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Paying Debt vs Saving For Retirement?

| November 30, 2020

This is a question I get from so many clients...

"Should I pay off my debt or start saving for retirement, first?"

"I really want to get rid of these student loans, but I also want to save up money. What should I do first?"

Why does it have to be an either/or? Why can't we do both?

To me, that is the right approach. Think about this, right now we are in an economic recession. That's obvious because everyone is locked up inside and the economy has ground to a halt, except for much of the healthcare profession, the grocery chains, and a few other "essential businesses". The stock market has dropped over 20% in the last month or so, and there are many well-known, and some lesser known, companies who have seen their stock price plummet. If you had rushed to pay off your student loans, what capital do you have to invest and buy those up at, in some cases, a 70% discount? If you took the either/or approach, you are missing out on potentially huge opportunities!

Another consideration is instant vs delayed gratification. This one is tough, and I'm saying that from personal experience.

When you watch your savings grow from $2,000 to $4,000 to $8,000 over a period of a few months, it seems like you are getting no where fast. Why can't it be $1 Million already?!? Well, because that's just not how money grows. It takes time, and time can be painfully slow, but it is a very rewarding thing. Have you ever heard of the term delayed gratification? You have to suck it up in the early years and be patient watching your savings grow little by little, in order to be rewarded in the future. In the future when your savings is at $1,000,000 and it grows by 5%, that's $50,000!

Paying down debt is no different. If you have $100k in student loans and you are paying $500, $1,000, or $2,000 per month, you are probably thinking "OH MY GOSH WHY ISN'T IT DONE ALREADY?!?" I'm with you! It just takes time, and it takes these early payments of knocking down the interest to be rewarded (lol, if can we call it that?) in the future of having more of your payment take down the principal. Just wait until you buy a house and have a mortgage. It's the same thing. Delayed gratification is one of the most difficult things in the world, because you don't see the power of your good decisions early on until the future. But stick to your plan and it will happen!

Now, what is your plan? Do you have a plan yet?

Everyone wants a plan, now more than ever. What's your plan for saving? What's your plan for investing? What's your strategy to balance those (we talked about that a little earlier)? How are you protecting your money, income, and assets during bad economic times? What areas are you not being efficient? You need to have a plan, and you need to have a process to help you achieve that plan. This is my shameless plug - reach out to me and let's chat.

Would you feel better with $10k more in savings, or $10k less in your student loans?

This is an important question. There's no right or wrong answer, it's all about personal preference. The risk-takers may say $10k less in student loans, and the more risk-averse people may say $10k more in savings. It's a about your comfort level, and everyone's is a little different. In times of stress and crisis, there's so much to be said with having the safety of money in a savings account. The downside is it won't grow a bunch, but the upside is that it won't go down either. When you have debt, paying that down faster means you are locking in the rate of return (your interest rate) on that money, which is a good thing. The downside is you may be able to deploy those dollars elsewhere for a better return, and if you need that extra payment, you can't get it.

Financial entertainers - Dave Ramsey, Suze Ormon, and the likes - often make it seem like it's an either/or. Meeting tons of people a year, many who follow that advice, it's nice because people are working to become debt-free, but they also may have little saved and have missed out on incredible opportunities along the way. Another thing that I find goofy is that Dave, for instance, touts that people can get 12% by investing in mutual fund - yikes - but then tells people to rush to pay off their mortgage at historic low interest rates. To me, that makes no sense and is a very inefficient use of dollars.

They often follow the math which, in many cases says to pay off the debt - like credit cards at 20% - but if you have a mortgage, or student loans, that are at 2-5%, it might not make a ton of mathematical sense to rush to pay that off (if you can get higher returns elsewhere). The other thing they often miss is the emotional aspect of financial decision making. Money is very emotional, it's why people can over spend on cars, houses, vacations, and those types of experiences. We need to recognize that. Having money to be able to enjoy life, while also not neglecting your savings, is important to building confidence and momentum. A lot of great things happen when building momentum over time, but there's that word again - time.

So what's the first step?

Save, save, save, AND have a plan to pay off the debt - BOTH. If you have savings, guess what? You can use that savings to pay down the debt if you choose. If something comes up unexpectedly, you can also use savings to pay for that expense. Without savings, your options are either going into more debt, or asking someone for money, and who wants to do either of those things. We also want to have a plan for how we want to attack the debt. Maybe that plan is to save for 3-6 months and then write a big check. A lot of my clients actually do that through the cash flow system I teach. If you're interested in learning about that, schedule a meeting here and we can review it together.

In 2021, let's create our own path to success, and not follow the path that everyone tells us we "need to be on". Your life is different from everyone else's, and your plan should reflect that. Let's uncover blind spots, fix inefficiencies, and set strategies in plan to accomplish what's important to you as soon as possible.

I look forward to seeing what 2021 brings you. It all starts now!