Chocolate or vanilla? Cake or ice cream? Beach or mountains? Either/or questions might have their place when it comes to icebreakers or dating profiles, but they have also become incredibly pervasive in personal finance. Pay down debt or invest? Grow your income or cut expenses? Donate time or donate money? Focus on little leaks or big holes in budgets? There’s a place for either/or questions, but personal finance probably isn’t it. Here’s why:
Life Doesn’t Happen in a Vacuum
Thought exercises are great ways to practice mental gymnastics, but very rarely does life unfold the same ways someone’s thoughts do on paper. Even if your brainstorming looks less like a line and more like a swirl, life is arguably more chaotic simply because of the sheer number of variables and extenuating circumstances. Never mind the fact that no one has still managed to manifest that giant pause button that so many of us long for. No matter how much the research shows that multitasking might actually rob us of our best work, very rarely does life allow us to truly only deal with one issue at a time. As a result, this either/or mentality often doesn’t apply.
Both is Best
Let’s look at some of the most common personal finance conundrums. Should I invest in my retirement or pay down my debt? It’s a question that I ask myself a lot. Pillars of the debt-free community will argue passionately about riding yourself of debt as fast as you can, not only to free yourself from interest and to make a guaranteed return but for the serious psychological and emotional benefits. Other people will argue that investing for retirement makes the most sense mathematically because of the power of time in the market (hello, compounding!). Realistically, neither option is ideal. If you only invest, you’re getting dinged with interest for the life of the loan. If you only pay down your debt, you are missing out on years or possibly even decades of time that your money could be working for you. Both is best.
Then there’s the whole idea of growing the gap. Financial success is simple on paper. Spend less than you earn and invest the rest. The bigger the gap, the bigger the financial freedom. The question is how do you grow the gap? Do you reduce your expenses or grow your income? Frugality is amazing, especially once we actually figure out what it is. But frugality isn’t everything. Not even close, no matter what the headline fodder tells you. The fact of the matter is you can only cut so much without also compromising your happiness and health. So then the answer must be to grow your income, right? That works, but it is a gradual process. There are no overnight successes. So here’s another instance where it makes a lot more sense to cut your expenses while you work on landing a raise or growing your side hustle.
Not convinced? Let’s peek at another perennial favorite of personal finance. Do you donate time or money? Because you do donate, right? Volunteering your time is so beneficial because it allows charities, schools, or other community organization the manpower that they need to accomplish tasks. Plus, volunteers can witness the impact of their time firsthand. Warm fuzzies for everyone! Still, if everyone opts to only give their time, how do these organizations keep the lights on? The cost of overhead and resources can only be paid with cold, hard cash. So what is best to give? Both.
The same holds true for budgets. While no one will ever be able to convince me that the latte factor isn’t real (just ask my closet!), I can very much admit that holes in my budget also wreak havoc. Passing on thousand dollar handbags and pricey cell phone plans is just as important as saying no to clearance shoes. Cultivating free hobbies (dare I say real hobbies) is just an important as dodging insidious little expenses for me personally. While we could spend all day arguing one side or the other, the bottom line is big-ticket expenses and small mindless transactions are both problematic. The best budgets keep an eye on them both.
One is Still Better Than None
So why the fascination with either/or? Aside from the fact that they help make the personal finance world feel a little bit more like Hogwarts (50 points for Gryffindor! 100 points for Mortgage Payoffs!), there are more legitimate reasons why these either/or questions are asked.
No matter how much of the 10x scalability Koolaid you’ve consumed, at any given moment, you have a finite amount of time and money. As a result, you have to decide what gets the biggest bang for your buck when it comes to actual bucks and mental resources. Don’t have extra money to spare? Donating your time matters! Working a job where raises just aren’t on the table (teachers, I see you!)? You had better work on cutting your expenses. Can’t come up with any income to invest because of your sky-high credit card interest? Pay down those totals.
