As I’ve begun my journey to get out of debt, I’ve been considering what has worked for me in the past and what hasn’t. What I’ve realized is that although my debt is staggering, if I solely focus on getting out of debt, my financial picture will be full of holes.
You see, if I were to focus all of my money and energy on the singular goal of getting out of debt, I may be able to get to a net worth of zero in a window of 3-5 years (based on my current income, plus the expectation of raises and inflation). But again, that’s a net worth of ZERO. After cutting costs, denying impulse purchases, and working side hustles FOR YEARS, I would quite literally, have nothing to show for it. Yes, I might have peace of mind, but I’d have nothing to use to build assets for my future.
Let’s talk about peace of mind for a moment. Right now, I do not have to make any payments on my whopping $145,000 in student loan debt. I am finishing up my graduate degree, so my loan is in deferment until March 2019. I have this monster sitting on my shoulders. Once my loan comes out of deferment, the payment will be $1600 a month! GULP!! That’s a huge payment for this single mama to take on!
I’m tempted to begin to throw every extra penny I have at my disposal to paying off as much of this loan as possible before it comes out of deferment. That seems like it would make sense, right? This would be a HUGE mistake for me. See, I’m a 44 year old woman who has about 20 years until retirement. If I spend 3-5 years paying off my student loan, and not contributing to my Roth 401K, I will find myself a 50-yr old woman with ZERO retirement savings, still renting instead of owning, and having only 3 months of emergency savings. I would lose all of the benefit of compound interest over time, which would help me accumulate wealth. There’s NO PEACE OF MIND in this scenario.
If I paid an extra $500/mo on my student loans I would save $14,191 in accrued interest. However, if I invested the same $500 in my 401k and got an rate of 6% long-term, I would earn $71,880!!
But when SHOULD you focus on paying off debt versus investing? If the interest rate on your credit cards or car or other loans is greater than about 6%, then you should pay those off first. But, put SOMETHING into savings and investment each month, even if it’s only $25, just to get into the habit of investing and saving.
Pay off your credit cards and consider refinancing your car at a lower interest rate as your FICO score improves. However, once those high-interest loans are paid, you should focus on maxing building 3-6 months emergency fund and maxing out your 401k contributions before diving into paying off your student loan debt or mortgage. Once you’ve maxed out your retirement savings, then begin paying extra on your long-term debt.
If I follow this plan, I expect to be completely out of debt within 7 years, have 1 year of emergency savings accrued, and +$71,000 in retirement account. That money put into my 401k will continue to grow over the next 20 years- giving me a total of $234,718 if it earns at least 6% interest (a very conservative figure). And, once my student loans are completely paid in full, I will free up even more money to invest in other assets, like buying a home.
So mama, want to see how much money YOU could Save /Earn if you invest instead of focusing all your resources on debt repayment? Check out this fantastic calculator at StudentLoanHero.com!