Investing While In Debt: How 2 Women Are Winning The Money Game

Should you invest or pay off debt illustration
Illustration: The Money Manual

If you ask any expert, the prime time to invest is in your twenties — the younger you start, the better off you’ll be. Unfortunately, a lot of people put it off until later in life. The main reasons? Income limitations and debt.

According to The Balance, as of july 2021, the total U.S. consumer debt is $4.33 trillion. I repeat, $4.33 trillion.

The debt crisis is especially dire for millennials who carry the highest loan debt average than any other age demographic (we can thank the ludicrous cost of higher education for most of that). Additionally, with low-paying entry-level jobs, the cost of living and healthcare going up with each passing year, plus the uneven economic repercussions brought on by the COVID-19 pandemic — it’s no surprise that many millennials aren’t making investing a priority.

Yes, debt can be a roadblock to starting to invest early, but building wealth through investing is still very much possible. Like many things in life, it’s all about finding a balance. But the first step is figuring out if investing makes sense with your current financial situation.

Should You Pay Off Debt Before Starting To Invest?

Depending on who you ask, you’ll get a different answer on whether you should pay off debt before you start investing. The best way to figure out if investing while you’re working to pay off debt is the right choice is to evaluate your debt because after all, not all debt is equal. Things to consider: income, debt payment amounts, overall debt balance, debt type, and debt interest rates — which plays the biggest factor in how long you stay in debt.

The most common debt Americans carry are mortgages and home equity lines of credit (HELOC), student loans, car loans, personal loans, and lastly, credit cards, which have the highest interest rate of all unsecured debt types with APRs ranging between 13 to 24% and interest that often compounds daily. Because of this, many financial experts like investing guru Warren Buffet recommend paying off credit cards as soon as possible.

During the 2020 Berkshire Hathaway annual shareholders meeting, Buffet said a friend of his came to him asking what to do with some extra money she happened to come into. He said he asked her if she had any credit card debt and she confirmed that she did and it was collecting interest at a rate of 18%. His response: “If I owed any money at 18%, the first thing I’d do with any money I had would be to pay it off,” Buffett told her. “It’s going to be way better than any investment idea I’ve got.”

Of course, not all debt is so cut and dry. Student loans, mortgages and, HELOCs typically carry lower interest rates, which can make them easier to manage alongside investing.

The U.S stock market has averaged 10-year returns of 9.2% over the last 140 years, but how much any individual makes varies because their investments vary, of course. In Erin Lowery’s book Broke Millenial Takes on Investing, Ellevest Co-Founder and CEO Sallie Krawcheck said that the average return of a diversified portfolio is a robust 6%.

If you have high-interest debt that matches or surpasses the average stock market return, it may seem counterintuitive to put any money towards investing. Despite this, in an interview with CNBC Make It, Krawcheck argues that paying off debt and investing doesn’t need to be mutually exclusive and encouraged people to start investing to start forming the habit for the long term.

“There’s a conception out there: Oh, I have to have $100,000 to invest or $50,000 or $10,000. Just start where you are,” Krawcheck told CNBC Make It.

Even if you can only put 1 or 2% of your income towards investing, Krawcheck says at least that’s a start.

Federal government employee 40-year-old Nika Booth agrees. Booth’s past debt included $40,000 across 15 credit cards, $21,946 in outstanding taxes, $3,250 car loan and $133,000 in student loans, of which $20,000 was accrued interest.

There was no debt I felt I needed to pay off before investing.

“There was no debt I felt I needed to pay off before investing,” Booth told us. “I realized I needed to stop listening to non-inclusive and outdated personal finance advice. This advice said to stop contributing to retirement until after your debt is paid off and truthfully, most of us don’t have that luxury to do one thing at a time. The longer it takes for us to invest, the more money we end up needing to save for retirement and I don’t want to work that hard or that long.”

Finding A Balance: How These Two Women Were Able To Invest With 6-Figure Debt

Woman deciding if she should pay off debt or invest.
Illustration: The Money Manual

One of the easiest ways anyone can start investing is through an employee-sponsored retirement plan, like a 401(k), or an individual retirement account (IRA). You allocate a percentage of your paycheck — whatever you’re comfortable with — to automatically be taken out and put towards your retirement plan every pay period, make investment selections for your portfolio according to your risk tolerance and your money grows in the background as you go about your life. There are huge tax advantages to this approach and over time, you make adjustments as needed as you approach retirement.

