U.S. Markets closed

Why student loans shouldn't keep you from investing

Alyssa Pry
Personal Finance Reporter

If you’re dealing with a mountain of student loan debt, the last thing you might be thinking about investing. But Erin Lowry, author of “Broke Millennial’s Takes on Investing,” says you should always have your other financial goals in mind.

“If you put the rest of your goals on hold, it can really limit your opportunities for your money to be growing and compounding,” Lowry says.

The earlier you start investing, especially if you’re putting money into a retirement account like a 401(k) or Roth IRA, the longer you have for your money to benefit from compound interest, which is crucial for a young investor, Lowry says.

“The worst case scenario to me is if you get into your fifties and you've done nothing to prepare for retirement, because that means probably three decades have gone by where you didn't take advantage of compound interest,” Lowry says.

If you want to start investing, she says the first step is to make sure your finances are in order: make sure your loan payments are current, you have an emergency fund set up, and you have a list of financial goals in mind.

“Your goals actually dictate everything about how you're choosing your investments,” Lowry says. “Be sure to write those down early.”

Then, you can decide how you want to invest your funds. A good place to start is through your employer-offered 401(k) plan—you should contribute enough to maximize your employer match, typically 3.5%. If that seems too daunting, start small and work your way up, Lowry says.

“I would recommend starting small—1%,” she says. “Then every six months try to increase it by another [percentage point] until you reach your goal. It's a slow way to reach your goal while not putting so much pain on your month to month budget.”

Build up your retirement savings gradually to start investing, Lowry recommends.

Once you have your retirement savings in place, you can start to explore other options, like mutual funds or ETFs. But you need to know your student loan’s interest rates to see if it’s a worthy investment: Lowry says a typical annual return on the stock market is 7%, but experts she spoke to recommend 5% as the magic number.

“If your [student loan] interest rate is above 5%, it just makes more sense for you to put extra money towards paying off your student loans,” she says. “If it’s under 5%, maybe you balance in investing while also paying off your loans.”

Whatever you decide, getting your loan balance to zero and your retirement savings started should be priority, Lowry urges.

“If you're trying to decide between paying off student loans, investing for retirement, and just investing on the side for other goals, I would nix investing on the side first,” she says. “It's easier to come back to taxable investing in the future, but right now your priority really should be getting rid of that student loan debt, and making sure you're preparing for your future self with a retirement plan as well.”

At the end of the day, your ability and desire to start investing comes down to your risk tolerance, Lowry says.

“It's perfectly fine if you just cannot stomach the idea of investing while paying off debt,” Lowry says. “What works this year might not be what works next year. So it is important to be checking back in, evaluating your goals, and how you're allocating your money.”

WATCH MORE

5 tips to take your investing to the next level

4 steps to getting over your fear of investing

5 ways women can become confident investors