Ep 9 The One About Investing vs Paying Off Debt

Have debt but want to invest for retirement? Do both. Here’s how.

Show Notes

I’m diving deep into the often-debated topic: “Should I Pay Off Debt or Invest for Retirement?” I’m passionate about debunking the myth that you have to choose one over the other and will guide you through striking the right balance between paying off debt and investing for retirement.

In This Episode:

  • [Understanding Debt and Retirement Investing]
    • Breaking down the different types of consumer debt: credit cards, car loans, personal loans, student loans, and mortgages.
    • Explaining the differences between revolving debt and installment debt.
    • Shedding light on retirement investing, emphasizing the significance of accounts like 401(k)s and IRAs, and the power of compound interest.
  • [Factors to Consider When Paying Off Debt vs. Investing]
    • Discussing the key factors in the decision-making process: interest rates, time horizon, risk tolerance, and tax implications.
    • Sharing my personal story about deciding between paying off a car loan and investing in a dividend stock, and why sometimes investing is the smarter choice.
  • [Strategies for Balancing Debt Repayment and Retirement Investing]
    • Introducing the 50/30/20 rule for a balanced financial approach.
    • Comparing the debt snowball and avalanche methods and emphasizing the importance of retirement investing, especially making the most of employer-sponsored retirement plans.
  • [Real-Life Scenarios and Case Studies]
    • Walking you through various scenarios: from an early-career professional grappling with student loans to a late-career individual urgently needing to boost retirement savings. I’ll show you how each can effectively manage their debt and investments.
  • [Tips for Staying on Track and Maintaining Balance]
    • Offering my top tips for maintaining a healthy balance between paying off debt and investing: creating a budget, adjusting financial goals, celebrating progress, and when to seek professional advice.

Episode Resources


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I get crazy when I see guys like Dave Ramsey say you have to pay off all your debt before investing for retirement. What a great way to never start investing.  My philosophy on this is that “IT’S AND NOT OR!” 

This is the My Money My Freedom podcast, where we unpack and simplify all things money so that you’ll always have more than enough to live your best life for life. Now here’s your host. Financial coach Susan Lassiter-Lyons. 

Welcome back to another episode of the “My Money My Freedom Podcast” Today, we’re diving into a topic that sparks a ton of debate  – “Should I pay off Debt Or Invest for Retirement?” We’re going to explore the idea of striking a balance between paying off debt and investing for retirement. 

Understanding Debt and Retirement Investing]

So, before we get into the nitty-gritty of how to balance paying off debt and investing for retirement, let’s make sure we’re all on the same page about what these two things are. 

First up, debt. We all know what debt is, right? It’s money that you owe to someone else, like a bank, a credit card company, or even a family member. 

For the purpose of this podcast, we’re talking specifically about consumer debt, like credit cards, car loans, and personal loans, student loans, and mortgages. 

Within consumer debt, we can drill down even more to revolving debt and installment debt.

An installment account is what you might imagine a typical loan to be. A mortgage, auto loan or personal loan are examples of installment loans. These usually have fixed payments and a designated end date. 

A revolving credit account, like a credit card, can be used continuously from month to month with no predetermined payback schedule.

Each type of debt comes with its own interest rate and minimum payment requirements.

Now, let’s talk about retirement investing. This is the process of putting money aside, usually into specialized accounts like 401(k)s, IRAs, or other retirement plans, to grow over time and provide you with income when you stop working. The idea behind retirement investing is to take advantage of the power of compound interest and long-term growth to build up a portfolio that can support you when you’re no longer working.

Factors to Consider When Paying Off Debt vs. Investing

With those definitions in mind, let’s talk about the factors you should consider when deciding how to balance paying off debt and investing for retirement.

First, interest rates. This is a big one. When you’re comparing debt interest rates to potential investment returns, it’s important to prioritize high-interest debt. Generally, if the interest rate on your debt is higher than the potential return on your investments, it makes more sense to focus on paying off that debt first. But if your debt has a relatively low interest rate, it may be more beneficial to invest. For example, I have a car loan on a BMW I bought in 2020. The interest rate is 1.9%. The balance owed today is about $12,000. Should I take $8,000 and max out my IRA for the year in a dividend stock that pays me 5% income or should I take that money and pay off my BMW loan? My personal rule of thumb is if I get a higher return on my investment than the interest rate I’m paying on the loan, why would I use the money to pay off the loan? In that scenario I’m literally LOSING money over time.

Next up is your time horizon. This refers to the number of years you have left until you plan to retire. The longer your time horizon, the more time your investments have to grow, and the more aggressive you can be with your investment strategy. On the flip side, if you’re nearing retirement, you’ll want to be more conservative with your investments and may need to prioritize paying off debt to reduce your expenses in retirement.

