Of all the questions asked, our generation seems to have this question more often than anything else. The funny thing is that most people usually already know or have a strong opinion about what they want to do. Maybe they just want me to prove them wrong?
Who knows. Sometimes we’re all a little weird sometimes.
However, before we begin I just want to be clear that there really is no “right” answer to this. I have some thoughts based on my experiences with debt, but with every person like me, someone else had an equally positive experience with a different strategy.
NO FINANCIAL SITUATION IS THE SAME.
Some people get awfully uncomfortable when we talk about money as it hits them too close to home. It’s only natural. My only goal is to provide insight and guidance and to tailor my content towards the audience and what you need.
So Which Is It?
As a general rule, I like to stick to the fact that using extra funds to pay off student loan debt (in particular student loans) instead of investing is the way to go. You may call me crazy, but hold off until I’m done explaining.
One of the most important things one of my professors told me was this:
“Your return on the investment of paying off student loans would be guaranteed”
Did your mind explode with this thought?
One could definitely argue that they could have put their money to use in the stock market instead, and there is a good chance that over the long-term this would have done better than your student loan interest.
But with any seasoned investors-they will politely tell you that you can’t predict the future and you shouldn’t try to. I can predict that I would put future interest money back in my pocket (more so keep it there) by paying down student loans that often range in the realm of 3.75 to 6.8%
^ You can actually guarantee this return which can be a powerful tool.
You Can’t Guarantee Returns Like That Anywhere Else
Sorry, but if you somehow have a way to guarantee substantial investment returns or even the average stock market return over any period of time then you should be doing that and not pay any attention to my site.
The reality is that markets rise and fall and there’s no definite way to accurately predict this. Now if you’ve somehow successfully figured out how to do this, great! I pat you on the back. Seriously. But I’m not going to tell your average graduated college student to do the same.
It would be irresponsible because I KNOW paying off their debt will help them get their head above water. I don’t know if investing in stocks or real estate will provide the same return. See what I mean?
Benefits You Can Feel
Anyone that has ever made their last payment on something knows what it feels like. Amazing right? That feeling is worth something. It’s real, it’s tangible. It has value and it’s worth sacrificing to achieve.
Talk to anyone who paid off their car, their student loans or even a mortgage. I guarantee you there is a strong sense of pride and achievement with it.
Can debt make you money? Definitely. I’m a huge fan of real estate and plan on allocating capital to it in the coming years. I already have with my first property. However the average person trying to figure things out needs to go with the most direct solution, not the one that could work.
Food For Thought
Now everything that I mentioned above I wholeheartedly believe. However there are a few instances where it is also good to allocate some of your debt reducing power elsewhere.
- 401k matching: Always be sure to take advantage of any employer sponsored match, it’s free money!
- Cash flow: Cash is king, paying off any liabilities impacts your liquidity which can impact an emergency or opportunity. In the event you need it you may not have it.
- Tax deductions: The interest you pay is tax-deductible (or at least used to be) and the interest you earn on any savings/investments is likely taxable.
Debt can be daunting sometimes, but with the right tools you can tackle it head on and truly free yourself to live a lifestyle you want.
Good Luck, Newbies
What’s your thought? Would you pay or invest instead?