This is how Booth and 34-year-old recruiter Kendall Philbrick both started their investing journeys while also paying off their six-figure debt. Both women had to make significant changes to their spending and found ways to bring in more money to make sure they could budget for both.

“I picked up a side hustle, first Instacart, then working at an indoor cycle studio. I minimized unnecessary spending and found ways to reduce my monthly bills,” said Booth. “I started to consistently plan meals and meal prep every Sunday for the entire week so that I ate more food at home. I started selling things I no longer needed or couldn’t fit on Mercari and Facebook Marketplace.”

Booth got so good at selling things on Mercari that she even wrote an E-book on the topic called From Clutter to Cash: A Step-By-Step-Guide to Selling On Mercari.

Philbrick, who graduated from the University of Maine School of Law in 2015 with $222,000 in student loan debt, also cut down on her monthly spending but was more so focused on finding a way to get a reliable increase to her annual income.

“I changed jobs and received quite a large raise — which really helped me speed up the debt pay-off process. I also started an Etsy shop, and have been able to monetize my Instagram, which has really helped as well.”

Both Booth and Philbrick’s employers offer matches for their retirement plans and they take full advantage of it.

I figured out exactly what I needed to contribute to get my [full] 401(k) match and made sure to contribute at least that amount, because — free money.

“I figured out exactly what I needed to contribute to get my [full] 401(k) match and made sure to contribute at least that amount, because–free money,” said Philbrick. “I’ve contributed about $45,000 to my 401(k) during the last 3 years while paying off debt.” Philbrick said she has seen great returns on her 401(k) over the years too.

Booth admits that though she’s been contributing to a 401(k) since she was 25, for many years she did so inconsistently.

“I had a horrible relationship with money for years, I depleted those savings when I had to cover rent or car payment.”

In 2010, Booth started regularly contributing to a thrift savings plan (TSP) and has put more than $60,000 towards it to date. She also opened a brokerage account in 2019, for which she set up direct deposit.

Over the last three years, Booth has managed to pay off $66,000 and Philbrick expects to finish paying off her debt in full next year.

Words Of Advice

Everyone’s debt pay-off and investing journey is different because everyone’s circumstances are different. What may work for someone, may not work for you, so it’s important to maintain perspective as you go about making a decision on how to handle your debt.

Booth recalled how difficult starting her debt pay-off journey was, explaining that she had tried a couple of times before finally getting serious in 2018. Since then, she said there has only been one time where she felt like giving up and it was the following year after receiving a nearly $22,000 tax bill (including interest and penalties, shortly after she had finished paying off $16,000 in credit card debt).

“It felt like a gut punch. I felt like I was starting all over because that tax bill essentially wiped out all of the credit card debt I had paid off and put me over my starting debt amount. I got depressed because of it,” Booth shared.

“But I also remembered that I gave up a lot of times before, that I would start and stop this journey for lesser things and still get nowhere. But having paid off that much credit card debt I proved to myself that I could do it and so I treated the tax debt like it was just one other hurdle to get over and to date, it’s been paid in full and now I’m onto my last credit card.”

Philbrick expressed a similar feeling of hopelessness about her debt initially. Of the $220,000 she owed, $30,000 was accrued interest. For the first couple of years, her monthly payments weren’t touching her principal balance.

The sooner you begin investing, the sooner your money can go to work for your future self.

“I honestly faced my biggest challenge at the beginning of my debt-free journey. I was so overwhelmed with the sheer amount of money that I owed that I couldn’t wrap my head around it,” said Philbrick “I felt so hopeless and honestly didn’t know how I’d be able to pay it off. Once I got started though, I just kept going and it’s gotten easier and easier over time.”

Today, both Booth and Philbrick are paying forward what they’ve learned over the years by sharing tips through their respective personal finance-focused Instagram accounts Debt Free Gonna Be and Babe On A Budget.

Per Booth: “Time is going to pass no matter what you do and the sooner you begin investing, the sooner your money can go to work for your future self. Don’t think that you have to have a large amount of money or wait until you’re out of debt to invest. Start small, set a budget, invest often, and you’ll be amazed at how much your money grows and your net worth increases.”

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