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Investing vs. Paying Off Debt: Millennial Edition

Investing vs. Paying Off Debt: Millennial Edition

If you're in your early 20s, and graduated college within the last few years, you're probably filled with a lot of optimism about your future, looking forward to starting your career, and are generally excited about your new independence. But with this independence comes responsibility, because you'll also have some decisions to make. Some of the biggest financial questions you'll have to answer concern paying off student loans and starting to save for all of your life events to come.

The upside to your situation is that you have a college degree, and hopefully a decent job in your field of study. A potential issue, however, could be the fact that you have upwards of $30,000 (or more) worth of student loans you need to pay.

Although these loans financed your education, helping to propel you on your career track, it doesn't take away from the fact that they are still loans that need to be paid back, and at a time when you may not be making all that much. So how do you approach the question of shedding debt while building investments, when your income may be spread a bit thin?

Considerations. All graduates will face different situations with regards to how much they owe, not only in terms of student loans, but debt on other items as well. Your situation is a unique one in terms of debt and financial goals, so there isn't a one-size-fits-all approach that will work. Since you really need to invest and pay off debt, it's not an either-or question. That said, here are some things to think about before formulating a post-graduate financial plan.

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Interest rates. While some federal student loans may have low, manageable interest rates, other loans do not. That's why it's important to figure out what the interest rates for all of your loans look like. Do you have multiple loans with varying rates? Or did you recently consolidate to a moderate-to-low rate?

If you have rates that are on the higher side, more than 6 percent for example, it may not be a bad idea to try to pay these off first. The reason is that what you'd owe on a higher percentage may be equal, if not more than what you could get in terms of a return from an investment.

But if the rates are lower, paying off the minimum on student loans and investing the rest could let you build your investments, and give you a tax advantage. Although your student loans take longer to pay off with this strategy, interest from them may be tax-deductible, which is a big benefit come April 15.

And lastly, be careful with loan consolidation. It may be tempting to take all of your loans and consolidate them, thus lowering your overall monthly payment and locking in a lower fixed interest rate. But in this case, chances are the terms of your loan were extended significantly. This will increase the amount of payments you'll have, and cause you to owe much more in interest over the years.

What to put your money in. What investment vehicle would appeal to you? Remember, the greater the return potential, the greater the risk you take on. Would the risk needed to make an investment outweigh the benefit of the interest you'd make? If you want to invest in stocks, the return may be greater than your student loan interest rate at times, but this volatility may not make it as smart of a decision, since these returns could drop significantly at a moment's notice.

A certificate of deposit would give you greater stability, but the potential for return will not be as great. This really depends on your level of comfort. How much are you willing to put out there? Know the difference in your student loan interest rate and the rate you could gain from your investments.

Also, if your employer offers a 401(k), are you taking advantage of the company match? If not, while it may be a struggle at times, it's almost imperative you're investing enough to at least get the full match. Compounding interest from this "free money" can greatly outweigh the amount saved if you took the same money and paid off your student loans earlier.

How much are you making? In some cases, starting-level salaries may not allow for extra funds to be allocated for investing after paying the minimum on student loan payments. If this is the case for you, be sure you understand what's coming in and what's going out for not only student loans, but all of your expenses. Sometimes spending can be restructured so you can use that "found money" to invest or pay off other high-interest loans.

For example, if you're going to put that concert ticket or long weekend away on a credit card, how much are they actually going to cost after interest is added before you can pay it off? These are hard decisions to make, but the more you can realistically see what things cost and where you can save, the better financial shape you'll be in later.

Hopefully these considerations have given you some ideas on what to look for and how to structure some of your preliminary savings strategies. If you still need help getting started though, it's never a bad idea to talk to a financial planner. You'll be able to get the help you need, while at the same time maintaining that newfound independence.

Securities offered through SII Investments, Inc. (SII), Member FINRA, SIPC. Advisory Services offered through Scarborough Capital Management (SCM), a Registered Investment Advisor. SII & SCM are separate companies. Neither SII nor SCM provide tax or legal advice.

Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.

Greg Ostrowski is a certified financial planner practitioner at Scarborough Capital Management , who helps clients with financial planning and investment management strategies. He says that helping investors stick to their plan and making adjustments based on long-term goals rather than reacting to the market, will result in stronger portfolios. Ostrowski lives in Annapolis, Maryland.



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