Should I Invest Money Or Pay Off 0% Loan

Photo to accompany opinion piece from Bernadette Joy.

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Never stop investing for retirement, even if you have debt. If you stop, you will lose time and compound interest.

I heard this advice from my father, my rich uncle, my financial advisor, and every mainstream financial expert throughout my entire adult life. But no one was able to answer my follow-up question:

"How can I invest when I have so much debt I feel like I can't afford to live right now?"

Their response was always "Well, you still need to do both."

I don't know about you, but I can only handle so much.

Four years ago, my husband and I had good jobs, a nice home, cars, cash savings, and we did exactly what everyone told us to do. We diligently contributed up to the employer match for our 401(k)s when our employers offered them.

But even though we were doing everything "right," we were faced with a harsh reality: we owed more than we owned.

An enormous amount of debt made me feel overwhelmed and stressed. Honestly, I felt hopeless. Investing felt like a very low priority.

So we made a move that horrified everyone around us. We started doing exactly the opposite of their advice: We paused our retirement investing to pay down debt.

Four years later, we managed to pay off all of our debt — including our home — and are investing more than ever before. We're on track to surpass our goals and our financial advisor's projections with a joint net worth of $1 million before I turn 40 (five years from now).

Big Picture

I've always struggled with generic financial advice, because personal finance is exactly that — very personal. I've learned through talking about money with hundreds of people that no two situations are ever the same. Though I certainly don't prescribe this strategy to everyone, here's why (and how) pausing investing and paying down debt worked for us.

Turning Debt from a Long-Term Lifestyle into a Short-Term Problem

Years ago, I had come to accept that debt was just a way of life. Even my husband said, "What's the big deal, everyone we know has debt!" But the more I thought about it, the more I couldn't stomach paying off $72,000 in student loans over an entire decade. I was working a day job while growing a side business, and wanted to be able to make the side business my full-time job without student loans looming over my head.

Instead, I resolved that we could — and would — pay off our debt in two years.

Of course, this came with a trade-off. In order to meet this aggressive deadline, we made the tough choice of pausing our 401(k) investing to divert those funds towards our debt. But something interesting happened. Forgoing investing actually motivated me to pay off the debt even faster. I didn't want to lose out on what everyone told me I would be missing.

My husband and I surpassed even our own expectations, paying off $72,000 in less than one year instead of two. This accomplishment encouraged me to stay debt free, and intent on exhausting all other options before taking on debt ever again.

I Learned to Measure Wealth by Net Worth, Not Just Assets

Here's the simple truth I learned by paying off debt: You can have plenty of money in investments, yet still be broke. I know this because we had six figures' worth of cash and investments, but we had even more than that in liabilities.

Focusing on our debt forced me to stop creating new debt. I stopped buying depreciating items like cars and clothes. I started paying more attention to my overall net worth, not just money in the bank.

Chasing the thrill of closing down accounts, I began to focus on earning more money, too—and diversifying my income streams. I rented a room in my house, I started charging for previously free advice on resumes, I sold junk from my garage. My husband and I even became extras for TV and movies, a fun way to make new friends while earning money, too.

After the student loans were paid, we turned our attention to our mortgage balance of $57,000 on a rental property. Paying this down felt less painful because we were so used to throwing money at the black hole of student loans. Putting money toward extra mortgage payments not only caused debt to go down, but the equity to go up — and therefore our whole net worth to go up, too. That felt so much more exciting and made me hungry to find other ways to invest in assets, rather than buying more stuff I didn't need.

Hustling to Pay Off Debt Gave Me Confidence to Invest in Myself

Even though I paused my retirement investing, I still felt like I was investing in my future, albeit in a different way.

My debt-free journey inspired me to learn different ways to make money beyond traditional investing. When I paid off my student loans, no longer having to make monthly payments gave me freedom and courage to quit a job at a company that didn't value me. I turned my side hustle—a local dress rental business—into my full-time job. I also carried the great money-managing skills I built from paying off debt to run that business debt-free, which is rare for a brick-and-mortar retail business.