It’s very true that doing one thing is hugely significant, especially in a world where the vast majority of people seem content to not just carry debt, but to continue to saddle themselves with more money problems. Still, I would push back hard at the notion that financial decisions have to be either or all of the time. By embracing both at least some of the time, we might make more money progress than we imagine.
So Tell Me…Is there a particular issue where you find yourself firmly on one side or can you see both as best when it comes to money matters?
When decision making is hard and we want to punt on it– because we have difficulty assessing future risks or whatever– doing both things is a reasonable strategy. It’s diversified and safe, but we should probably be aware in choosing the “both” option we’re often choosing something non-optimal for the sake of not making a decision on what is the best use of our limited resources.
Maybe. But I don’t think it’s always indecision or lack of certainty. I think it’s the fact that we can prioritize, but we can’t pause. I suppose where I’d push back on that pretty hard is when it comes to debt payoff versus investing. An alarming (or what is alarming to me) number of people are making comments like, “I’ll save for retirement after I payoff my debt.” Whoa, buddy. That’s time in the market you’ll never get back. Our compromise for this is to max out our Roths and pay extra toward our mortgage; once our Roths are maxed, then we push even more toward our mortgage. That’s not to say that my “both” is perfect, but I do think it’s better than missing out in a situation where time is such a factor.
Yeah, we tend to think life is black and white a lot of the time, I know I am certainly guilty of that!
But I agree you should trim your expenses and grow your income, that one is a no-brainer.
Agreed on both counts!
1 is better than none
Both is great, but I always frame this up as which one is better to FOCUS on. We only have so much time, depending on your circumstance you may need to focus on debt or income.
Also a factor – which one do you get more excited about accomplishing? Despite what the math says excitement could drive more progress if you are more passionate about the goal.
Totally. Priorities and momentum matter. But just because something isn’t your focus doesn’t mean you ignore it, IMHO.
It also depends on where you are within your “timeline”. After university, all I wanted to do was pay down those student loans. My job at the time had a pension I could contribute too so I felt I was covered that way and therefore could focus on debt reduction. Now, the student loans are paid off but I have a 3 year old and safe but uninspiring job. Between these two spots I went back to school, racked up some debt, didn’t always have a job (but had an awesome boyfriend-now-husband) and haven’t built up my retirement savings to where I wish they would be.
Now it’s about catching up, watching pennies, and building the retirement nest egg (and wee one’s RESP). I don’t have time to have a side hustle, I barely have time to donate to anything. Once she’s older though, and I figure out if I want to/what I want to do as a side hustle, then maybe it will be time to enlarge the spread.
Moral of story: there might be one side that is better for you right now, but that will change depending on how your life changes.
You are so right, Joy! Being flexible with our thinking and our planning is so important. I am terrible at that. I’m far too type A for my own good. The idea of rerouting used to be very troubling to me. Now I realize that it’s probably the only way to get ahead!
I believe that if you have a dilemma where you have to pay off student loans, credit card debt and want to contribute to your retirement account, you can do all that but you have to plan it out on how to want to distribute them. This also means cutting back on your expenses like you alluded to so you have more to pay off debt/loans and contribute to your retirement.
If you have a priority to pay off a loan/debt first, go ahead and do that but don’t completely forget about your other debts and contributions.
Totally! That’s exactly where I am. My debt bothers me emotionally and psychologically, but I know that I will never get time back on our Roths. So, we maxed it out with our refunds. Now, everything that we would normally put toward our Roths each month can go to our debt (mortgage)!
The first thing I thought of was that little girl in the El Paso commercials (??) and she’s like…”why not both?!” then everyone’s stunned to silence at the brilliance then it’s cuts away to people throwing her a party. I hope you’ve seen that one or else I’m coming off looney. Why can’t people see both?!
Why not both is my default. I began investing while I still had CC debt. Seeing how quickly investments can grow is far more powerful than reading about it for years. Folks should seek out balance and what helps them sleep at night. It’ll be different for everyone, and that’s okay.
I agree with you. It’s possible to have the best of both worlds as long as you work hard enough. There’s no reason why you have to sacrifice one for the other.