Should You Invest in the Stock Market or Pay Off Student Loans 2020?
Understand the Trade-Offs of Investing and Student Loans
You Just Graduated College, Now What?
You have just graduated from college with student loans and a job. You learn a little about the stock market and realize the power of compound interest. The question is should you invest in the stock market or pay off your student loans or both at the same time?
The short answer is, it depends.
The long answer, well, continue reading to find out.
But First, Monthly Minimum Payments
Every month you have to pay a monthly minimum payment for your loan just like any bill you have to pay. You DO want to pay these every month to avoid penalties like high-interest rates or lowering your credit score.
Emergency Money
Before deciding to pay off more than the minimum off your student loans or invest in the stock market I suggest saving 3–6 months' worth of money and putting it toward an emergency fund. After all, you never know what will happen in life. Perhaps your car breaks down, an unexpected hospital visit? Either way, it is better to be safe than sorry.
The Loan Rule of Thumb
The rule of thumb is that if your student loans are under 6% then you COULD invest in the market with less risk. While if your student loans are over 6% then you should most definitely NOT invest in the stock market.
Why 6%? Well on average you can expect a long-term return of about 7% on your investments if you invest in the S&P 500. What does this mean for you? This means the gains in the stock market COULD outweigh the losses from your loan interest, resulting in a net gain, overall.
“The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent” — Warren Buffet
Paying Off Your Loans First Is Never A Bad Idea
To the untrained eye, the stock market is a guessing game. Even to experienced stock traders, the market is unpredictable. It would be less risky to pay off student loans with 7% interest rather than gamble on the stock market to try and make a rate of return higher than 7%.
“Whatever interest rate you have — it might be a student loan with a 7 percent interest rate — if you pay off that loan, you’re making 7 percent. That’s your immediate return, which is a lot safer than trying to pick a stock or trying to pick real estate, or whatever it may be,” — Mark Cuban
My Two Different Strategies
Method 1: Start by eliminating debt using the Debt Avalanche Method. Simply put, the debt avalanche method is where you pay off the minimum loan payments first, then put in extra money toward the high-interest loans.
After you pay off a few of those high-interest loans your average interest-rate will go down. Once the interest rate is lower than 6% I recommend putting a small amount of money into an index fund such as the S&P 500 to learn how the market works and grows.
Method 2: This method only works if you have good credit and can qualify for loan consolidation. Third-party companies such as Sofi can consolidate all of your loans and give you a lower interest rate than what you are already paying.
With a lower interest rate, like method 1, put in a small amount of money into an index fund to learn more about the market.
Economic Uncertainty (COVID-19)
In times of economic uncertainty such as COVID-19 where the market has been on a roller coaster ride. It may be advantageous to save up during the crisis. Supplies could be limited and more emergencies are prone to happen. We have already experienced toilet paper struggle in our local grocery stores.
At the same time, if you already have extra money saved up, you may be able to invest in the stock markets at a low entry point because many businesses will struggle and have to adapt to the current conditions of the economy or in this case the COVID-19 virus. If you invest now, and COVID-19 is no more, the economy will continue to grow and your investments during the pandemic will continue to grow as well.
Remember that most student loans and be deferred or postponed for a couple of months. Please double-check this with your loan provider about this. However, during this time you can save some money for emergencies and invest some money leftover into the stock market.
Invest at your own risk
When starting to invest. It isn’t the amount of money you put in, it’s the consistency of investing. This is how your money will compound into more.
These are all just recommendations based on historical data, entrepreneurs’ experiences, and personal experience. Please take caution when investing your money.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
