If in Debt, Should You Still Save?

If in Debt, Should You Still Save?

So, you may be in debt—should you still make investments for the future?

Some believe debt should be paid off before considering to build up your assets; and others debate that investing for the future should be in the forefront.

Is there a right answer?  It’s complicated. We checked on what our partner Vanguard and other financial experts had to report on the subject.

Investing or paying off debt can be a concern at any age. But young workers, who may have incurred far more in student loans than previous generations, can be faced with a higher level of debt. Couple that dilemma with trying to save for a home, and investing for the future seems like a far-off plan.  And it can be just as daunting for older adults who are still hanging on to debt and doing so with retirement approaching quicker than later.

However, as outlined by the Retirement Planning Services at CBS, the power of compounding, shows that a little early planning at the start can go a long way, making their money work for them by using the time value of money. Someone who begins saving at 25, versus  35, can literally earn more money investing and contribute less. Check out this scenario:

Assume that Jill and Jack are both 25 years old. Jill saves $50 per pay period immediately versus Jack who waits 10 years and saves $100 per pay period. Jill who makes an annual contribution of $1,300 totaling $52,000 in contributions by normal retirement age; will retire with $268,622. Compare this to Jack who makes an annual contribution of $2,600 totaling $78,000 in contributions by normal retirement age; but will end up with a lower account balance of $254, 191.

The consensus appears to lie in creating a balance.

According to an article by The Balance, one way to look at the decision whether or not to invest or pay off, is to essentially do both, deciding which debts to repay and which investments to fund.

For instance, invest in your 401 (K). If you haven’t started saving for retirement through your employer; it’s like leaving money on the table. 

In addition, most financial experts agree to paying off any high-interest credit card debt and student loan debt. Student loan debt also can be prioritized because it can be the most difficult to discharge in bankruptcy.

Once debt is paid off, you can circle back to the 401(k) plans and increase your contributions, adding up to the maximum an employer will allow.

In a recent Vanguard podcast by The Planner and the Geek, financial experts take into account the perspective of cash flow management and personal choices.

 In an excerpt of the transcript, Maria Bruno states: “I just jump to what people often think- that it’s sometimes all or nothing and it’s not. And Joel had talked about this earlier, it being a series of tradeoffs. So, yes, if you save 100 percent for retirement, you’re not going to be able to meet these other goals or invest in yourself or your company. So I think account diversification is good. Having different types of accounts, retirement/nonretirement, so that you then have the flexibility. And that can include emergency savings where you might need to tap into things sooner rather than later. So I think that’s a prudent approach. I do think you need to think about it short term and then long term.”

To listen in or more of the podcast, check out: https://investornews.vanguard/can-debt-burdened-millennials-afford-to-invest/

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