It’s no secret that debt can be a pain. It can hold you back from living the life you want to live and put a major damper on your entire financial situation. I’ve been on an aggressive debt payoff journey for almost two years now and I’d like to say it gets easier after a while but you have to be very motivated.
One thing I’ve been slow to get started on due to my debt is investing. Last week, I discussed crucial financial moves you need to make in your 20s and investing is one of the important ones. We all want to retire some day and build wealth, so getting started with investing is one of the best ways to do it.
I used to think I could never become a millionaire but then I heard about compound interest. If you start investing at 20 years old and want to retire in your 50s, you can very well retire a millionaire thanks to interest compounding on your consistent contributions.
But enough talk about why investing is important. Today, I want to talk to you about your investing options while you are in debt. Some people advise against investing while in debt while other people prioritize it over their debt payments because there’s no better time than the present to get started.
I’m never going to tell you which one is more important or which one you should prioritize because it’s not my style to tell people what they should do with their money. I can only provide you with the options, tools, and resources to make your own educated decision.
With that being said, here are some options for investing even if you still have debt.
Contributing to your 401(k) is one of the easiest ways to invest. A 401(k) is an employer-sponsored retirement plan that might be a part of your benefits package. The great thing about a 401(k) is that it allows you to contribute funds as taxes are taken out of your check, so you never really see the money leave your account to begin with.
Most 401(k) plans allow contributions to be made pre-tax meaning you’ll have to pay taxes on the money when you withdraw it. What I love about 401(k) plans is that some employers will match your contributions so it’s basically like getting free money. As an example, if you contribute up to 3 percent of your income to your 401(k), your company would match your contribution by adding 3 percent of their own so you’ll have 6 percent of your income saved up for retirement.
I’ve personally never had the privilege of being offered a 401(k) plan through my employer but my husband has and I was sure to have him check to see if his company provided a match. When we found out they did, it was a no brainier that he would contribute to his 401(k) despite having student loans and other debt.
Contribution limits change every year but for 2016, you can contribute up to $18,000 annually if you are under 50 and $24,000 if you are over 50. In 2017, those limits are expected to stay the same.
If you end up switching jobs, don’t forget to roll over your 401(k) contributions. DON’T attempt to withdraw the money.
Individual Retirement Funds
For people who don’t have a 401(k) plan as an option but still want to invest, an individual retirement account like a traditional IRA or Roth IRA is the next best thing. The main difference between a traditional IRA and a Roth IRA is the way your contributions are taxed. With a traditional IRA, contributions are taxed when you withdraw the money and with a Roth IRA, contributions are taxed before when you deposit them into your account so when it’s time to withdraw the money, you don’t have to pay any taxes.
Since tax rates have been known to inflate over the years, it may sound better to pay your taxes upfront so you don’t have to worry about higher taxes when you retire. With a traditional IRA, you have to start making at least the minimum distributions by age 70 1/2 but with a Roth IRA, the money can continue to grow tax-free in your account throughout your lifetime.
In 2016, traditional IRA and Roth IRA annual contributions limits are $5,500 or $6,500 if you are over the age of 50. While there are no income limits for contributing to a traditional IRA, you must earn less than $132,000 annually if you are single or $194,000 if you are married in order to contribute to a Roth IRA.
What I like about IRAs is that you get 15 months to make contributions that count for the calendar year instead of 12 so I will definitely start maxing out my Roth IRA next year. Another thing I like about both of these options is that after 5 years of making contributions, you can withdraw up to $10,000 penalty-free to cover first-time home buyer expenses.
The SEP IRA gets its own category because it is a type of traditional IRA for self-employed individuals or business owners. Since I’m a full-time freelancer now, this type of plan has piqued my interest.
With a SEP IRA, contributions are tax deductible and taxed upon withdrawal just like with a traditional IRA. You can contribute up to $53,000 annually or 25% of your income to a SEP IRA (whichever is less). Unlike with a Roth IRA, there isn’t a strict cap as to how much you can earn in order to contribute.
Other Investing Options
Let’s say you want to explore your other investing options but you don’t have a lot of money to start with. If you’re in the process of paying off your debt, it’s understandable that most of your disposable income is going toward paying it down each month.
However, if you have really low-interest debt, and can spare $100+ per month, you can start building your nest egg immediately.
Betterment- Betterment is my favorite because they do all the heavy lifting for you. When you sign up for an account, you’ll fill out a brief survey about your investing goals and set up recurring deposits from a checking or savings account of at least $100 per month. Betterment then distributes your funds into ETFs based on your portfolio allocation whether it’s stocks, bonds, or both. You can even open a Roth IRA with Betterment which was perfect for me because my current employer doesn’t offer any retirement benefits.
If you choose to sign up for Betterment and start investing, be sure to use my referral link which will give you 6 months free. Normally, Betterment takes a 0.25% fee annually which is small, but with my link, you’ll be able to allow your investments to grow more with half of your first year fee free.
Loyal3- Loyal3 is an online broker that allows you to buy and sell stocks for free. Normally, brokerages charge you up to $10 to buy or sell a stock. Loyal3 currently offers a select amount of stocks including big name companies and are constantly adding to the list so more and more opportunities will be available further down the road. The minimum investment you can contribute is $10.
Mutual Funds- Mutual funds are made up from a pool of funds collected from many different investors. Money managers operate the funds and invest them in an attempt to produce capital gains and income for the group of investors. Charles Schwab offers dozens of different mutual funds all requiring a minimum investment of around $100 once you open an account. Fidelity Investments mutual funds are also around the same price.
Getting Started Is Easier Than You Think
As you can see, it’s not difficult to get started with investing whether you have debt or not. You don’t have to start out by maxing out your retirement accounts if you can’t afford it right now but if you can contribute around $100 per month or contribute up to your 401(k) match, you’ll be off to a great start and won’t miss out on these precious years for investing that you’ll never get back.
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Have you considered investing while you’re in debt? There’s no right or wrong answer. Why or why not?
My Favorite Resources
LendEdu – Free online marketplace for student loan refinancing. Shop around for better student loan rates without hurting your credit
Betterment – This is where I keep my Roth IRA. Betterment is my favorite investing tool because they do all the heavy lifting for you which is so helpful especially if you’re completely new to investing and have no idea what you’re doing.
Pay Down My Debt – If you hate paying interest on your debt, you’ll love this service. It helps you make frequent automatic payments to reduce your debt balance faster so you can pay less interest overall
CapitalOne 360 – My favorite high-yield online savings account. Earn $25 when you open an account.
Stop Worrying About Money and Regain Control
Ready to regain control of your money? Take the first step with this free starter pack which includes:
- 2 Monthly Bill Calendar templates
- 1 'Start Paying Off Your Debt' Checklist
- 1 'Drastically Cut Your Expenses' Checklist