This is a guest post from Kayla on behalf of ListenMoneyMatters.com. Let me know if you would like to guest post on RFI.
I didn’t plan on acquiring debt during college, other than my small student loan to help pay for tuition. It just sort of happened when I wasn’t paying attention to my finances.
I started living a more expensive life than how much I was earning from my part-time job, and before I knew it, I had high interest credit card debt.
If you’ve done any reading about personal finance, you know that paying off high interest debt should be your first step toward getting your finances in order, other than maybe building a small emergency fund. But even though I wanted to get my credit cards paid off, I decided not to put off investing, and here’s why.
I Didn’t Want to Miss My Employer’s Match
Landing a job with 401(k) was something I was very excited about when I graduated from college. Many of my classmates weren’t so lucky. I’m not sure if the value of a 401(k) match is lost on a lot of young people because they just don’t understand it, but I sure as heck wasn’t going to let the opportunity to double my money pass me by without taking advantage of it.
Think about it for a minute. Most employer match programs will match you dollar-for-dollar when you invest in your 401(k) up to a certain percentage of your salary or a certain dollar amount. This is an instant 100% return on your money. Even if you invest only 1% of your salary, you really investing 2% because of the employer match.
What Are the Risks of Investing When You Have Debt?
Investing while you have high interest debt and little savings like I did is kind of a risky decision in some ways. If I had encountered a financial emergency, it would have been difficult for me to deal with it as most of my credit cards were already at or near their limits.
One is how risks of investing in a retirement account is that your money isn’t easily accessible, unlike when you put it into a savings account. Some people will argue that this is not a valid point because you could always take a loan from your 401(k), but that’s never a good idea.
A risk of not investing is losing money. Yes, you read that right. By not investing in your 401(k) and instead paying off debt, you are actually losing money. Even though credit card debt is at high interest rates, sometimes over 20%, you are losing out on a 100% match by not investing in your 401(k). Many people will say that paying off debt is the smart way to go because your investments will probably never grow at a rate of 20%, while your credit card interest is always at that high rate, but they often forget to take into account that employer match, as well as the interest you’ll earn on your money and your employer’s money.
This is why I started investing even though I had debt. But investing vs. paying off debt is a numbers game we all must play from time to time, and the winner of your numbers game may change depending on your situation, which is why you have to evaluate all of the pros and cons for yourself before deciding if you should get started investing or pay off debt first.
Kayla is a personal finance blogger in her mid-20s who loves to write about money topics of all kinds.
That’s an interesting perspective. Many financial blogs recommend getting rid of Debt first, but it sounds to me that the more “mathematically” correct solution is what you advise:
– 401K investment (up to the employer match value) first
– Debt second
– other investments first.
Once debt is in the clear, then the 401k investments can be ramped up… does that make sense?
Cool to hear you’ve found something that works for you. I know everyone really has to find something they can get excited about in order to stay ambitious about it. Sounds like you’ve done just that. Great post.
It’s really hard to do when you are in this kind of situation. But, I would still start investing even though I have debts as time is really a matter of importance in investing. And, I think I can sacrifice other wants for me to invest and pay my debts.