If you feel like you have too much debt to ever save for retirement

Seed sprouting

Debt reduction and wealth building are part of the same process, so you are working toward your money goals even if you don’t think you are.

I believe retirement is possible for us. But at the same time, I’m on record saying that student loans (and other debt) need to be paid off before starting to invest for retirement.

What gives, Mike? I have so much debt that I’ll never get it paid off, so I’ll never have any money for retirement! Thanks for ruining my day by reminding me of all this.

I understand that sense of despondency all too well. I spent many years believing that I’ll never get anywhere, that I’d always be poor, that I’d never get any traction. But a few years later, I paid off all my student loans, saved up an emergency fund, started investing for retirement, and bought a home. It wasn’t quick, but things changed for me over time.

So before we all give up, I invite you to re-frame the situation. Because as I’ve learned, just re-framing your situation can be the difference between a feeling of success and that of failure.

Retirement fund or emergency fund?

At a meeting of the Portland Integrative Finance Community (a discussion group I used to run in Portland, OR) I heard from someone who felt she was “failing” at saving for retirement.

The story went that she would put money away for retirement, but then some emergency would come up and she would take money out to pay for it. The account was just a money market account, so she wasn’t hit with the (upwards of 40%) fees and penalties associated with taking money out of a retirement account. But she still wasn’t getting any traction, and felt like she was failing.

But to me, this didn’t sound like a retirement account at all. This sounded like an emergency fund.

More to the point, this is exactly what an emergency fund is for. You take money out for emergencies. Then you build your fund back up again.

And I recommend getting an emergency fund in place before starting to invest for this very reason.

In short, I believe that she was 100% successful, but at an entirely other activity. Treating this fund like a retirement fund felt like a failure, but if she were to treat this fund as an emergency fund, then it is a total success.

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It’s the same outcome, but the sense of achievement is very different.

Retirement and the financial number line

Now back to those who feel like they have too much debt to ever start on retirement.

On the contrary, I believe that if you’re working to pay off your debt, you’ve already started on retirement.

Think of wealth as a continuum, like a number line. When most of us start out as adults these days, we start on one side with a negative financial net worth. This is because we start out with debt, mainly in the form of student loans, but possibly many other kinds.

Applications for graphic designer are open, by the way.
Applications for graphic designer are still open, by the way.

But as time goes on, we move from negative money to positive money. We pay off debt, and then we build wealth. We save for emergencies and invest for the future.

This is why the order of operations has to be to pay off debt before saving for retirement. You can’t walk backwards and forwards at the same time. Unless you’re Michael Jackson.

It doesn’t make sense to invest for retirement, making a positive return, at the same time as you are paying off debt, making a negative return.

(And it also doesn’t make sense to pay the minimums on your debt and take the extra money to invest in retirement. The math rarely adds up, and you will make less progress than if you focused on one thing at a time.)

You are already working on it

But remember, our wealth line is a single line, containing debt on one side and wealth on the other side.

So do you feel like you have too much debt to ever start working on your retirement?

That’s not true. Just by paying off your debt, you are already working on your retirement.

It may not feel like it at first, but it’s all part of the same process, our one single financial trajectory: moving to a greater financial net worth.

Sure, you may not have lots of money in a retirement account just now. But you’re working on it. You’re moving forward. A seed does lots of growth before it breaks the surface. Keep growing.

Just a heads up here: This is my 400th (!) post. A great thanks to everyone who has supported me in this crazy endeavor over the past few years. And we’re still just getting started!

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