2971: Should I Pay Off Debt or Invest by Chris Reining on How to Start Investing for Retirement Early

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[00:01:00] This is Optimal Finance Daily. Should I pay off debt or invest? By Chris Reining of chrisreining.com.

[00:01:09] Today's question comes from Colleen. She asks, quote,

[00:01:13] Quote,

[00:03:13] And they all tell me the same thing. I wish I would have started in my 20s. It's an important lesson because you're in your 20s and have a unique opportunity to do better. Most people your age think about getting started, but retirement is decades away, so it's easy to put off. You tell yourself you'll get around to it someday. Plus, you have student loans to pay off. And then in your 30s, you're buying a house and raising kids. And then in your 40s, you're putting those kids through college.

[00:03:42] And then you find yourself in your 50s, sending me an email asking if it's too late to get started and wishing you had a time machine. The data coming in backs this up. The average family has about $104,000 saved for retirement. At a 4.5% withdrawal rate, that provides $4,680 a year. Okay, but what about Social Security?

[00:04:07] The average Social Security check is $1,360. And when you're living on $16,000 a year, that's pretty close to the $12,000 poverty line. That might be okay if you live a simple life. But if you want to spend your retirement doing all the things you want to do, that's not enough.

[00:04:28] Anyways, there's the question about whether it's better to pay off your student loans or invest. And here's the answer. It's always the better financial decision to do the one with the higher number.

[00:04:41] You have $9,000 in student loans. And you don't say, but let's pretend the interest rate is 4%. If you're investing in the stock market, the stock market historically returns about 7%. Some years it's more, some less, and some negative. But over the decades, that's what it smooths out to.

[00:05:02] Now that you know these numbers, you're deciding between paying off your debt at 4% or investing at 7%. And it's easy to see the better financial decision is to invest. But not every decision in life is a financial decision. Think about how you'd feel not having debt. And if you'd feel better not having debt, then pay it off.

[00:05:26] Here's an example from my own life. The interest rate on my mortgage is 3.125%. And while I could write a check to pay it off, I'd rather have the money invested. But I sleep okay not having a paid off house. Makes sense?

[00:05:43] My recommendation for you is putting money in savings though. You're telling me you're worried about having money invested when you don't have much in savings. You should never feel worried about money you invest.

[00:05:56] And when someone tells me they're worried about their investments. I know right away that they have too much invested. To be successful at investing, you have to invest within your comfort zone. Because when you're investing within your comfort zone, you're less likely to make bad decisions. Like pulling your money out at the worst possible time.

[00:06:17] You weren't investing in 2008 when the market went down 37%. If you were a new investor worried about losing money, you'd probably pull your money out and never invest again. And that would be really unfortunate.

[00:06:32] If you focus on building up your savings, you're going to feel more secure. And when you feel more secure, you can start diverting money to investing. And the easiest way to do that is with your 403B.

[00:06:45] Your 403B probably has low cost index funds like what you're looking for. And then the money is coming directly out of your paycheck so you never have it. And if you never have it, you won't worry about it. And decades from now, you'll look back and thank your younger self for starting in your 20s.

[00:07:02] You just listen to the post titled, Should I Pay Off Debt or Invest? By Chris Reining of chrisreining.com. And I'll be right back with my commentary.

[00:07:17] I wholeheartedly agree with Chris's first statement. If you are a young person taking any steps towards investing in a retirement vehicle like a Roth IRA or 401k, you are so far ahead of the game, it's not even funny.

[00:07:32] Even if you're investing a super small amount regularly, you are well on your way to financial freedom.

[00:07:39] I also agree that having a good pile of savings on hand makes investing so much easier.

[00:07:45] I like to think of the money I invest like a tax I'm paying to my future self.

[00:07:51] When I invest in low cost index funds, I see that money as gone because I don't plan to touch it for a very long time.

[00:08:00] Since I have a fully funded emergency fund, I can invest with confidence.

[00:08:06] I know that money can be put to work and left alone to grow through the power of compound interest because I have other money in my savings account set aside with a different job.

[00:08:18] And that job is liquidity and accessibility.

[00:08:21] I've noticed that often this question to invest or pay off debt is usually posed as this either or choice.

[00:08:30] But you could choose to do both.

[00:08:32] Pay a little more towards low interest debt while investing the rest.

[00:08:37] Or split your monthly surplus between your savings account and 401k contributions.

[00:08:43] Investing, saving, and paying off debt are all really great ways to deploy your hard-earned dollars.

[00:08:51] And there really isn't a wrong choice here.

[00:08:54] There may be more optimal ways to get to your financial goals faster.

[00:08:59] But if figuring out the most optimal way leaves you paralyzed in making a choice, then it's really not serving you.

[00:09:06] I would encourage us all to make the best decisions with the information we have now,

[00:09:12] knowing that we will continue to improve our financial strategies as we learn more.

[00:09:18] And that will do it for today.

[00:09:19] Have a great day.

[00:09:21] Thank you for listening.

[00:09:22] And I'll be back here tomorrow where your optimal life awaits.