Now I Can Take More Risks — And Ride Out Challenging Times

At the beginning of 2020, I started my second business, a financial education company based on large speaking engagements and workshops. Cut to three months later, and the pandemic completely derailed my plans.

Still, I managed to keep trucking with my new business, even with no income and no guarantee of success. I could only do this because I didn't have student loans, car payments, credit cards or a mortgage.

When we had debt, it cost $5,000 a month to run our household. After paying off debt, that number shrunk to less than $1,500 a month to cover basic necessities. I'm grateful we can still make ends meet and haven't had to take out any loans.

Six months into the pandemic, many people are pausing investing or even withdrawing from their retirement plans because they have no other option. Because we had taken care of our debt years ago, my husband and I are still able to contribute fully into our retirement accounts. Paying off debt and then saving also helped us increase our emergency fund from three months to almost a full year.

All told, not having debt gave me the freedom to continue building my business without worrying about bills as much as before.

Even Counting Lost Investment Time, We're Still Ahead

Let's go back to the argument about losing time and compounding interest.

Before debt freedom, we invested $6,000 annually ($500 monthly) into a 401(k) to make the company match. It was all we felt we could afford. Confession time: We even withdrew from our 401(k) once before we had healthy money habits, and it seemed a lower priority to invest in something so far away when we had immediate expenses to face, a situation so many people are now facing.

Assuming we continued on this path, starting from $0 at a 7% return, that plan would produce a $584,726 return after 30 years (before taxes and inflation). Even accounting for a full company match every year, which we no longer have after switching jobs, that habit would have produced $1,169,453. Seems pretty good, right?

Consider this alternative. Pretend that AJ and I played out every financial advisor's worst nightmare and stopped investing until we paid off all $300,000 of debt.

But let's say we have an aggressive four-year plan to tackle debt, and when we're finished, we have new discipline and excitement to max out all retirement accounts, rather than dutifully putting away the minimum we could afford.

Let's assume the same conditions as before, except we only have 26 years to compound. But now we're able to contribute $31,500 a year (from a 401(k) with no match and two IRAs). Invested annually, we would end up with $2,231,867.

That's not including the value of our paid-off home, a business that replaced my corporate job with several streams of income and, most importantly, my sanity (which my husband will tell you is priceless). None of that would exist without first becoming debt-free.

4 Things You Need to Know About This Approach

I recognize that we are an extreme case, but I learned things I hope can benefit you, even if you can't pay off all your debt or pay it off as quickly. The advice to "always be investing" is well-meaning, but it can often ignore how much debt distracts us from becoming long-term, intentional investors. It also normalizes accepting debt as a perpetual part of life, when it doesn't have to be.

Even I underestimated how becoming debt-free can build the mental fortitude and discipline to become a better long-term investor, much like how running a mile at a time prepares you to run a marathon.

However, before you throw your retirement account to the wind to tackle debt, here are a few crucial pieces of advice, based on my own experience:

Only pause investing if you are committed to a debt payoff plan for a finite period of time. This only worked for us because we paid off debt faster than most people would believe, and we stuck it out. If you can't pay off all your debt, try starting with the most stressful or pressing debt, like high-interest credit cards.
Get organized on your plan before you pause investing. Streamline your accounts, automate where you can, get on a monthly budget, and build your plan before you stop your investing. And again, have a final goal for when you'll be debt-free.

Approach investing with the same urgency you brought to paying down debt. You won't build wealth paying off debt alone, especially if you revert back to the spending habits that created the debt in the first place. Once you're done paying down debt, continue that habit and apply it towards investing instead.
Make investing meaningful to you. While retirement plans are the right place to start, I became even more motivated to invest when I diversified beyond traditional means to include real estate, my small business, my community, and myself. These things excite me even more because they make investing not only about money, but about purpose. After paying off debt, learn all the ways you can invest beyond the traditional advice that are personal and rewarding for you.

Bottom Line

I learned a lot about myself and my priorities, personally and financially, with an aggressive debt payoff plan, a clear end goal, and optimism to see it through. I'm happy that paying off debt was a short chapter in my life, instead of the whole book. If you're struggling to pay off debt and invest at the same time, it's worth reexamining your plan to find an approach that fits your own life story.