Should You Be Investing While Paying Off Debt?

DebtAs someone who in the past lived with a high level of debt, the day I realized that I needed to pay it off, I became laser focused on doing everything in my power to become debt free.

I did what many of the personal finance experts suggest, which was to cut expenses and find ways to increase my income.  I even sold a majority of my furnishings and downsized my living environment in order to free up more money to get out of debt faster.

Several personal finance experts advocate minimizing or temporarily stopping retirement, personal savings and investment contributions altogether during a debt paydown phase.  I wasn’t convinced that this was a good idea, so I didn’t.  Here are ways I managed to continue saving and investing money in the market while paying off $55K worth of consumer debt in 3 ½ years.

Maximize the Company Match

The company I worked for gave a maximum 4% match to employees retirement funds since they didn’t offer a company pension.  By the time I started to seriously pay down debt, I was already contributing the required 4% in order to get the match.  I didn’t believe in leaving free money on the table, for any length of time, so I stuck with my 4% contributions.

If you participate in a company sponsored retirement plan, that matches a portion of your contributions, do your future self a favor by at least keeping up with the required amount in order to get the company match.

If you are making contributions that exceed the company match, it’s a personal decision whether you want to temporarily redirect that amount to your debt payments.  Take into consideration how long you estimate it will take you to pay off your debt before making any retirement contribution adjustments.

Invest Pay Increases

I was fortunate to have received merit increases during the debt payoff years. Instead of using pay increases to inflate my lifestyle or even apply them onto my debt, I decided to contribute the surplus to my retirement account.  This way, the raises would be automatically contributed to my retirement account by my employer and I wouldn’t notice the difference – except in the growing balance of my retirement account.

If you have recently received a raise but can afford to pay your expenses on your current after tax salary, you may want to consider investing the new found surplus.  When debating to investing your raise pre-tax or redirecting it to your debts, in the latter case, calculate how much you would lose to taxes and see if it’s worth it for you.

Treat Savings As An Expense

As I pared down unnecessary expenses and made the commitment to living with less yet still enjoying life, I started to treat savings as an expense category.  Once I had saved up enough money to establish a sufficient emergency account, I redirected the majority of the funds towards debt and the remainder into investments.  I viewed this method of consistent saving as one way to protect myself from getting into debt again.

Should I have applied all of the extra money towards debt payment?  Perhaps, but at that point, the interest rate on the remaining debts were lower than the rate of return that I could realistically expect by investing in the market.

You may have heard the saying “personal finance is personal”.  This is true because no two people share exactly the same financial circumstances or approach to dealing with money. Paying off debt is key to growing a positive net worth but I believe that saving and investing can and should play a role during a debt payoff phase, even if it’s a small one.