If you’re a tech employee, you’re part of an ever-evolving landscape. As your career evolves with the industry, you may find yourself having to face critical financial decisions.
More specifically, if you’re in debt but are doing well in your career, you may wonder if you should prioritize debt repayment or investing your money. Here, we’ll explore the pros and cons of both options to help you determine the best option for you.
Understanding The Importance Of Financial Goals
We must touch on financial goals before getting into the pros and cons. This is because your financial goals are the guiding light for the decisions you make along the way.
You should have both short and long-term financial goals that you’re well acquainted with, are actively working towards, and ideally, have been discussed with a financial professional.
Short-term goals are typically your goals from now up through the next few years. These goals will look different for everyone but may include creating an emergency fund, putting money towards credit card debt, or obtaining a promotion or higher paying job.
Long-term financial goals include saving for a large purchase such as a car or a house, paying off a large chunk of debt such as school loans, or saving money for retirement.
By clarifying your financial goals and objectives, you can act in a way that aligns with them and work towards the financial future you envision for yourself.
Evaluating The Impact Of Debt On Financial Health
When it comes to debt, it’s not uncommon to have it or several types of it. The average American debt (per U.S. adult) is $58,604. This debt can come from student loans, credit card spending, auto loans, and beyond.
Of course, just because debt is typical doesn’t mean it should be accepted or shrugged off. Carrying high levels of debt can harm financial health on several levels.
For starters, it can result in the wrong mindset regarding spending, such as a “buy now, think later” mentality that only results in you getting further into a sandpit. Bad habits like these can stick with you if you’re not careful.
Perhaps most devastatingly, debt isn’t a one-time problem- with high-interest rates, it simply accrues more and more. Have you ever found yourself struggling to keep up with credit card payments? The companies that set the interest rates know what they’re doing, and it’s challenging to keep up with such payments if you’re not diligent.
Additionally, debt can land you in bad standing. Whether it’s your credit score or your relationships, a stressful element of debt puts you “behind” and can have a ripple effect on your finances and life.
But it’s not all doom and gloom. Debt payment is best done by being intentional and consistent with a plan. For example, you might use the debt snowball method, where you pay off your debts from smallest to greatest, using the money you’ve knocked out on each debt to pay larger payments towards the next, more significant debts on your list.
Or you may consolidate your debts. This process takes your high-interest debt, like credit card balances, and rolls them into one monthly payment, ideally at a lower interest rate. This can allow you to pay off debts faster.
In general, when it comes to paying off debts, you’ll also want to adhere to a written and stricter budget until you’re back in good standing. Find ways to use your money towards debt repayment, such as previous luxuries for several months and putting the funds towards your repayment. This sacrifice now will pay off later.
The Case For Prioritizing Debt Repayment
Now, let’s talk about paying off debt versus investing.
If you choose debt repayment over investing, you’ll likely find more peace of mind and reduced financial stress. These aspects don’t come with a price tag, so you’ll have to decide how much you value them.
By paying off your debts, you are taking the reins on your finances, allowing you to be in a better long-term situation. Not only that, but you’ll save in the long run by avoiding more and more interest payments stacking up as the years go by.
As we mentioned, many Americans are in debt, but you can develop discipline and habits that will serve you for a lifetime if you can repay and stay out of debt.
The Case For Investing While In Debt
This doesn’t necessarily mean you can’t invest while you’re in debt. A general rule you could use is if you can earn more interest on your money by investing it than your debts are costing you, then investing makes sense.
You must also thoroughly understand the investments you’re making, the good and the bad. One potentially good aspect of an investment is if it earns compound interest, meaning the interest on the investment itself gains interest. This way, your money will continue to add up, and it can be a wise investment decision.
Lastly, when it comes to investing, there is significant potential regarding the growth of your investments over time. If you start with a tiny seed now (even if you’re currently in debt), this can lead to a massive reward in the future, which you can use to better your financial situation and maximize your money.
Balancing Debt Repayment And Investing
It comes down to assessing your financial situation holistically and deciding what is best for you.
If you run the numbers and find that potential, once-in-a-lifetime investment will benefit you more in the long run than paying off all your debt right now, it may be worth it to take the risk. Or perhaps you simply can’t feel at ease in your financial situation until you have certain debts completely paid off. Then you know this is the right choice for you.
Ideally, you can do both. As we’ve mentioned, being in the tech industry can mean being in a position ripe for investments and possibly having the money to make them for the first time. You also need to be wise about your debt and consistently seek to be financially better than you were previously. You can do two things that will help you in this way.
A Bright Future
Debt can come with a lot of fear and shame. By creating a solid plan, sticking with it, and working with a professional, you can eliminate debt and become the “you” with the financial health and security you dream of.
For those in the tech world, taking a realistic look at your financial situation and making informed decisions is a powerful way to avoid financial missteps. The first is to create a financial plan. Teaming up with a financial advisor can help you to create a plan that includes a cash flow plan, savings goals, investing plan, and debt repayment strategy. Your advisor can help partner with you to make a game plan to pay down your debt, invest in alignment with your goals and values, and work toward a brighter future.