I know this is a question that a lot of people have wrangled with in their own lives. When I was struggling to find a plan for my own personal finances I took the shotgun approach. Yes I contributed some money to my 401k, some went to the kids college, a little extra went towards the debt payments and the rest went to eating out. Or some semblance of that order. It’s easy in retrospect to see what an ineffective plan that really was considering the amount of debt we were in but it begs the question. If you have outstanding debt should you invest or save for retirement? Let’s look at investing first.
How to make a Guaranteed 19% Return on your Investment
Popular personal finance personality Dave Ramsey often asks this question of his callers. “Would you take out a loan to invest in the stock market?” It’s a good question and will make you think about your finances in a different way. So think about it this way. If I have a credit card with a 19% interest rate and a balance one thing I can be guaranteed is a negative 19% rate of return on my finances month after month. Now I defy you to find an investment that will give you a positive rate of return greater than 19% year over year. Your best return of investment is getting rid of that debt which will put you in a place to get towards positive numbers.
Should I save for Retirement When I have Debt?
The answer to this question is a solid “depends.” If you are going to focus, and throw everything you’ve got at your debt I would recommend holding off on the retirement saving. You’ll be out of debt that much quicker using the power of your singular focus. In my own life nothing can beat the momentum I can build by focusing on one thing. Multitasking is much less efficient behaviorally speaking. Now if your plan is to work at your debt over a period of time greater than two years or so then it makes sense to at least put in enough money for a company match if your workplace offers that. Also bear in mind that when I talk about debt I’m referring to non house debt.
What about College for my Kids?
Honestly I would put your kids college behind your retirement. It’s going to be more important that Billy and Sally don’t have to support you in your old age than worry about you paying for their Princeton education. Put that focus to work for you get out of debt, then hit your retirement and college saving.
So what’s your plan, are you doing both or is this irrelevant because you aren’t carrying any debt. I’d love to hear your views on the matter. Thanks for stopping by and please stay tuned because Friday I’ll be posting the one thing I’ve dreamed to write since starting FiscalGeek. Ooh the suspense. See you then.