You’re in debt.
And you are consciously trying to pay it down, but you can say it. Even though you have a plan on getting your debt paydown, you still wonder if you should be investing as well.
Or if you even can invest while you are paying down debt.
Dave Ramsey recommends delaying investing while in debt, but for most people, that’s a pretty bad idea.
I know Dave Ramsey has been in the personal finance sphere for a while and has helped many people. And in the past, I followed the advice and did the same thing.
But speaking from personal experience I can tell you right now, I wish I had invested from the beginning (even while in debt).
When I was fresh out of college and into my first job, we were right on the cusp of the great recession. And during that time I saw the carnage of the market tanking, people losing 30% of their investments, while simultaneously being crushed by housing and credit card debt.
Naturally, I developed a healthy dose of fear and concluded that you should only invest money you can afford to lose because investing is a huge gamble.
You give your money over to the house, and if lady luck smiles on you, then you get to leave with a little more than you came with. And we all know that the house always wins.
So when my wise and very grayed coworkers asked me if I was contributing to my company 401k, I laughed and told them that I had student loans to pay off first.
Why? For three reasons.
1. Because Sallie Mae is a roaring lion looking to devour me and I needed to get out of its path ASAP.
2. I really really really HATEd debt (yes I needed three reallys).
3. And in my heart of hearts, I kinda felt like I had time. Time to save later and that I would save harder and faster with the debt.
Sure I would have to save more money later but that would be easy because the loan monthly payment I was making to Sallie Mae would be bundled into contribution and it would all balance out. Yeap sounds like a dynamite plan.
Fast-forward 10 years and I wish I could go back and give myself a smack in the back of my head.
Aside from the fact that my company at the time was proving a 5% company match, fully vested from the 1st day and had quite a few options for investing which you can rarely find these days, but since the market was being ravished, I could have bought incredibly cheap and been on the receiving side of excellent returns now without having to save much.
But my tale of regret and missed opportunity isn’t about me. It’s about you.
You and I are the generations of college degrees and student loans, and with an average loan debt of $37,172, students that graduated just last May have joined the ranks of the most indebted graduating class. And a new 2015 Bank of America report on Better Money Habits Millennial Report shows we are also a generation that takes debt very seriously.
e have seen what debt can do, so I completely understand your desire to postpone future needs like emergency savings and retirement planning until you’ve made a dent in your debt and meet your day to day needs. I pass no judgment because I was standing exactly in your shoes a few short years ago.
YOU CAN INVEST NOW, WHILE PAYING DOWN DEBT, FOR CHEAP
But even though having a hefty student loan payment, car payment and trying to pay monthly essential bills is very hard. And it might feel like you don’t have another penny to squeeze out, but you do! When you use a traditional IRA or 401K you contribute with before-tax dollars. That means you get the opportunity to pay yourself before the IRS gets its cut.
That might not sound like much difference but consider this.
If you invested $5000 in before-tax dollars, with the Traditional IRA tax deduction (depending on your tax bracket), your actual pre-tax dollars from your paycheck would be $4,085 (not as bad as $5000 right). Meaning, you only ‘feel’ a $4085 difference in your paycheck. A saving of over $900 than was invested.
Another plus is deduction also lowers your overall amount of taxes. So you are saving money on taxes while investing. It’s a win-win.
RETIREMENT SAVINGS CAN’T WAIT. IT’S ALL YOU GOT
It might not seem like a lot but that money has an extremely important purpose – to take care of you when you can’t work. So you gotta show it some love and throw some dollars in its direction, primarily because it’s all most of us have!
This wasn’t supposed to be the case. Our social security, pension, and the 401K were 3 legs in a three-legged stool that we use for retirement. That meant your employer would take care of you after working the best days of your life and giving the most of yourself to your company. And your government would also help take care of you, after taking a large chunk of your paycheck. You would also partake, and take care of yourself with the 401k.
But since pensions are abandoned and social security administration keeps pushing back retirement age, they have pretty much said ‘See yah, we are out of here and you are on your own now!’
A one-legged stool is in pretty bad shape, but with a strong enough leg, you can turn it into a stable bar stool. And it’s definitely better than being flat on your butt.
But while you are off feeding everything else and ignoring your retirement investment, you are losing the opportunity to beef up your stool and setting yourself up for a much more tin foil rather than, golden years.
