Ask a Trainer: Should I still be saving and investing if I have debt?

This is a question we get a lot.

Sometimes people have consumer or student loan debt, and they feel guilty saving and investing, or think it’s irresponsible to put money away while they still have credit card bills to pay. Sometimes they’ve read a lot about the student loan debt crisis, and they're scared that it’s going to be a death sentence if they don’t put every penny into paying it off. Sometimes the loudest of the anti-debt financial gurus get into their heads with the mistaken idea that having debt is immoral, and that they don’t deserve to save and invest until they are 100% debt free.

That’s not true, and in fact, it’s often the first myth we dispel when we start working with clients.

Don’t get me wrong. Debt can really suck. It sucks to pay 20% interest on purchases you made months or years ago. It sucks to pay back student loans for a college education, especially when we know that student loan debt can be crippling, many of us signed onto it before we really understood how they even work, and they are bound to impact low income and POC communities disproportionately. It also complicates working towards longer term goals and creating a secure financial foundation. We are well aware.

But debt, in some form, is a fact of life for most people. Higher education is exorbitantly expensive in the US and the cost of attending college is increasing way faster than wages are. If we aren’t born into situations where we have the advantage of generational wealth, we often enter adulthood without a safety net that protects us from going into debt to cover education or emergencies. Even those who are fortunate enough to have avoided these things obsess about credit scores so that they can get good rates on loans when it comes time to buy a house or make other large purchases. 

Hell, some of us even made mistakes and wound up buying things we couldn’t really afford, and that’s ok, too. 

That is all to say that being in debt does not have to mean living in shame and it doesn’t mean you shouldn’t have a financial safety net. Our economic system is predicated on debt, and most of us will have some at some point in our lives. 

When a client walks through the (literal or metaphorical) door of The Financial Gym, the first thing that we work on is establishing an emergency fund that can cover 3-6 months of their expenses. I tell my clients that getting 1 month of their expenses saved is a 911-level emergency, and that they should do whatever they can to get there, whether it’s working over time, eating lentils, or walking their neighbor’s terrible yappy dog. 

The journey to 3 months of expenses is still a sprint, but at least your hair isn’t on fire. Still, it should be prioritized, and takes precedence over paying down credit cards faster, tackling student loan debt, or investing (with the possible exception of contributing enough to a 401k to get an employer match). Once those 2 pieces are in place, you can start to work on eliminating debt and building your investments, even at the same time.

Again, just in case I wasn’t clear, it’s not only not wrong to save if you have debt, it’s the right thing to do.

Just think of this very real life example, from the debacle of the year that was 2020, when huge numbers of people lost what seemed to be very secure jobs. Imagine you had put every extra penny towards paying off student loans, and sacrificed saving for an emergency fund. March rolls around, and you don’t have student loans, but you also don’t have a job. Without an emergency fund, the next 18 months (or longer) may have proven very difficult for you. Alternately, if you’d had a solid 3-6 month emergency fund, you’d have a cushion to protect you, AND you’d have a forbearance on your student loans. The COVID-19 crisis proved (once again, and on a large scale) that this system works. I can’t count the number of emails we got from clients thanking us for insisting they start their financial journey with some solid savings.

Savings is an insurance policy against future debt. Once you hit that 3 month mark, you can steady your pace on your way to your 6 month target. That means you can reduce your savings amount and make larger payments on credit cards if that is your goal. If you want to invest more aggressively for retirement, that’s an option, too. In many cases, if your interest rates are low enough, we actually recommend saving for retirement before paying off your low interest debt to avoid opportunity costs and you’ll come out with more money in the end than if you’d waited to invest until you were debt free.