One of my friends recently asked me what should come first, paying off student loans or investing. It really depends on your situation.
First of all, if you are paying interest on your debt, and that interest is higher than what you expect to make investing (over 7%) then pay it off as soon as you can. Eat rice and beans until that crap is gone. Seriously.
But if you have debt that you aren’t paying interest on yet, or the interest is very low (less than 2-3%), take a look at how much debt you have, and how comfortable you are with it. Take for example someone who is getting done with 8 years of higher education which they’ve funded by taking on a lot (read: a crushing mountain) of debt, and will not be paying it all off in a short period of time. In their situation, I would recommend focusing all financial efforts towards getting that debt paid off, and freeing yourself. Once the debt is gone, then the savings and investments will start piling up.
On the other hand, if someone has a smaller, more manageable amount of debt that they expect to pay off quickly (within a year or two) upon graduating, then starting an investment strategy may be a good option. When contributing to your Roth IRA, you can only deposit $5,500 each year. So if you had the opportunity to contribute the maximum amount one year ago, but didn’t do it, you’ll never have that opportunity back. In other words, if you have 40 years until you withdraw that money, you will have given up $82,000 in tax-free money in retirement ( 5,500*(1.07)^40= 82,359.51 ).
Especially if you are not currently paying interest on that small amount of debt that you plan on paying off quickly before graduating, then contributing to a Roth IRA makes a lot of sense.
That being said, you should still consider your situation and how you feel about debt. If having any debt at all stresses you out, then you might be happier getting rid of it right away (I would be in this category). If you are ok with having some debt, and are confident you will be able to pay it off as soon as interest payments are due, then feel free to get started on your investments. But after maxing out your IRA for the year, paying down your debt should be the next priority if you’re in this situation.
P.S. I am a big believer in the power of just getting started. Even if you open up a Roth IRA today, and put a hundred bucks in it, then don’t touch it for the next four years because you’re paying down debt, that’s an awesome start. Simply knowing that you have an account there waiting for you to put more money in can motivate you, and it will be easy to transition from debt payments to IRA deposits once your debt is gone.
***Also, if you are working full-time, and your employer offers to match your contribution into a retirement account like a 401k, always contribute enough to get that match. Even if you’re in debt. That’s free money, please don’t throw away free money!
(Pictured: Me getting a workout in at Enchanted Rock, Llano, TX March, 2016)