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Financial Question Of The Day #10

By Erik Folgate

Is getting out of debt or investing for retirement more important to you?

This is an interesting debate. Many young people leaving undergraduate and postgraduate studies aren’t too concerned with getting out of debt right away. Many of my wife’s friends who will be leaving with considerable student loan debt from medical related degrees say that they would rather invest their big paychecks rather than use it to pay off the debt.

I think that’s backwards way of thinking. If you clean up your debt quickly, you’ll have more chunks of money to invest, which will allow it to grow quicker and help you catch up for the time lost when you were paying off debt. When you have $50,000 in the bank and $50,000 in debt, you really don’t have any money. You’re just borrowing against your own money. Many people argue that they can make more interest on the money than what the interest is on the debt. But do you really? Let’s say you rolled the dice and you invested it in a mutual fund that makes 10% interest, and let’s say that your debt is at 6%, which is the current rate for student loans. That 4% difference really isn’t 4% once you factor in capital gain taxes and expenses taken from the stock broker. So, is the 1% or 2% interest really worth the extra risk? It’s not worth it to me, but it may be to some of you.

Comment with your answer and your reason why.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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Comments

  • http://chieffamilyofficer.com Chief Family Officer

    This is a tough one because I really want to do both. And I’m 25ish years from retirement. A few years ago, I calculated our “retirement number” and made sure that we’re on track to meet the minimum of that range, and since then we’ve done that minimum and directed everything else toward paying off debt.

    So I guess I agree with you that debt payoff comes first, but I also think that a person should put some money into retirement savings at the same time so that there is some progress/cushion there too.

  • author

    it wouldn’t be a bad thing to start contributing to your 401k to get a match while you were paying off debt, just don’t put like 15% towards it. Put 5 or 6 percent towards it and focus on paying off the debt. Then, you’d get the best of both worlds.

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