AND YOU ARE THE RICHEST YOU WILL EVER BE, RIGHT NOW
The money that you invest now when you are early in your career will set up your future self for massive gains over time and that is because of this one tool.
We are talking about compound interest in a retirement account.
Compound interest is what your student loan provider uses to decimate your paycheck and make you repay more than you borrowed. It is also the same technique you will use to gain more than you save and grow rich quick with less effort.
Sounds really weird but you have the most valuable and expensive resource available to any human being – TIME.
No matter how wealthy they are, you have this incredible tool at your disposable, prime for the chance to turn it into real wealth. And that is time.
It’s not reserved for the wealthy or those out of debt. It is available to anyone in any situation but the young like you, have the most of it. And right now you want to think since you have so much time then you can do this later.
But if you don’t take advantage of it now, you will replace your student loan anchor with fear, regret and try to play catch up with your retirement later.
THINK YOU CAN WAIT A FEW YEARS ‘TILL AFTER DEBT IS CLEARED? THINK AGAIN
It’s not magic, but let me show you just how powerful compound interest is, and that the longer you invest for trumps the investment amount almost every time.
Let’s say when you started right away while you were paying down debt. So when you were 25, you started investing a measly $10 a week – that’s barely a combo meal at McDonald’s.
Further, let’s say that you got a very conservative 7% average rate of return and you had that $10 weekly deposit on autopilot and forgot about it.
After one year you would have saved $539.40, after five years: $3102.36, after ten years: $7453.58. And if you continued with that deposit until you were 65, you would have $107,697.43!
Not too shabby a return considering you only invested a total of $20,800.
Now let’s say that you decided to wait until all your debt was cleared. So you wait a few more years before deciding to get serious about saving. At age 40, you’re a little more motivated and save $50 per week since you are catching up but you stay the course 65. After 20 years you’d have just about the same return at $110,584.58.
That’s great that we can catch up! We can save the same amount, in the end, starting later in life but guess what? You now had to invest $52,000, nearly three times the amount, if you had started earlier! This is the epitome of working harder, not smarter.
If that’s not enough to get you wanting to start saving today, let’s do one more scenario.
Let’s say you started investing at 25 with a modest 7% return but decided to be a little more aggressive and save $25 a week. Let’s also imagine, that when you hit 35 years old, you decided and didn’t want to invest anymore, but you still let the money in the vehicle until you were 65.
Your balance would be $141,852.93. This is the highest return of any of scenarios with the least out of pocket investment of just $13,000!
Yes, I will say this again. You put in $13,000 over ten years at $25 a week, and by the time you are 65, you would have close to $150,000! This is how you can get rich even off the smallest investment or salary.
It’s your money machine. And it is willing to keep giving you free money the longer you keep it churning
You don’t need a lot; you just need to start. Today, with any amount, the more, the merrier, but anything will do.
INVEST WHAT IS REASONABLE FOR YOU
Compound interest works in your favor for your investments every time because you can start with whatever is reasonable for you to save. Even if life happens and you need to lower your savings or stop altogether for some time, your investment machine keeps churning and the longer you keep it, the more it grows.
DON’T THROW AWAY FREE MONEY
If you haven’t started to save yet and take maximum advantage of compound interest, all is not lost. Starting yesterday is best, but starting today is better than starting tomorrow. You can still reap the benefits of compound interest later in life; you’ll just have to contribute move to play catch up.
But why work harder than we have to? We are losing time, every day that we don’t save. We are only allowed to invest a fixed amount of tax-free money into our IRA and our 401K per year and every year we miss the mark, or worse, don’t invest at all, is time and riches lost and can never be regained. Envision where you will be 30 years from now and start saving. Your future self would be thanking you!
READY TO START? LET’S DO IT RIGHT NOW!
If you haven’t taken advantage of your company’s 401k then sign up now! If you have a 401k already or don’t have access to one, then sign up for a traditional IRA (so you get the tax benefits now).
I for one like the electronic Robo-adviser systems like Betterment.com which allows you to start for as little as $25. It literally takes 15 minutes (if even that) to set up, and you can get on your way to fueling your money machine or you can use acorns which rounds up your everyday spending and saves it for you.
I know I’m already living the – I wish I had started sooner blues having to contribute more to play catch up.
But today is always better than tomorrow, and you don’t have to go big, just get started.
You can do this! Your future self will thank you.