Expert advice for investing and paying off debt at the same time

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  • Personal finance experts Kevin Matthews II and Mandi Woodruff-Santos have joined Insider’s Master Your Money Twitter space.
  • They discussed how to fit debt repayment and investing for the future into your budget.
  • Both experts recommend asking key questions about your financial situation before making any decisions.
  • This article is part of a series focused on Millennial Financial Empowerment called Master Your Money.

Many people feel like they have to choose between investing for the future and paying off debt now, but you can do both with smart advance planning.

At a recent Twitter Spaces event titled “How to Invest and Build Wealth When You Have Debt” – part of the Insider’s Master Your Money series, presented by Fidelity – experts Mandi Woodruff-Santos, co-host of the Brown Ambition Podcast, and Kevin Matthews II, founder of Building Bread, presented different debt management options and the best ways to start investing.

1. Calculate how much money you make per month

You need to know what your financial situation looks like before you start budgeting.

“The first step to a strong budget that gives you the ability to invest and pay off your debt is to start with how much money you actually got in and what is left,” Woodruff-Santos said at the event. “You can use this to accomplish things like paying off debt and paying yourself off so you can start investing. “

She stressed that a budget shouldn’t seem limiting or stop people from doing what they want. Instead, she encouraged people to think of a budget as a plan that allows them to do what they really enjoy.

If during your budgeting you find that you don’t have enough money left to meet your goals, consider reducing or finding additional sources of income to meet your goals instead.

Matthews proposed a structured approach to budgeting.

“Try to get as close to the 50/30/20 rule as possible,” Matthews said. “Fifty percent of your spending should be on your bills, your debts, your rent. Thirty percent is for your enjoyment – because you should be enjoying some of your money. The last 20% is for savings and investment. ”

2. Consider refinancing debt to spend more money on investments.

If you want to free up money to contribute more to your investments, you may want to consider refinancing your debt. Just be sure to weigh the pros and cons before doing so.

“It can definitely be a good idea,” Matthews said. “I want to stress ‘may’ because it’s not 100% final. There are times where it might make sense. You want to be very, very careful about what debt you decide to refinance.”

Refinancing a federal student loan could cause you to lose key protections, such as eligibility for the public service loan forgiveness program and income-tested repayment plans. However, it might be a good idea to refinance credit card debt, personal loans, and private student loans if you can get a lower rate or a shorter term to pay off your loan faster and lower its overall cost.

If you’re not sure which programs are best for your situation, call your loan officer. Also, be sure to keep track of your communication with your lender.

“You can’t completely trust your server to keep tabs on everything,” said Woodruff-Santos. “Document those conversations, make sure you know where the types of loans you have and what your balances are, and call your service agent regularly to stay in the know. “

If you change your interest rate, your monthly payments, or if you suspend payments, it will have a “ripple effect” somewhere, Matthews said. For example, with forbearance, interest will continue to accumulate, increasing your loan balance over time.

The same principle applies for investing.

“Investing now will have a ripple effect in the future,” said Matthews. “We hope this will create more wealth for you. How will not investing today affect you? “

3. Don’t overthink the best way to invest – just start

There are many ways to build wealth while paying off debt. You can take advantage of options like an automated investing app, online brokerage firm, financial or 401 (k) consulting firm and other employer sponsored plans.

While the number of choices may seem overwhelming, that doesn’t stop you from taking action.

“Don’t think about it too much. Just start,” said Woodruff-Santos. “A lot of people have access to 401 (k) through their employer. For a lot of people who work nine to five, it’s the easiest thing to do.”

To get started with your 401 (k), find out where in your employer system you can register. You may even have access to a 401 (k) match, in which your employer matches your contributions up to a certain amount – essentially free money for your retirement.

Even if you only invest in the 401 (k) of your job, you should think of yourself as an investor, Matthews said.

While starting to invest may seem daunting, Matthews said the key to investing is consistency, no matter if you start with $ 50 or $ 100 – it just adds up over time. Start somewhere and work your way up. Many people start with basic investments like index funds, which are an inexpensive and relatively low-risk way to invest in the stock market.

“You want to do what I call layup,” Matthews said. “You can shoot from half the court if you want to, and you could do well. However, go for the easy. Go for what is right in front of you.”

4. Be careful when you withdraw from retirement accounts to pay off your debts

Making withdrawals from IRAs, 401 (k), or similar employer-sponsored accounts to pay off debt is a risky proposition.

For example, if you quit your job, the money you borrowed from your 401 (k) could quickly expire, leaving you in a situation where you might feel stuck in your job. Woodruff-Santos said you need to hedge the risk of having to repay the money quickly with the benefit of not depleting any cash reserves you might need in an emergency.

“It’s extremely rare that I suggest or agree to withdraw from any investment account to pay off debt,” Matthews said.

He asked several questions you should consider before taking out a loan from your retirement account to pay off your debts:

  • What is the debt?
  • Is it something recurring?
  • Is it something that it’s a unique thing and that we’re done with it forever?
  • How much does it cost?
  • Do we have to pay this for x time?
  • Would you like to keep your job for the foreseeable future, depending on when you plan to repay the loan?
  • Are there other ways to settle this debt?

Be sure to consult a financial planner before deciding to take out retirement account loans to pay off your debts.


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