What to Prioritize: Paying Off Debt or Saving?

Anytime I am able to sit down with a young adult just starting out in life, one of the first questions I am usually asked is, what should I do first, pay off my debt, or start saving? While the bigger problem is that they already have debt before asking the question, it is something that most young Americans will face. Most individuals make financial decisions in their late teens and 20s that will follow them for the next 30 years of their lives. How they answer the question above will play into how those 30 years will look and if the cycle will start all over again.

The average college student ends their college career with somewhere between $35,000 to $55,000 in student loans. Many also have credit card and auto loan debt. If they pursue advanced degrees, it compounds the debt further before they start on their chosen career path; also, many of those career paths won’t offer the income needed to manage the debt load and allow for the comfortable life they have grown accustomed to under their parent’s roofs. Young adults often forget their parents have been working for 20 to 30 years to provide the life they enjoyed growing up, but it wasn’t where they started. For students who choose not to take the college path, but rather, pursue a vocation, they still have costs and possibly debt that follow them into their career path as well. Talking with your teens and young adults about the cost and potential outlook of a career path would help on the front end of them being out on their own.

Once they are through their education and starting life on their own, a debt load eats up a lot of the income from their first job. Common advice they will receive is to pay off that debt as fast as possible. Live on beans and rice until it is paid off, and look at all the money you will free up to be able to save. The problem with this is:

  • It is hard to be disciplined enough to stick to a budget so restrictive, especially if your friends are not doing the same.
  • This is the time when most Americans are the most social (meaning a wider variety of friend groups as they narrow down the ones they will continue to live life with). It is hard to be social while not participating in events with others.
  • If you do stick to a restrictive budget, you need to stay on that restrictive budget in the future to make up for the savings you didn’t put away in those early years.

If you start saving $100 per month at age 20 and invest until age 30 and then stop, you will have more in your investment account than someone who invests at age 30, saving $100 per month in the investment and continues until retirement age because of the power of compounding interest. The 30-year-old will end up saving $31,200 more of their income than the 20-year-old but will end up with $11,459.50 less in their account than the 20-year-old. (Based on 7% annual return.) So, giving up those early years to pay down debt can hold you back later, because of the value of time and compounding interest.

So, what should be the priority? The answer is: both. Life very often is not a “this vs. that.” It is more a “this as well as that,” and we have to figure out a balance to make both work, all while doing the thousand other things life requires of us.

You need to sit down and look at what your income is and what your cost of living is. Your tithe, debt payments, utilities, retirement, and “what we like to do.” The hard part is making debt payments and savings rank higher than the “what we like to do” section of our monthly budget. Putting more weight on both paying of debt and saving will benefit you much more in the future because life happens while we are doing everything. And while it is hard now with just you alone, it becomes different when you are married and have children. Your priorities will shift through life, but having a good jump start on debt reduction/paid-off and healthy savings/investments, frees up resources for when your kids need braces, school, and sports.

Unfortunately, this isn’t easy, and a preferred method would be to avoid getting into a situation of having debt in the first place. Still, as that is not the case for most Americans, it is important to be willing to focus on priorities that will pay the greatest advantage to you in the long term—working not to be tied to your debt but allowing your investments to provide additional opportunities for you and your family in the future.