Personal finance Q&A: Should I pay off debt or invest?
When it comes to investing, nothing is more important than when you begin, says Fritz Wood, CPA, CFP, a veterinary financial planner and owner of H.W. Wood Consulting in Lake Quivira, Kan. “Please start now!” he says.
But before you rush off to build your portfolio, consider this: When you’re paying off debt, you earn the rate you would have otherwise paid. So, for example, if you pay off an 18 percent credit card, you earn a guaranteed, risk-free 18 percent. “If you can beat that rate, call me,” Wood says.
On the other hand, federal student loans charge 6.8 percent. Can you do better than that on the market? Probably. While not risk-free or guaranteed, the U.S. stock market has clocked average annual gains of 10 percent to 12 percent over the past 84 years (starting in 1926—and including the Great Depression). “I hate to see people paying off student loans early at the exclusion of beginning their investing career,” Wood says.
So if you’re free and clear of high-interest credit card debt, Wood’s advice when it comes to investing is: Just do it. “Have a dollar amount subtracted from your paycheck every pay period to put toward your investments,” he says. “I recommend 10 to 20 percent of your take-home pay. Financial independence is worth it.”