I hear stuff like this all the time: “My student loan is at such a low interest rate that it’s better for me to just pay minimum payments instead of being in a hurry to pay it off. I can invest the money I would have used to pay it off instead.”
Well, sure, you could.
But will you actually make more on your investments than you’d pay in interest over the life of the loan? For that matter, since it’s possible to lose money you invest, how do you know that you will make money at all?
An even better question is, would you really faithfully invest money you could have used to pay off your student loan? Every month, like clockwork, even if something “comes up”? Once your loan is paid, it’s paid.
Reality vs. good intentions
The truth is, hardly anyone actually does do exactly what they intended to all of the time. In any area. That’s because we’re human. We make mistakes, and life happens. We’ve got all of these good intentions, but reality doesn’t necessarily match up.
What’s more likely in the student loan vs. investing scenario: That life will go perfectly, or that you’ll end up spending some or all of the money you intended to invest on something else instead — maybe even going further into debt in the process? If the latter happens, you’ll pay thousands of dollars in interest for the privilege.
Make things match up
When it comes to debt — student loans or otherwise — it pays to examine what you’re really doing vs. what you intend to do or believe will happen. It’s not just a matter of investing vs. paying off a loan, either.
It’s a matter of making sure that your intentions match up with what you actually do. And if they don’t, it becomes a matter of facing reality and then acting based on that.
Something comes up
For example, how many times have you bought something on credit, intending to pay it off with your next check, or before the end of the month? You’ve got the best of intentions, so you don’t see any reason to wait when you can go ahead and get it now. After all, you won’t pay any interest on it because you’ll pay it off before it’s due.
But then something comes up.
Well, if something “comes up” on a regular basis, it’s probably something you should count on happening. It’s probably NOT an exception, even though you think it should be.
Rather, it’s the rule. And if it’s the rule, you should plan for it.
Sometimes the smartest thing to do is the surest and simplest thing to do.
People who are in debt need to come up with a plan and stick to it no matter what. I hear so many excuses, sometimes it’s just so sickening. Just with everything else in life, if you stick to your plans it should in most cases work out.
It is amazing what making good plans and then sticking to them can accomplish.
I agree that paying down debt should be a priority unless you are ACTUALLY making a great return elsewhere. Even while it is important to compare interest rates, there is a lot to be said about having it paid off early and giving you more freedom later in life.
Yes, it’s amazing how much more you’re able to do when your money is no longer going to debt.
Discipline is key. If you know you’re a person that falls off the wagon frequently, you’ll probably want to make larger payments that just the minimum. If you can be diligent with your payments, than go ahead and stick with the minimums for a while.
I think it depends on a combination of your goals and your personality.
Being disciplined and motivated are key to paying off debt. If you don’t have will power than you won’t be able to stick with your plan to pay it off. You can plan all you want but you need to have your emotional self in check or you won’t get anywhere.
I agree. Being disciplined does make all the difference. Even if you’re only disciplined enough to not add any new debt, you’ll eventually get the old debt paid off.
Maybe that could be a good label for a savings envelope, the “Something Always Comes Up” fund. That could be over and above a real emergency fund.
That would be a funny label :)
I bet many people have a miscellaneous fund or a slush fund that serves a similar purpose. I hate not knowing, so prefer to figure out exactly what those “unexpected” expenses are going to be. After about a year of doing that, I got most of them into my spending plan.
I agree that is depends on how disciplined you are. If the interest rate on your loan is lower than your investment return, invest. If it is the reverse, pay it off.
The important thing is to do what you actually *intend* to do (whether that’s invest, or pay off debt) instead of something else instead.
Good intentions are not enough, one always needs a dose of reality override the intentions in order to avoid surprises. There are no guarantees with investing especially if you’re looking for a significant return. Keep that in mind!
Yeah that’s definitely something to keep in mind. Paying off something like a student loan, on the other hand, can be guaranteed — because once it’s gone, it’s gone!
Jackie,
You hit the nail on the head with this post. I struggled and debated paying my student loan off early. Then I realized that I need to just pay it off. I’m not even sure why I hesitated to pay it off.
At least it was on your radar as something to do. Mine just sat there for years before it dawned on me that hey, maybe I should pay this off…
Have you gotten it completely paid off already?
Jackie, I am loving every post. Short and to the point. Simple is almost always better. Be mindful and spend less :)
Thanks, glad to hear it :)
So true – I pretended like paying off my student loans was no big deal for a while. Now I’ve paid off a huge chunk and am wondering why I didn’t figure this out much earlier. One big student loan to go…..
Isn’t that funny? Before you pay it off, it seems like such an impossibility or just something that’s not worth doing, but afterward is a different story!