Should You Pay Off Debt or Invest in the Stock Market First?
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Almost daily, two ideas swirl about the personal finance sphere – paying off debt as soon as possible and the importance of compound interest. Not always the most exciting of topics, I know, but both are very important and relevant at varying degrees for most of us. To a lesser extent though, we deal with what should be done if you have both debt (I am speaking of any non-mortgage debt here) and are balancing that with investing in the stock market.
In my previous life, I saw individuals on either end of the extreme and few that struck a balanced chord with the pay off debt vs. investing debate. As this can be an issue that many face, I’m including this in my how to invest in stocks series. If you ‘d like to check out some of the previous posts in this series, you can click on the links below:
- How to Invest in Stocks When You Do Not Know Where to Start
- Is Investing in the Stock Market Really That Easy?
- When Should You Start Saving For Retirement?
- Investing In Stocks: Are You A Trader Or Investor?
- How To Invest In The Stock Market With Little Money
The Case to Pay Off Debt First
I hate debt! Debt can be burdensome, taking years to pay off – especially when you’re dealing with credit card debt or student loans. When I reflect on my journey to pay off debt, I still get a bitter taste in my mouth thinking of all those years I made monthly payments towards my credit cards. It took me nearly five years to pay off the $25,000 I owed and several years more to pay off my student loans.
Sadly, I know that I am not the only one who has been in this situation of needing to pay off debt as I know many of us have been in this spot, or are still in it, and want to do all we can to pay it off. If you’re like me, you likely attacked the debt with all you had – looking for ways to cut expenses, earn extra money and throw all you had at the debt. In short, it’s a laser like focus that is often needed to pay off debt in order to achieve success.
Ultimately, when you’re struggling with debt, you’re not really “free” financially. You always have someone that you’re obligated to. Whether it be payments towards your credit card or towards student loans you’re held back from doing all or some of the things in life you want because you owe someone money. That being held back, and the potential thousands you can save in interest costs is a great reason to focus on paying off debt first.
Related: If you’re looking for a low cost brokerage option, then check out my Scottrade review to help you have more of your money work for you in the market.
The Case to Invest in the Stock Market First
While the journey to pay off debt does generally take years to accomplish, the very same adage is true for investing in the stock market with an eye towards saving for retirement. Unless you wake up some morning swimming in a pool of cash, you’ll likely need years to invest in the stock market to build up a portfolio of any worth. A common argument for those in the “pay-off-debt-first” camp is that they can’t afford to invest. I’ll cede that, to a certain extent, as you need to be throwing as much as you can towards your obligations to make a considerable dent in the debt beast.
However, is that reason enough to give up investing in the stock market altogether? I think not. Let’s take a look at the easiest and best option at getting started at investing and saving for retirement – a 401(k). I’ve spoken with countless people who were in debt that would not even invest in their 401(k) plan because they felt that everything had to go towards the debt. The key here is to not cut off our nose to spite our face. In most 401k plans you’ll likely get a match of some sort. That’s FREE money people, I can’t think of any better form of money! Add to that its ability to lower your taxable income and 401(k) plans get a double bonus in my book.
Is There an Easy Answer?
Unfortunately when it comes to the issue of what you should do first – pay off debt or invest in the stock market, there generally is no easy answer; it really is a personal decision. Speaking for myself, I put so much focus on trying to get out of debt that being in the stock market went by the wayside for almost five years. Looking back, I still kick myself for handling it that way. Of course, hindsight is 20/20, but I see it as missing out on five years that I could’ve been growing my money, albeit in small amounts.
I know the argument can be made that I was growing my money by paying off debt first, but I was not actively saving for retirement. That lost time is not time I can get back. While I can do things like put more money away now, that will not make up for the time that I lost. As opposed to throwing everything I had at my debt, I wish that I would’ve taken a more balanced approach to the issue. While it would’ve likely added a number of months to my debt repayment, it also would’ve started my investing clock earlier.
Ultimately, though, there is no real easy answer in regards to paying off debt or investing and what should be done first. I would tend to say a balanced approach is best, though that is going to vary for each individual circumstance.
What’s your take? Would you pay off debt or invest first? Have you been in this situation and if so what did you do?
Additional resource: If you’re looking for a simple way to stay on top of all your finances as you develop healthier financial habits, then check out my favorite tool – Personal Capital. Completely free, it allows you to track your spending, monitor your bank and investment accounts and watch your net worth grow plus many other tools.
John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.
Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.
Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.