The never ending debate. The question that everyone has an opinion on (Let’s hear them in the comments below!). Should you pay down debt early or invest for retirement first?
I’ve grown up always believing debt to be the worst thing you can have. I saw it as a burden and something that could hold you back. I’ve also seen the side where too many people choose debt to get the life they want. Because I always saw debt as a bad thing, I’ve always planned that I would tackle my debts first and then hit saving and investing much harder after those debts are paid off.
However, my views have changed to a degree. I’ve tackled all my non-student loan or mortgage debt. And begun investing in a Vanguard IRA and my workplace 457(b) plan. But, is this the right move?
This is where the question comes in: Should you aggressively pay down debts? Invest heavily and pay minimums? Or a combination of the two?
Our Situation:
We are 28 years old (25 at time of posting), married with a three month old son (he’s 2 now!) and we are homeowners. Currently, we owe $160,000 still on our home (as of Nov. 2020). We have no credit card debt. But, we do have sizable student loans. And our one car loan is almost paid off (paid off in 2020). I have 770 credit score and my wife a 720. We can afford to either save or aggressively pay down debts with almost $1000/month.
Invest heavily or pay down debts aggressively?
This is where the debt comes in. Without sharing specific details in this post, of what we pay, what percentage, the size of our investment accounts, etc. It can be hard to get a good debate going. There are some “general rules of thumb”-type of advice out there. Such as, if you debt’s interest rate plus the rate of inflation is higher than your expected investment returns, then pay down your debt. Or, if you are paying more than 39% of your income towards debt repayment, tackle debts first.
So much of this debate comes down to personal opinion, individual situations and risk tolerance. There is great benefit to having more time in the market by investing early. There is also immense benefit to being debt-free. Some of the decision will come down to psychology. Do you prefer the freedom of knowing you owe nobody a dime? Or do you prefer to watch you accounts grow and feel as you are becoming wealthier?
As for myself, I tend to try to find a happy medium to them both. But, by dipping my toe in each and not fully committing, we don’t get quite the same benefit. But I needed a cop out for this one. I am so anti-debt, but also so pro-compound interest! I just can’t take a side!
Our current path
Currently, we believe our best course is to pay down debt and save what we can. Our plan is to pay off the car loan (we did in 2020), snowball into our student loans (not mine- mine are eligible for forgiveness) and then attack the mortgage. I know others think paying your mortgage off early isn’t a good idea (My parents included), but it would give us great freedom and flexibility.
We want to keep our accounts growing and our money able to get more time in the market. While also aggressively focused on our pay down debt strategy. We want to build wealth, despite my teacher’s salary being a bit limiting.
What do you think? What should our course be?
Pay down debt or invest aggressively?
Let us know in the comments below or on any of our social media channels!
For More on our Wealth Building Strategies and Stretching a Teacher’s Salary, check out these posts: