110: Should I Invest if I’m in Debt? ft. Erin Lowry

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I'm a former Analyst, Podcaster, and Producer. My goal is to help you understand your finances better in about the time it takes to make a bag of popcorn!

Erin Lowry from BrokeMillennial.com is back to help us tackle a question that I’m hearing more and more these days; Should I invest if I’m in debt?

Pop-Up Debate!

In addition to our conversation on investing Erin has agreed to the ultimate challenge, a Pop-Up Debate!  In this special episode format we will each have 1 minute to argue our point.  Our topic… Is it ok to Mooch Off of Someone Else’s Netflix Account?

Meet Today’s Guest – Erin Lowry

Erin Lowry is the author of Broke Millennial: Stop Scraping By and Get Your Financial Life Together and Broke Millennial Takes On Investing: A Beginner’s Guide to Leveling Up Your Money. Her first book was named by MarketWatch as one of the best money books of 2017 and her style is often described as refreshing and conversational.

Erin has appeared on CBS Sunday Morning, CNBC and Fox & Friends. She has written for Fast Company, Cosmopolitan Magazine and Refinery29 and regularly speaks at universities and conferences around the country.

Erin has a special gift for Popcorn Finance listeners that order her new book Broke Millennial Takes On Investing: A Beginner’s Guide to Leveling Up Your Money!

Erin will send you a special 30 Day Rookie Investor Action List if you follow the quick and easy steps below:

  • Place an order for her new book
  • Send Erin an email to info@brokemillennial.com
  • Write Popcorn Finance in subject
  • Include proof of purchase in the body of your email
  • That’s it!!!!

Erin is also going on tour in April and May! She’s doing events around the country to help you learn more about how to start investing. Learn more at brokemillennial.com/tour.

Episode 110 Kernels

What for you is something that people should consider if they have student loan debt, and they also want to invest what will be the first thing you say they should look at?

The very first thing is to consider a retirement plan. One of the things that I want to say right up front is I am on a crusade, a campaign, whatever you want to call it to change the language we use about retirement. Because we say save for retirement, but really we’re investing for retirement. Language has power, and I want you to say it that way because I want you to feel like, “Hey I’m an investor I’m investing in the market.”

So automatically it takes a little bit of that fear, a little bit of that intimidation out. So if you have student loan debt, but you also have access at work to a 401K or 403B and especially if there’s an employer’s match, that’s a really easy way to get started.

Maybe in the beginning you don’t have enough discretionary income to … I probably shouldn’t even call it discretionary, maybe there’s just not enough room in your budget to be putting 4%, 5% to get enough of the employer match. Start with one, then you at least get a little bit of a match so you’re already at 2% which is great and it gets you in the habit.

Every six months, reevaluate and try to push it up one more percent until you reach your goal. Now for those of you who are self employed, I always like to plug this in because I am too, and I can just hear you being like, “Well, I don’t have that.” I get it because I don’t either. Look into an ITRA or a SEP- IRA or solo 401k if you’re just getting started a Roth IRA is a very easy way to go, you probably don’t have more than $6,000 to soak into it. So it’s an okay way to get started right in the beginning.

But as you grow, you might want to look into a SEP-IRA or solo 401k, because it enables you to put a little bit more money away as you and your business continue to flourish.

Another point that you mentioned in your book was, if you potentially wait until you’re done with paying off all of your debts specific student loan debt, which could be huge, you’re kind of pushing your start date way out into the future.

The thing too with time is so many of us, you’re on not a 10-year repayment plan, which is standard, you could be on a 20, 25 year because you might be on an income driven repayment plan. If you wait until you’re in your late 40s, to early 50s to get started, you really lost a lot of the big advantage you have of being young.

That’s not to discourage anyone who might be listening who is starting in their 40s, or 50s, but it is to say that if you have the advantage of time, even if it’s a small amount that in your mind sounds inconsequential, trust me, it does make a difference, and it’s a good way to get started.

You go into great detail regarding comparing interest rates in your book. Looking at the interest rate that you’re paying on your student loan itself versus what type of interest rate you would get when you’re investing.

I think the interest rate part is the most critical when you’re doing the math on how to be investing while you carry debt. When you have consumer debt, and by that I usually mean credit cards, as do most people, or any sort of high interest rate debt. So 15%, 20%, 30%. You want to be paying that off aggressively because to be honest the odds of you out earning that in the stock market at least on average is slim to none.

So it makes sense financially to be ditching that high interest rate debt quickly again caveat being employer match on a retirement plan that you want to be taking advantage of. I like to always keep plugging that in. But you do want to be getting aggressively rid of that high interest consumer debt.

But now when we reposition to look at student loans specifically, it’s a hard question because you might be investing for retirement and then you’re still paying off your student loans but there’s other goals that you have and maybe you think, “I want to be earning more than 2% interest rate on my savings account or for some people who might still be in 0.01%,” which please change, you need to be earning a better interest rate on your savings account. I totally understand and empathize why you want to invest in what we call a taxable account so not a retirement account, a taxable account.

So the problem is, you got to do the math. What are the interest rates on your student loans because some people have higher interest rates, it could be 7%, it could be 12% especially if you’re looking at private loans. Sometimes those suckers have very high interest rates and it still might make more sense to be more aggressive with your student loan debt.

I pose this question to every single investing expert I talked to for the book, and almost across the board the answer was 5% being the rule of thumb. If your student loans are under 5%, you know what? You can probably balance them in, again investing for retirement, but if you also want to be investing in a taxable account if you’re under 5% all right probably mathematically can make sense if your risk tolerance and debt tolerance emotionally allows you to do it okay go ahead play around.

One thing to consider is no one ever regretted paying off debt quickly. So it totally depends on you, your risk tolerance, your debt tolerance. If you think like, “Hey, I’m just going to put money away for retirement other than that, I’m focusing on my student loans,” that’s also an okay answer. So you have to do the math and you also have to do what’s best for you and your mental health.

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