Risk tolerance is another important factor to consider. Everyone’s comfort level with risk is different, and it’s essential to be honest with yourself about how much risk you’re willing to take on. Balancing risk and potential rewards is a personal decision, and there’s no one-size-fits-all approach.

Lastly, let’s touch on tax implications. Both debt repayment and retirement investing have tax consequences. Contributing to pre-tax retirement accounts like traditional 401(k)s or IRAs can reduce your taxable income, potentially saving you money on your tax bill. On the other hand, paying off debt doesn’t typically offer tax benefits, with some exceptions like mortgage interest deductions.

Strategies for Balancing Debt Repayment and Retirement Investing

Alright, now that we know what factors to consider, let’s talk about some strategies for balancing debt repayment and retirement investing.

First up is the 50/30/20 rule for budgeting. This guideline suggests allocating 50% of your income for needs, 30% for wants, and 20% for savings, which can include both debt repayment and retirement investing. To adapt this rule, you might consider splitting the 20% savings portion between paying off debt and investing for retirement, depending on your personal financial situation and goals.

Another strategy involves using the debt snowball or debt avalanche method to tackle your debt while still investing for retirement. The debt snowball method focuses on paying off your smallest debts first, while the debt avalanche method prioritizes paying off the debt with the highest interest rate first. Both methods have their pros and cons, and the right choice depends on your personal preferences and motivation.

For example, the snowball method can be more motivating because you’ll see debts disappearing faster, while the avalanche method can save you more money in the long run by tackling high-interest debt first. Whichever method you choose, it’s important to still allocate some money toward retirement investing to take advantage of compound interest and long-term growth.

A key strategy for retirement investing is maximizing your employer-sponsored retirement plans. If your employer offers a 401(k) or similar plan with matching contributions, make sure to contribute enough to get the full match – that’s free money you don’t want to pass up! Additionally, be mindful of the investments you choose within your retirement plan, balancing risk and potential rewards based on your time horizon and risk tolerance.

Real-Life Scenarios and Case Studies

Let’s take a look at some real-life scenarios to see how these strategies might play out in different situations.

First, imagine an early-career professional with student loan debt. They might prioritize paying off their high-interest loans while still contributing enough to their 401(k) to get the full employer match. I call this contributing the minimum to get the maximum. We’re not ever passing up free money. And as they pay off the high-interest debt, they can gradually increase their retirement contributions.

Next, consider a mid-career professional with a mortgage and consumer debt. They might focus on paying off the high-interest consumer debt first, using the debt avalanche method, while still contributing to their 401(k) or IRA. Once the consumer debt is paid off, they can redirect that money toward retirement investing or paying down their mortgage more quickly. This is what I did when I was in my 40’s.

Lastly, let’s look at a late-career professional with little retirement savings. In this situation, they might prioritize maximizing their retirement contributions while still working on paying off any remaining debt. They may also consider working longer or finding additional income sources to boost their retirement savings. This is the profile of the average woman I work with in My Money My Freedom and this system works amazingly well to pay down debt and catch up on retirement savings.

Tips for Staying on Track and Maintaining Balance

To wrap up, here are some tips to help you stay on track and maintain a balance between paying off debt and investing for retirement.

First, create and stick to a budget. This will help you allocate your income appropriately between debt repayment, retirement investing, and other expenses.

Second, regularly review and adjust your financial goals. As your life circumstances change, your priorities may shift, and it’s essential to keep your financial plan updated to reflect those changes.

Third, celebrate milestones and progress. Paying off debt and saving for retirement can feel like a long journey, but acknowledging your accomplishments along the way can help keep you motivated.

Lastly, don’t hesitate to seek professional advice when necessary. If you’re unsure about your financial decisions or need guidance, consider working with a financial planner or advisor or a coach like me who can help you create a plan that works for your unique situation.

And there you have it, kids – “The One About Investing vs Paying Off Debt.” We’ve covered the factors to consider when balancing debt repayment and retirement investing, shared some strategies to help you find the right balance, and walked through real-life scenarios to see how these strategies might play out.

Remember, everyone’s financial situation is different, and there’s no one-size-fits-all approach. It’s important to assess your personal financial situation and goals to determine the best path for you.

But at the end of the day my philosophy when trying to decide between paying off debt or investing is that we have to do both. If you wait to invest until all your debt is paid off, you’re losing out on precious time in the market that will naturally grow your retirement through compounding.

Remember, it’s AND NOT OR.

Thanks for listening to My Money My Freedom. Visit our website at mymoneymyfreedom.co and follow us on Instagram @mymoneymyfreedomhq  

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