Should I Invest or Pay Off Debt First?
Ready to tackle it all? In your 30s, investing early is key—just start by knocking out bad debt.
Let’s be honest, pretty much everything about your 20s is excusable, including your financial decisions. But you’re in your 30s now. Time’s up. Kidding. While you definitely still have time on your side, the benefit of starting to invest in your 30s is huge compared to your 40s, so don’t wait. It’s important to understand how to navigate your competing priorities so you can make progress toward your bigger financial goals the right way.
Okay, let’s do this. Should you prioritize saving for a dream vacation, investing for a comfortable retirement, or chipping away at those student loans? The quick & dirty answer is, you should do it all. But bad debt comes first.
Pay off bad debt first
We shoot it straight around here, so let’s start with bad debt. It’s called bad debt for a reason.
Bad debt is any debt that has more than a 6-8% interest rate. Think credit cards, personal loans, sometimes even private student loans.
Side note: if you’re dealing with a heap of credit card debt AND you’re making six figures, it’s time to take a good hard look in the mirror. You may be dealing with Lifestyle Creep. If you make six figures but don’t feel like you have any extra money to work with, chances are you are living a lifestyle you can’t afford.
If your debt is over 6-8%, you’re going to want to tackle it before you start investing. The reason is because while a properly diversified investment portfolio can and will return at least 6-8% over the long run, you’ll simply lose those gains to the interest you're paying on your debts. Like it or not, it’s best to pay off bad debt before you start investing.
Our advice: tackle it relentlessly. And kind of like going to the gym, you may not look forward to it but once you’re back home on your couch, you’re happy you did it.
Balancing good debt and investing
Good debt, such as a mortgage or federal student loans, typically has lower interest rates and may be tax-deductible. It's generally considered acceptable to carry some good debt while also investing, as long as you're making consistent progress on both fronts.
Prioritize maxing out any retirement contributions that offer an employer match (free money). Then, assuming you have an Emergency Fund with 3 months of essential expenses in place, you should start investing additional funds in a well-diversified portfolio.
Each month you should aim to carve out 20-30% of your income for paying down debt and your investment portfolio, with at least half of that going towards your debts. The goal is to automate debt repayment and wealth-building to ensure progress on both fronts. Don’t leave it up to chance.
Investing once your debt is behind you
Once your debts are zeroed out, you have a golden opportunity to accelerate your wealth-building journey. You can also upgrade your lifestyle! Here’s why we say that. For most 30-somethings, 20% of your paycheck going towards your saving and investing goals is typically the right amount.
So while you’ll need to live a little lean while you’re paying down debt, as soon as it’s paid off, you can divert that dollar amount directly to your lifestyle or to fast-track progress towards your investing goals.
So where should that 20% go? Again, prioritize taking full advantage of any employer match offered through your company-sponsored retirement plan.
With the remaining funds, it’s time to start thinking about your larger financial goals. Maybe you want to put money aside for a wedding, a big trip or buying a house someday. Remember, for any goals coming up in the next 2-3 years, you want to keep that money sitting in cash (NOT invested), and preferably in a High-Yield Savings Account.
For goals 3+ years out, investing is the name of the game. But, investing is a long-term strategy. Don't get discouraged by short-term market fluctuations–they are a normal part of the process. Stay focused on your goals and ignore the noise (and news!)
The Bottom Line
Imagine the possibilities once you're debt-free: more money for travel, a down payment on a dream home, or early retirement. It all starts with a plan. Tackle that bad debt, automate your finances, and watch your wealth grow.
Remember, time is on your side, but the sooner you start, the better. Take control of your finances today and unlock the financial freedom you deserve.
Key Takeaways
Prioritize paying off high-interest debt before investing.
Balance investing for the future with enjoying your present lifestyle.
Automate savings and investments to ensure consistent progress.
The F. Word
Ready for some real talk on how to master your money? Pull up a chair and pour yourself a glass.
Financial Planning For 30-Somethings
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