When you are in debt, it can be hard to determine what financial goals to prioritize. Obviously, you are likely focused on becoming debt-free ASAP. But does this mean you should spend all your extra money on paying off your balance, as some finance experts like Dave Ramsey suggest?
According to Erin Lowry, the answer is no. Lowry is the author of three "Broke Millennial" books and the creator of the "Broke Millennial" blog. And she recently addressed the question of how to balance debt payoff with investing on her Substack. Here's what she had to say.
The "Broke Millennial" creator believes waiting to invest could be a serious mistake
When it comes to the question of whether to focus on debt payoff before investing, Lowry says the answer depends on what kind of investing you're talking about. "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," she said.
But, retirement investing is a different ball game and she believes you can "balance both investing for retirement and paying off debt."
In fact, not only does she think you can find a hybrid approach that allows you to both invest and focus on paying creditors -- but she actually thinks it would be a serious mistake if you don't do that. "It’s damaging to people’s wealth building opportunities to say one must be debt free (including student loans) before investing for retirement," she warned.
She takes this position for a few key reasons, including the fact that it's important to take advantage of compound interest early to build wealth, as well as the fact that many people are entitled to an employer match if they invest in a 401(k).
"This is an immediate, 100% return on your investment," she said of a 401(k) match. "It’s really the best deal that exists when it comes to investing." Because of this matching contribution, she explained that it takes half the effort to invest because your employer is putting money into your retirement plan as well.
How should you balance investing and debt payoff?
Since Lowry thinks you can focus on retirement investing and pay off debt at the same time, you'll need to figure out how to do that. And she has some advice on this as well, although she says your approach should differ depending on what kind of retirement savings opportunities are available to you.
Lowry makes clear that it's ideal to invest enough to earn your full employer match. But, if that's not possible, it's still worth contributing even if it's a small amount.
If you do not have an employer match and would have to save in an IRA you open yourself with a brokerage firm, she also believes you should still invest while paying off debt in most cases. However, it may depend on the kind of debt. If you have a mortgage or other low-interest loans, then retirement investing while working on debt payoff makes sense. But if you have high interest credit card debts, it may not.
"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," she explained. "Real talk: you’re probably not averaging 20%+ returns year-over-year in the stock market."
However, even in this situation, she believes you should put a "modest amount" toward a retirement plan to establish the habit of saving and to begin the process of making compound interest work for you. She suggests around 1% to 2% of your income.
Her advice here is really solid, and most people should listen to her because passing up the chance to start saving for retirement early could be a decision you regret.
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