I am by no means a finance and budgeting expert. But I do enjoy the challenge. When I was getting ready to graduate from undergrad, the financial burden of paying off debt and obligations were quickly becoming a harsh reality. Knowing I have a car payment, rent, student loans, and much more were becoming real, the question became what do I tackle first? Many people told me to pay off my student loans before anything. Others said to throw as much into investments and retirement as I can. Both of those extremes are not feasible at the same time for newly-minted college grads. And both have their tradeoffs.
Paying Off Debt First
On one hand, paying off debt first is the quickest way to financial independence. However, your opportunity to take advantage of compounding interest in investments in your early 20s disappears. The value of $1 you invest at age 22 is worth significantly more than the value of $1 you invest at age 30. You lose that by putting all your eggs in the “paying off the debt” basket.
Making Investing a Priority
On the other hand, by investing as much as you can in retirement and investment account, you might be bootstrapped to debt for potentially a long, long time. Yes, you can quickly build assets through compounding interest but it means nothing if you have debt that offsets it. Not to mention the payments you are still responsible for.
Compromising this Conundrum
Honestly, I don’t like either of those directions. It may work for some people, but, to me, neither is sustainable nor sets you up long term. Paying off your debt sets you free but kills your ability to take advantage of compounding interest in your 20s. Investing every penny you have hurts you now by extending your terms of debt repayment. Neither truly frees you. I believe you must address both but not to an extreme.
It starts with budgeting. Get out the handy dandy spreadsheet and understand what you are spending monthly on bills and investments. These can include:
- Rent
- Utilities
- Student Loan Payment
- Cay Payment
- Insurance
- Retirement
There can be much more but these are just a few examples. Write them down in the spreadsheet and net it out against your income. This will tell you how much you have leftover for savings and debt repayments. For example:
| Topic | Amount |
| Net Income (Take Home Pay) | $1,000 |
| Total Minimum Expenses and Savings) | $800 |
| Leftover Income | $200 |
This will help you understand and prioritize that income. You may have that $200 left in your bank account and without prioritizing it, you may spend it on something not necessary. By prioritizing it you can focus what your goals are while saving and paying off debt at the same time. For me, I take a part of that leftover income and put it to both retirement and debt repayment. I use other leftovers and use it to reward myself with something like dinner or concert tickets. It is important to also enjoy the fruits of your labor. Ultimately, it’s totally up to you what you want to do. Just prioritize what you want and go for it.
