Is it Smarter to Pay off Your Debt or Invest?

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Is-it-Smarter-to-pay-off-debt-or-investThis is definitely a dilemma our family has been in the in the last couple years.  After the loss of our business and the economic recession at the same time we accumulated more debt than we should have (which we will pay off by this year, btw). While paying off this debt we had some great concerns about not being about to save and invest as we might like.  We questioned: Should our primary concern be to Pay off Debt or Invest any extra money that we have to work with?

It can be hard to determine which course of action will best benefit you at any point in time. If you receive “extra” money, like as a tax refund, inheritance or work bonus, you need to consider the most effective way to use that money with your future in mind.

Deciding whether to pay off debt or invest is a scenario that you’re likely to face many times. As our financial situations often ebb and flow. So the best decision for you will depend on your own unique financial situation.

Here are two paths to consider when  deciding to Pay off Debt or Invest:

1. Rate of return. This choice involves looking only at the numbers. Ask questions like: what’s the most profitable use of my extra money? Not all debt is created equal, so the solution isn’t always clear. Student loans, mortgages, and similar debt may have low interest rates and you could profit more by investing rather than seeking to pay these off early.

  • But credit card debt, costs you more. Credit cards typically comes with an exorbitant interest rate, making it best to pay this debt off as soon as you can. The rate of return on paying off a debt like this would often be better than investing that money.
  • Check your credit card interest rates, or interest rates on other lines of credit that may be costing you money before you decide what to do with your extra money.
  • Saving for retirement is also essential but keep in mind other options you might have available to you. Does your employer contribute matching funds to what you put into your 401(k)? Consider investing at least the amount that your employer will match in order to double your money immediately.

2. Consider your Feelings. You need to look at more than the numbers, considering your own feelings, and those of your family, too.  Ask yourself: where do you think the money would be best used? If you have a significant bonus of money, do you feel best investing it or using it to repay a large portion of your mortgage or other debt? The best answer for you will fall in line with your highest priority goals.

  • It’s important to make the decision that you’ll be happiest with, so consider all options before applying money to one or the other.  Make a list and write down the pros and cons.
  • It’s a good idea to speak with an investment professional or ask your family for advice. They may point out options you hadn’t considered. But in the end it is your personal choice.

Important! Before you begin to pay down your debt or invest, there are two important things you should consider:

  • The first is to ensure that you have an emergency fund so you won’t have to rely on credit in the future if a financial emergency occurs. Even if you have debt this is important.  Being in debt is stressful and you don’t want added stress from unexpected expenses.
  • If your company has a 401(k), begin investing in it as soon as you can, even if you cannot invest a lot at first. At the very least, invest enough to receive matching funds from your employer.  In the end this is like free money (and who wants to pass up free money!). Plus since it is automatic you won’t forget to save the money.

One thing to keep in mind that very rarely do you have to rush to a decision. Don’t let this decision add to any stress you have over paying off your debt or even worrying about investing. Make sure you take your time and make choices that will benefit you both in the short term and for your future. Ultimately, it’s up to you to decide how you want to spend your money and if you want to Pay off Debt or Invest.

And make sure to download our free personal budget worksheet  to help get you monthly budgeting under control.

Keep in mind I am not a Financial Adviser so this article is for informational purposes only.

Pay off Debt or Invest

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  1. Martin says

    There is a third option to consider. If your debt is manageable, that means you can comfortably pay more than minimums and yet still have enough left, then do both. Invest and pay the debt off. When however your debt goes over your head that you barely keep paying the minimums up then stop investing and pay the debt off. You would have no chance anyway.
    I believe you should still continue investing at least $50 a month creating reserves while paying the debt off. However, this is every ones individual decision.

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