We’ve already said that time is money, but let’s talk for a minute about the time value of money.
Einstein once said that the most powerful force in the universe is compound interest. Invest money, earn interest on that money, and then let it ride. That way, you earn interest on top of interest.
Let’s talk for a minute about those student loans. How much do they actually cost?
In contrast, let’s say that an 18 year old fresh out of high school goes to work right away and sets aside ten percent of her income in an IRA or a 401k right from the beginning.
Explain 401k put in 6% to get 3% match, that’s 9% but no taxes. Then earn interest on that money. Comes out of your paycheck without you ever seeing it so you never miss it. Even if you had good intentions of using that money to pay off your mortgage, probably not a good idea unless you truly intend to live in your house forever; otherwise, the additional principle you pay won’t lower your monthly payment, so there’s no need to pay down your mortgage quickly. It won’t create financial freedom because that payment won’t go away. On the other hand, if you have very high interest credit card debt, it’s possible that foregoing the 401k contribution and paying it off may be a better idea, but let’s do the math. The other thing to consider is whether the credit card balance will actually stay at $0 after you’ve paid it off. If not, if you’re not disciplined enough, then you may end up with a lot of debt and no savings – the worst of both worlds.