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Should you prioritize paying for college or maxing out your Roth IRA? In this highlight, Bo and Brian share advice on how they would approach this situation.
For more information on this subject, check out this highlight clip called, “Roth IRA vs. HSA: Which One Should You Prioritize?”
Kevin has a question for us. He says he’s 19 and in college and has enough money to either pay for his school or max out his Roth. However, he feels trapped because he is unsure what to do. In response, we’d like to have a dialogue back and forth with Kevin because we need more information before we can provide an answer.
Firstly, we ask Kevin about who will pay for his school if he doesn’t pay for it himself. Is this something that involves taking out student loan debt? In our opinion, we don’t recommend incurring student loans if he can avoid it. We believe that starting college without any debt will be a significant advantage to him. Debt is a constraint and an encumbrance that keeps you from having the flexibility to make decisions.
We think Kevin has the most valuable resource on his side, which is time. Even at 19, he can already take advantage of the power of compounding. One dollar can be really powerful for a 19-year-old, but it’s still really powerful for a 20 or 21-year-old. We advise Kevin to avoid accumulating student loan debt if he can and to start his career debt-free. That way, he can hit the ground running when he gets his first job.
On the other hand, a lot of people, when they are in college or have savings, want to fund their Roth. We think that is an excellent strategy, as Roth IRAs are great emergency piggy banks. If worse comes to worst, Kevin could get his basis or contributions back without taxes and penalties. However, we wouldn’t encourage Kevin to fund his Roth in lieu of accumulating student loan debt.
Maximization-wise, it’s probably better to fund a Roth IRA, especially in a bear market where valuations are compressed. But from a behavioral perspective, there is a risk because we’ve seen so many young people trapped in student loan debt. Debt is a constraint and an encumbrance that keeps you from having the flexibility to make decisions.
We agree with Kevin that the mathematics of dealing with finances is incredible, but we also think that there’s a behavioral side to it. Building the habit of being debt-free is crucial. It helps you respect the tool of debt and ensures that you don’t justify other exceptions to the rule later on. We think that being regimented and disciplined is one of the key recipe ingredients for building wealth.
In conclusion, we advise Kevin to focus on being debt-free as he starts his career. We also suggest that he focuses on a major that will have great earning potential once he graduates.
For more information on what you should do with your next dollar, check out our Financial Order of Operations course.
