Should You Invest In Your Retirement If You Have Debt?

by TTMK on December 1, 2017 · 1 comment

The following post if from Melissa Batai

If you listen to Dave Ramsey, you know his mantra is that you should stop all retirement contributions until your debt is paid off.  However, is the answer really that simple?

No, of course not.  You must decide, based on your own financial situation, whether you’ll want to invest in your retirement if you have debt.  Overall, I’d encourage you to do just that, while simultaneously paying down debt.

Look at Your Financial Situation

But, you’ll need to look at your own financial situation.  If you have a credit card balance and you’re paying 14% interest, clearly, pay down this debt before you save for retirement.  However, if most or all of your debt is under 7% interest, you should feel comfortable saving for retirement while paying down debt.

The Power of Compounding Interest

When I was in my late 20s, I had student loan debt and some credit card debt.  My salary was small, and my husband and I were living off my income while he went to graduate school.  We were living in a high cost of living area, and my paycheck just couldn’t seem to stretch enough.

My employer automatically took 8% out of every paycheck to put in a state retirement fund.  I’m not going to lie, I really resented having that much money taken out of my check each time.  I definitely could have used that money to make my budget more comfortable.

But year after year, I watched that money grow.  When I left the company 10 years later, I had a sizeable retirement to take with me.  If I hadn’t been required to invest the money, I wouldn’t have.  I learned a valuable lesson about the power of compound interest, especially when you invest when you’re young, and there are plenty of years for the money to grow.

The Magic of a Company Match

If your company offers a retirement investment match, make sure to invest the maximum amount you can to get the match.  You will not be sorry.  In fact, in this case, investing for retirement even when you have debt above 7% is a smart idea because the match can quickly make your nest egg grow.

My employer also matched my 8% contribution with their own 8%.  That was free money for me, and by the time I left, I was walking away with tens of thousands of dollars in a company match.

The Benefits of a Roth IRA

If you’re worried about investing because you’re afraid you might need the money later, consider investing in a Roth IRA.  There are two reasons to do this.  First, if you do find yourself in a financial bind, you can withdraw your contributions (but not the interest earned), tax and penalty free if you’re under 59.5 years old and you’ve had the account for five years or more.  Second, you’ve already paid taxes on the money when you invest in the Roth, so once you reach retirement and take money out of a Roth, you can do so tax free.

Do you recommend people invest for retirement even when they have debt?  Why or why not?

{ 1 comment… read it below or add one }

Paul Sharp December 14, 2017 at 9:09 pm

Your story seems interesting and inspirational. The money taken out of your paychecks will eventually grow when you leave the company and there will be plenty of funds available to meet with financial challenges when you retire.


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