With so many students graduating with significant debt, the question of paying off student loans or investing often comes up. In any financial matter, it is important to get all of the facts straight. For this exercise, you will want to know the rates (or rate if consolidated) of interest for your loans. You will also want to go to Bankrate and find out what the current interest rates for US Treasuries, savings, and money market accounts. Take a look at the rates and see if you can gain an edge on the banks by allocating money in a way that most benefits you. For some students, a simple savings account yields more than they pay on their student loans, so while this holds, paying off the student loans does not do anything but lift the mental burden of outstanding debt (and many do find value there).
For those looking to step deeper into investing, one thing that I cannot encourage more strongly is to take FULL advantage of your employer’s 401k matching plan. If they are matching up to 5% of your salary, start there and see what you can afford. Once that money stops showing up in your paycheck, you hardly miss it and it is a great way to begin investing. Too many employees do not take advantage of this.
Where financial planning gets tricky is when students and recent graduates begin taking on their own stock portfolios. If you’ve decided that you have a certain pool of money that you want to invest, as opposed to paying off student loans, you need to analyze your risk tolerance for the entire amount. For example, say that I have $1,000 – can I afford to lose it all? Do I need to have at least $900 of that left in 1 year? Then, allocate your money appropriately. For example, I may take $500 for riskier investments, $250 for less risky, and $250 for bonds or other low-risk investment. If you do not have a nice pool of money from graduation cards or other savings, it is not a bad idea to set-up an automated withdrawal from your checking into your stock trading account. Even if you are only dropping in $25 per check, the exercise is worthwhile. Remember, it is a lot easier to save money that you never see.
One thing to consider: Will investing in stocks or putting money into your 401k or IRA lead to increased credit card debt? If you need the money automatically allocated to your investments, will you be forced to ‘charge it’ more? Let’s face it, the occasional beer binge or long weekend in London, are things that will also come up – do you still have disposable income for such items? To that point, please begin by paying off all high interest rate credit cards, cutting them up, and finding a low interest card for your new professional life (rewards don’t pay!).
Don’t forget, wealth is generated in this country through wise investments. Get educated and be smart. Remember, investing only $2,000 a year for the next forty years will make you a millionaire, assuming historical returns in the stock market. Good luck!