Thousands of graduate students are troubles with the following common dilemma: So I found a nicely paying job. What should I do, should I begin investing for my future or focus on paying off my debt now?
This is no easy question to answer as it depends on numerous factors, including a person's individual feelings towards debt, their comfort with risk, their financial goals and aspirations all the way to more practical, but no less important things like the interest rate of their specific student loan as well as their own liquidity needs for their other expenses.
Paying debt is an investment itself
The most general advice we can give you, which is transferable to many other aspects of your life, is to regard debt payment as an investment by itself. Even though this idea may sound strange to you at first, it will become much clearer as we explain:
By paying off your debt, you are getting returns that are equal to the interest rates on your loans – this obviously makes paying off loans with higher interest rates much more imperative than low interest ones. As the rate of your student debt converges with your other expected investment returns, there is less and less value in delaying student loan payment to make these investments.
It is not always as clear cut as this, but this general rule of thumb should definitely help you sort things out when your confusion levels hit red.
Playing it Safe
Building on our previous point, the paying off debt is an investment in itself, we can expand on this point as follows: Paying debt is an investment with a guaranteed investment return. On the hand, investing on markets, shares, bonds and funds while certainly having the potential the earn you multiple times the investment returns is not at all guaranteed. Especially if you do not really know what you are doing.
Most investors, even highly seasoned investors will admit that they cannot really predict the future and can only make assessments and estimates with a reasonable chance of success. If you are honest with yourself you will accept that there is no way you can guarantee substantial, investment returns over a long period of time – keyword is guarantee. There is a huge risk component in investing, a risk you instantly get yourself rid of by committing to pay off your student loan.
For most people, interest is the enemy. It brings money out of their pockets. Investing, at its core, is about changing your lens and start viewing interest as your friend – making your money work for you, by letting the interest bring money to your pocket instead of taking it. The thing is, investing in markets does not bring back a fixed amount of returns. At one point you might get super-charged returns, and at other times you will see substantial loses. The bottom line is, that no matter what, you can’t really guarantee you will have steady and consistent returns every single year. Doing so, is inherently risky. If that doesn’t scare you, here is what you NEED to do:
- Student loan interest: Make sure paying off your student loan is very likely to lead to worse investment returns than investing – in other words, the lower your loan interest rates are, the more likely investing being a solid option is.
- Keep paying minimums: Even if you want to get into investing, you sure do not want to end up in default in your student loan.
- Figure what you can invest in: Decide how much you can invest each month and what you want to invest in. You can start investing even with very small amounts of money. Look up on investing resources or even pay a specialist to set things straight. You should know what you are doing before you start investing.
There is a lot to be said about hard numbers but probably the most important factor is knowing what type of person you are. When it gets down to it, even if you can logically conclude that investing is a better option for you, if you are the type of person that is unable to put the idea of debt hanging over their head away, staying awake at night squirming at your bed, you should obviously focus on ridding yourself off of it.
There are people who have trouble coming in peace with the concept of debt. And it is fine. Like we said, paying off your student debt is STILL an investment – and a guaranteed one at that – it just has lower returns than normal investments. Others are completely comfortable with carrying debt for decades, remaining totally calm by the pressure. They sleep just fine. It does not phase them. And that is okay too.
Where you are on this spectrum of comfort is a question only you can provide an answer to. Before committing to one choice or the other, make sure you have come in peace with the pros and cons of both and have thoroughly analyzed your own personality and psychological make-up.
To summarize, whether it is right to pay off your student loans or start investing early is not an easy dilemma to answer. Both solutions have great and real arguments to be made in their favor. On one hand, focusing on eliminating debt is a guaranteed way to get measurable returns on your money. Plus, you get peace of mind. On the other hand, investing can potentially prove to be much, much more profitable for you. And you might be able to handle the pressure of the possibility that your investment returns are not guaranteed just fine.
You would do well to weigh the upsides of both options carefully and thoroughly and decide what you wish to hold in your life. Are you the type of person that prefers to hold a shield, protecting yourself from harm? Or are you the type that likes to hold a sword, thrusting yourself into risk but potentially winning big time?