Should You Invest While Still in Debt?
Wed, May 26, 2010
Should you invest while still in debt? This can be a challenging question to answer for many people. On one hand, you’re in debt and you know there are impacts to being in debt. You don’t have as much freedom and you’re paying extra for your loans in interest charges which can be quite expensive if you have credit card debt. You’re also carrying around the emotional stress associated with the debt. In other words, it’s no fun to be a slave – The rich rule over the poor, and the borrower is servant to the lender (Proverbs 22:7).
On the other hand, you’re losing out on the magic of compounding interest and risking not growing your investments as much. If you don’t have as much saved in retirement this could mean you work longer, or don’t have adequate funds to have the lifestyle you desire in retirement.
So, what do you consider when trying to determine if you should still invest while in debt?
Realize investing can slow down your debt payment plan
While investing is obviously very important, it can slow down your debt payment plan. Your goal above investing should be to get out of debt. When you get out of debt you have more money to build your emergency savings, or invest to build your retirement nest egg. If you were to max out your retirement investing you’d most certainly slow down or even stop your debt pay off. You have to take a measured approach and make sure you’re still making forward progress in paying off debt if you decide to invest.
Invest enough to get employer matching
Don’t throw away free money if your employer offers to match your 401(k). Again, invest up to the minimum to get the match as long as you can still make forward progress in paying off debt. But avoid the match if you can’t pay extra on debt or meet your emergency savings goals. Personally, I hate to see anyone lose free money, so I would recommend a lifestyle adjustment to insure you can invest the minimum and still make forward progress on other goals.
There is one other consideration here. If you’re not automatically vested to get your employer’s match you need to consider how long you will be working for your employer. You may want to work on the debt first if you’re not planning to be with your employer long enough to become vested.
Yes, your mortgage is considered debt, but don’t pause investing to pay off your mortgage
Remember, your mortgage is considered debt. It’s often referred to as an investment and can be in many cases, but at the end of the day you still owe money. You should max out your retirement investing before paying extra on your mortgage even though it’s considered debt. In my opinion, you shouldn’t start investing in real estate and other non retirement investments until you’re able to pay extra on your mortgage each month.
Interest on debt versus the average return on investments
You also have to think about whether or not you have high interest debt versus the average return you will receive on your investments. You’re losing money if the return on your investments is less than what you’re paying in debt interest.
However, there is an emotional and spiritual advantage to paying off debt even when logic and numbers doesn’t make sense. Truthfully, we don’t know God’s plans for us for the future, but we do know debt is slavery. The opposite of slavery is freedom. That being said, you should consider continuing to pay off debt, even if it is lower in interest than the average return on your investments over time.
Final thoughts
Today, our family is paying off remaining car debt and investing enough in retirement to get my employer’s match.
- Is investing slowing our debt pay off down? Sure, but we’re getting free money, or employer matching.
- Are we maxing out our retirement? Absolutely, not. We wouldn’t be able to pay off debt if we were maxing it out.
- Do we plan to pay off our mortgage debt before increasing or maxing out retirement investments? Absolutely, not. Paying off our mortgage will be a longer road, so we’ll max our retirement first. We’ll also insure we can pay extra on our mortgage before we stretch our investing to real estate and other non retirement investments.
- Is the interest on our debt more than what we’re earning on our investments? No, but we choose freedom and faith in God’s plan for our lives versus making minimum car payments.
So, what about you? Are you investing while still in debt? If so, please share your reasons why in the comments. Is there anything else you should consider when trying to make this decision?
Great Post! Investing while in debt is SO tempting (and it’s the ‘normal’ way to do things I’m afraid), but it’s not the best way. People often feel smart keeping student loans around at low interest rates and investing at higher interest rates, but there’s so much going on here besides math!
I have found that I get the best results when I focus on one thing. When I was paying off debt I put other stuff on hold and focused all of my financial, emotional, and physical energy at that one thing. Now that I’m able to invest I can do the same thing. The end result is something much more then if I tried to do them all at once.
Deacon Bradley´s last blog ..What Freedom Sounds Like
Deacon, you do make a great point in regards to focus. I think things such as employer matching is good reason to also invest, but in general, I agree you can get better results with focus.