Going into debt is easy. You sign on a line, receive funds, and spend what you’re given. There is rarely any fanfare involved in this everyday process, and if there is, it usually starts off as celebratory.
Take, for instance, what happens when you make good on a student loan and graduate, or sign a car loan and get behind the wheel of a new ride. Those big purchases often involve walking across a stage or smiling at the shiny, gaudy addition of an oversized bow. Even getting a credit card can be exhilarating. All of the sudden, almost anything can be obtained with a swipe and a signature.
But most Americans know what comes after that initial elation. In early 2018, the Federal Reserve reported that Americans owe $1.5 trillion in student loans, followed by $1.1 trillion in car loans and $977 billion in credit card debt. What feels exciting and even commonplace at first can soon turn into a life-changing burden — the reason why many young adults have decided to put off homeownership, marriage, and children. It’s also part of the reason why only a third of Americans can last just a few months on their current retirement savings, and why investing can seem like a luxury that’s far out of reach.
Nevertheless, investing should still be a part of every adult’s financial plan. It may be harder to do than going into debt, but it’s ultimately worth it.
“At Stash, we don’t believe debt and investing are mutually exclusive, especially when it comes to ‘good’ debt, like student loans,” Priya Malani, founding partner at Stash Wealth, a financial planning firm for high earning millennials, says. “You can and should do both.”
There are two key reasons why Malani says that it’s a good idea to invest with debt, even if it can initially feel like taking one step forward and two steps back.
“In order to hit some of your mid and long-term financial goals, you need to get your money working harder for you than it is by sitting in a checking or savings account,” she says. “And investing takes time. The sooner you start, the more successful you’ll be. Every dollar you invest in your 20s grows to about $16 in retirement. Every dollar you invest in your 30s grows to about $8 in retirement. This point isn’t meant to scare you, it’s just to say that it sucks to have to play catch up.”
It’s common to feel scared, and probably even overwhelmed, reading her explanation. You have debt, you need to invest, and you should get started—probably yesterday. What are you supposed to do with that? Well, let’s back up and talk more about debt. It’s not something to take lightly, even if it’s easy to take on.
“Remember, debt just means you’re using someone else’s money to pay for something, like school or a car,” Malani says. “And any time you borrow money from someone else, there’s gonna be a price to pay. That price, in case of debt, is called interest.”
When discussing the details of debt —or, perhaps, to find a silver lining in the resulting stress— it’s common to break debt down into “good” and “bad” categories. Malani describes so-called “good” debt as borrowed money that will help someone “with a value equal to or more than the total price they pay, including interest.” It’s a description that’s often given to student loans, since students believe that their degrees will provide more earning potential over the course of their careers than if they didn’t have one, she says. Credit card debt, on the other hand, is often considered “bad” debt because of its higher interest rates.
If you have bad debt, then you know that a dollar can only go so far. Malani suggests paying it off as your first priority by creating and sticking to a budget that looks like this, with some tweaking depending on your individual needs. “Twenty percent should go toward paying down debt,” she says. “Ten percent should go to saving and investing. And 70 percent should go to life—bills, rent, mortgage, brunch, and so on.”
On the other hand, if you have good debt, then Malani suggests this scheme. “If you have good debt, use the 20/10 split discussed above,” she notes. “As soon as your good debt is paid off, you can graduate to an 80/20 split: 20 percent of your income should go to saving and investing and 80 percent can go to life.”
Now let’s move on to investing. Obviously, you’ll need to do your research, since investing has come a long way from simply “buying stock.” The first and important step in starting to invest is establishing goals for what you want your investments to do.
“Wall Street loves to tell you what to invest in before knowing what you’re investing for, which leads to investing for the sake of investing,” Malani says. “Your investing decisions should be driven by your goals.”
Lastly, and this is a big one, don’t think of investing as being risky with your money.
“If people think investing is risky, it’s probably because they don’t understand the difference between investing and gambling,” she continues. “People think that if they are buying bitcoin, they are investing. Nope. Buying bitcoin is gambling.”
When done right, and regularly, investing can provide the bright future that debt often overshadows. That’s why it’s a habit that you should start as soon as possible, Malani says.
“Investing isn’t just about retirement,” she says. “It’s also a way for your money to grow so you can be on track for all the other goals you have, like buying a home, taking exotic vacations, upgrading your lifestyle, and starting a business.”