Hi guys, Bridget from Money After Graduation
here to talk to you about a question I get all the time: Should I invest or pay off debt? The first thing I want to mention is there
is not a one-size-fits-all solution to this questions. Everyone has different loan balances, different
interest rates, and different financial goals that will greatly impact what is the best
option for them. Nevertheless, there are a few rules of thumb
that are applicable to every financial situation and should help you decide what option is
best for you. The first thing that everyone should know
is you should absolutely do both. What I mean by that is you should save and
invest while you are paying off your debt. People think that this is counter-intuitive. Why wouldn’t you use all of your available
cashflow to pay down your debt, rather than save it in a savings account at a low interest
rate? It’s so important to save while you’re paying
off your debt. When you’re just starting out, the habit is
more important than the amount. People think that once they pay off their
debt that they will simply switch to putting that amount in savings. This isn’t as easy as it sounds. It’s easy to pay off debt, because debt is
an obligation. You HAVE to pay it off. Saving is always a choice, and it can be a
hard one to make, especially if you’ve deprived yourself for years to pay off your debt. It’s unlikely that if you haven’t been saving
for years, you’ll become a saver overnight. It takes practice, and one of the best times
to practice is right now. For this reason, I usually encourage people
to save a small amount, $50 or $100 per month, while tackling their debt. They can gradually scale up that savings efforts
as their income increases or their debt goes down, but ultimately they’re in the habit
of saving by the time their debt is paid off. That’s good advice for people who want to
focus on debt repayment, but what I hear a lot more often is people that want to jump
right into the stock market even though they have large debt loads. Now, I don’t really think that this is a good
idea, and I love the stock market. I think that everyone should invest in their
20’s and 30’s. It’s the best way to build long-term wealth. However, if you have a large debt balance
that you’re neglecting, by using money that you could be paying towards that debt to invest
in the stock market, you’re doing yourself a huge disservice. A lot of people look at the returns that they
think that they can get in the stock market, and compare it to the interest rates on their
loans and they think, “Well, I could get 5% on this stock and my student loan interest
is only at 2% so there’s a 3% gain to be had”. That is NOT true! One of the most important things to remember
is that rate reflects risk. What this means is that higher return investments
are typically associated with taking on more risk. If a stock is going to pay you 5% it means
that you’re going to assume the amount of risk that is appropriate for a 5% return. However, if you’re borrowing to invest in
the stock market or if you’re using money that could otherwise be used to pay down your
student loan, say it’s at 2%, you’re actual risk that you’re taking on is more appropriate
for 7% — 5% + 2%! But you’re still only going to get the 5%
stock return. Would you risk 7% for a 5% return? No, that doesn’t make a lot of sense. I usually discourage people from pursuing
investing aggressively if they owe more than $25,000 in loans, and the reason for this
is that even at low interest rates, $25,000 of debt accumulates a lot of interest really
fast. If you have large loan balances, really focus
on bringing them to $25,000 or lower before you start aggressively saving and investing. This is just the beginning of your wealth-building
journey. If you’re in your 20’s, you might feel like
you’re in a hurry to get your financial footing underway, to pay off your debt, to build your
investment portfolio. But these things don’t happen overnight, and
time is on your side. The stock market will still be there in 6
months, in a year, in 5 years, and your debt will not! Make your financial plan flexible so feel
free to scale up your debt repayment or scale up your savings, depending on what works best
for you and what feels most comfortable in your budget. Hope you guys learned something that will
make you richer today! If you enjoyed this video, please like and
subscribe to my channel. If you have any questions about investing,
please feel free to comment below or send me an email at [email protected]
and I’ll be happy to answer them in an upcoming video. Bye!