-tax, or after-tax if you choose a Roth option.
Now, here’s the free money part: many employers will match a percentage of your contributions! That equals free money for you. Unless you have a lot of high-interest debt, the amount of money you can gain from just a year of employer contributions is probably more than what you would pay in interest.
This means you should come out ahead in the end if you invest in a 401(k).
Run the numbers if you are unsure. I did, and it’s why when I was offered a 401(k) plan at my first job while I was still in college and had debt, I started contributing anyway.
Investing is Easy
Did you know investing can be easy? Many people think investing is a complicated and time-consuming process. In the past, it may have been, but that’s not necessarily the case today.
One way you can simplify your investing is by using a robo-advisor, such as Betterment. Your investments can be tailored to your needs and goals and there are no minimums. It doesn’t even take that much money to get started with most robo-advisors. That’s just one more reason why I invest even though I’m still in debt.
I have a Backup Plan
Having some money set aside that you can easily access is a great idea in case of an emergency. If most of your money is tied up in investments, it can be tricky to get to in a hurry. That’s why I started an emergency fund I can use if some unforeseen event causes me need money fast. This increases my comfort level in investing the rest of my money even though I still have some debt to pay off too.
I’m Still Paying Down Debt
I’m not saying you should invest and not pay down your debt, I’m saying you should do both.
It can be very freeing to see progress toward paying down debt and it can relieve stress and anxiety also. Every time I make a loan payment or add money to my investments, I feel a pressure lifted off my shoulders.
Everyone’s situation is different and unique to them. However, these are the reasons why I‘m investing even though I’m still in debt. Only you can decide what is best for you.
This post is by Kayla on behalf of Frugal Rules. Kayla is a personal finance blogger in her mid-20s who loves to write about money topics of all kinds.