If you're a professor at a relatively early stage of your career, you likely have worked very hard on your own educational goals and have chosen to turn your passion for education into a career. You likely have accumulated some debt thus far. And you may also have started saving some money toward your future goals.
Debt and savings may seem to be at odds with each other, so which of these items should you prioritize and put your money towards? Let’s look at a few things you should consider as a professor. (For related reading, see: Professors: Stop Drowning in Student Loans.)
Advantages of Paying Down Debt
- Less stress and worry. For many, debts are thought of as the very worst of the four-letter words. Some people have a tolerance toward debt, while others can’t sleep at night when they have any debt at all. It’s important that you take into consideration how your financial decisions affect how you feel.
- You free up cash flow. When you pay off debts, you then have increased cash flow that can be allocated to other things. Maybe you’d like to start investing more, traveling, or saving for a new home. Paying off debts can give you more flexibility with your cash flow.
- Ability to better handle a crisis. Life sometimes comes at us from all angles. If you were to lose a job, become disabled, or have to care for a loved one, having less personal debt can make handling these crises more doable. You can cut back on many of your expenses, but personal debts are usually not negotiable. Getting debt off of the books can allow you to better handle unforeseen crises.
- Interest savings. Paying off debts quickly can save you from paying interest. Interest on many debts (especially credit cards) are very high and can be hard to pay off over time if you stick to the minimum payments. Paying above and beyond the minimums can save you from paying hundreds—even thousands—in interest.
Advantages to Investing
- Tax advantages. If you contribute to your 403(b) plan or an IRA, you are doing so tax-deferred. You are lowering your taxable income by directing your money toward retirement savings. Whereas if you pay down debt, you are doing so with after-tax money.
- Market gains. If you invest in the markets, you have a chance to grow your retirement savings exponentially with compounding interest. Since 1929, the S&P 500 has had an average annual return of over 11%.
- Future flexibility. Saving a substantial nest egg can give you more flexibility in the future. If you can retire comfortably, you have more freedom to enjoy your passions. Saving while you're younger can drastically impact your future account values.
- Tax flexibility. If you invest in a Roth option in your 403(b) or a Roth IRA, your account is tax-exempt in future years. Hypothetically, if you invested $100,000 over the years and 30 years from now that account was worth $500,000, that money would be tax-free after age 59.5. (For related reading, see: Top 3 Secrets to Financial Planning.)
How to Prioritize
Great question … it depends! It depends on your phase of life, your risk tolerance, and types of debt among other considerations. If you have high-interest credit card debt, make it a priority to eliminate that debt as soon as possible. This is the worst kind of debt. Unlike mortgages and student loan debt which allow you to deduct interest, credit cards just bleed your cash flow. If you only have small debts or a mortgage with a great interest rate, you should prioritize investing aggressively. If your company offers a retirement plan match, you should make sure to get that match no matter what. This is too good of an option to pass up.
Often, a happy medium is the best option. Paying off debt and investing do not have to be mutually exclusive. Work to establish and prioritize your goals so that you have a plan in place. This plan will never be set in stone; it changes when your family dynamic or your career changes. Sound financial planning will always evolve as you do. It’s important to review your goals and progress to make changes as necessary. The number one thing to do is to get started now—any progress is better than no progress.
The financial planning industry revolves around numbers. It would be easy for me to meet with any clients and base recommendations off of the numbers involved and it would seem like a very simple, easy decision. However, it’s not always that simple. You are not a number. It’s important to base decisions on how you feel and what you are comfortable with. Your dealings with your financial planner should take into consideration not only your goals but also the emotional impact of all financial decisions. (For related reading, see: Paying Down Debt Vs. Investing.)