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Should I invest while paying off debt?

   Posted On: January 15, 2024  |    Posted In: Investing  |     Posted by: Broke Millennial®

“Doesn’t paying off debt and investing for retirement cancel each other out?”

That is black and white thinking in a nuanced conversation because you can do two things at once: build wealth and pay off debt. This question is so frustrating to me! Certain folks in the personal finance community preach that you have to achieve debt freedom before you start the next phase of building wealth and working towards other financial goals. Ehhh, wrong!

new girl no GIF by Fox TV

Quick Answer

Do I think you should be investing beyond retirement (aka tax advantaged accounts) while paying off (non-mortgage) debt – no, not in the majority of cases.

Do I think you can balance both investing for retirement and paying off debt? Yes, yes I do.

Frankly, it’s damaging to people’s wealth building opportunities to say one must be debt free (including student loans) before investing for retirement. 

Translation Timeout: Investing for Retirement
Long-time followers of Broke Millennial and those who have read Broke Millennial Takes On Investing know that I hate the term “save for retirement.” You’re not saving, you’re investing for retirementThe money you’re contributing to a 401(k), 403(b), TSP or IRA should be invested and not just sitting in a settlement fund or cash management account.  

Detailed Answer

There is a difference about how to approach this based on your retirement plan opportunities through work.

TRADITIONALLY EMPLOYED with AN EMPLOYER MATCH

Investing for retirement while on a debt pay off journey is partly about taking advantage of any employer-matched contributions. That means your employer will contribute money to your retirement plan, but only if you contribute too. This is an immediate, 100% return on your investment. It’s really the best deal that exists when it comes to investing.

For example, let’s say your employer matches up to 5% of your retirement contributions.
Your 5% + Employer’s 5% = 10% contributed to your retirement account.

Now, maybe 5% (or whatever the full employer match is)  is too much for your budget right now because you’re trying to crush some credit card debt that’s sitting at 20%+ APR. You could still contribute just a little bit, like just 1% little bit, and then your employer contributes 1%, so you’re at 2% for half the effort.

SELF-EMPLOYED or NO EMPLOYER MATCH

If you’re self-employed, like me, or don’t have an employer-matched retirement plan, it can still make sense to be investing for your future, even while paying off debt. Especially if that debt is student loans, a mortgage, auto loans or anything else “low interest”. (Think single digits.)

Credit card debt is a more nuanced conversation for the self-employed/no employer match folks because the interest rates on credit card debt is often in the 20%+ range.

Real talk: you’re probably not averaging 20%+ returns year-over-year in the stock market. You don’t have the advantage of an employer match with its 100% return. (To clarify, this is not a guarantee about stock market performance, just that if your employer matches how much you contribute, that’s a 100% return.) Despite all this, you could contribute a modest amount like 1% or 2% of your monthly paycheck towards a retirement plan, assuming it’s not putting you in a financial bind. It helps establish the habit and you’re still beginning to grow your future wealth.

WHY THIS IS SO IMPORTANT!

Investing for retirement while paying off debt is important because it ensures you’re taking advantage of compound interest EARLY. Compound interest is working against you with your debt, so let’s harness that power for good with investing.

Translation Timeout: Compound Interest

Compound interest, in simplest terms, is earning interest on your interest. Compound interest works for you with investing and against you with debt. Let’s say you invest $1,000 this year and earn a 10% return. At the end of the year you have $1,100. Next year, you’ll be earning interest on $1,100 – not just the initial $1,000. That’s how money invested can grow without you ever contributing another penny. (But you should keep contributing!).

Time is one of the biggest advantages you can have when it comes to investing. You can invest less money and achieve more when you start early, even in a modest way, and are consistent.

Proof that SMALLER AMOUNTS + TIME = SUCCESS

At 25, you begin to contribute $400 a month towards your retirement account (this includes your employer match). You do this for 40 years and at 65 you’ll have a bit shy of one million dollars, assuming an average 7% return on your investments.

The alternate-universe-version of you decides to wait a decade to be 100% debt free (including student loans). Attempting to play catch up, this version of you contributes $800 a month towards a retirement plan. $800 a month at 65, in 30 years, with a 7% average return will total to a little more than $900,000.

$400 a month for 40 years beats $800 a month for 30 years when invested.

  • Want to play around with your own numbers? Here is my favorite compound interest calculator.

You should also keep in mind that life tends to get more complicated, and expensive, not less. Buying a home, having children or pets, caring for a family member, or experiencing illness are all situations that may cause your cost of living to increase in tandem with earning more. Just because you’re earning more, it doesn’t mean future you can aggressively fund your retirement. Present day you needs to lay that foundation.

Total debt freedom, especially from low-interest debt like student loans or auto loans, doesn’t need to be your starting point for investing. You can balance building wealth and pursuing debt freedom.


To Recap: 

  • Yes, it’s okay to invest for retirement and pay off debt.
  • Invest enough into your retirement plan to at least take advantage of your employer match.
  • Self-employed? No credit card debt: then yes, invest for retirement! With credit card debt: Consider putting a small amount into your retirement account, if it’s manageable for your budget, to establish the habit and still be taking advantage of time.
  • Life tends to get more complicated, not less. So start early, even if it’s modest, and be consistent with investing for retirement.

Extra reading: Don’t Wait Until You’re Debt Free to Begin Building Wealth

Photo by Colton Sturgeon on Unsplash

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