Invest or Pay down my debt

If I choose to jump on the debt, this is how I'll do it.  A ridiculous avalanche off of half dome.  That's right Sallie Mae, I'm going to dump your body off half dome in the middle of winter!

I’m not sure if you’ve noticed this about me through my writing but I tend to think a lot, sometimes too much.  This blog is limited to personal finance mostly but still, you’ve probably noticed that I go back and forth on concepts and ideas, wavering on the execution and which strategy is best for which time.  Which brings me to my current dilemma: should I be investing my money or putting every extra penny into paying down my debt?

I go back and forth on this all the time.  I’m already paying extra into my debt to knock it back but still, I feel like I could do more.  I look at the $750 a month I spend there and literally drool at the investments and returns I could be making.  I already put away $400 a month outside of my 401k, so if I was able to put aside $1150 a month?  Now we’re talking.  At the same time though, I enjoy putting money into my investments.  Watching my $400 a month grow into something is exciting and gives me hope that I just might be doing something right with my money!

When I look at how my net worth has changed over the past year, what I see is that my debt has just slowly, moderately decreased, while my investments in my 401K and Vanguard account have led a massive charge forward.  Since I started tracking my net worth like a crazy person, in January of 2012, my debt has decreased by only a total of $7,900 while my investments have risen by $12,500.  There is a huge disparity here and while I’m not going to say I dislike it (I do like having more money as opposed to less), I tend to think about the road not traveled.

The thing is, my investments massively outperformed the interest I paid on my stocks.  Since January 2012, my investments have paid a return of over 22%, outpacing the weighted average of 5.25% of my debts (not taking into account the tax deduction for student interest).  I can look at those two numbers alone and know that my money is being put to better use by investing it.  The bigger question now is, now that I have enough savings to feel safe in case something truly awful happens, should I just do it?  Should I just go for it, cut my 401k and my investing and just knock away my debt?

I’m honestly not sure about this.  On the one hand, I hate debt.  I truly loathe it!  It’s one of the only things that can keep me up at night and I don’t even have that much of it!!  I hope I never have a mortgage, otherwise I’ll never sleep.

If I choose to jump on the debt, this is how I'll do it.  A ridiculous avalanche off of half dome.  That's right Sallie Mae, I'm going to dump your body off half dome in the middle of winter!

If I choose to jump on the debt, this is how I’ll do it. A ridiculous avalanche off of half dome. That’s right Sallie Mae, I’m going to dump your body off half dome in the middle of winter!

On the other hand, I love watching my investment account grow.  I love having money as opposed to giving it away.  In the end, I’m almost positive that I will take stashing money into a Vanguard account over paying off my debts any day.  The more quickly that account grows, the quicker my net worth heads towards positive and the less I will worry about my debt just hiding off to the side, slightly out of view.

Opinions here are appreciated.  What do people think?  I know a great deal of people choose murdering debt while others would rather build up their cash stash.  Let’s hear it, what road should I take?

 

Photo courtesy of somewheregladlybeyond

Retirement planning in your twenties and thirties

I was roaming Investopedia today and I came across a great series of articles related to retirement planning in your thirties.  Not wanting to be left out of the party, I decided to take a look and read it.  As with most of the articles and series on the site, it was well written, well structured, and had a lot of great ideas in it.    In general, a lot of the ideas can be taken to someone in their twenties and applied with ease.  Or even if you’re, you know, actually near retirement.  I mean, the important thing is that you’re trying, right?

Needless to say, the key points were awesome.  I’d really like to highlight three of them off the bat:

1. Increasing your Savings Rate

We’ve talked about this before and the methods you can employ.  You can save more of each raise or you can cut out things in your life that are too expensive or have inexpensive substitutes.  The biggest thing is to Save More.  Whether this is through reducing your taxable income by contributing to a 401k and a regular IRA or but putting 50% of every raise into your Roth IRA and your Taxable investment account, savings is key.  If you keep saving at a low rate from when you’re young, you’ll never get there.  Granted, you’ll have a huge leg up on the guy that doesn’t start saving until he’s 40 but if the savings aren’t growing, you’re not going to have an easy retirement.  Rule of thumb: save 10% of your income.  Once you do that, start increasing it until you can eventually save 25% or even 30%.  Some people (Financial Samurai, I’m looking at you!) have been able to save 50% or more of their taxable income.  While that’s amazing, it is also not for everyone.  Remember, this is a process.  Baby steps folks, baby steps.

2.  Managing your Investments

If you’re going to read any bit of the series on Investopedia, read this.  This is fantastic.  It breaks down many of the financial instruments you can invest in for your retirement, the different risks involved, and gets a bit into asset allocation by age.  Basically, you shouldn’t have the same asset allocation at 25 as you do at 40.  You also shouldn’t have the same asset allocation at 40 as you do at 65.  It’s a constantly changing and balancing thing and what it all comes down to is one thing: you.  Are you able to accept risk?  Can you tolerate short run losses or will you get fidgeting watching 40% of your portfolio disappear?  If you want to have a strong retirement or even an early one, you have to active in managing your investments and choosing the best items to give you a good future.

3.  Minimize withdrawals

One of the worst things you can do is take money out of your retirement accounts years or decades before you retire.  The time value of money and compounding interest is hugely powerful device and taking out a portion of your nest egg to buy that jet ski will set you back.  If it’s to buy your first home, something you’ll live in for twenty years, I can understand that.  That makes sense!  But for a car or a vacation, it’s just not worth the loss.  The less you take your money out of the retirement accounts, the more money you’ll have once retirement actually arrives.

Investopedia consistently has great series on investing and retirement and this was no different.  I strongly suggest that you all go check this out and make sure you’re following at least some of the advice given in the article.  You won’t regret it, I promise!