In this article, Should I Invest Or Pay Off My Debt Early?, Lidia Staron informs the best times to either invest or pay off debt early and what pathway may be better suited for you. Lidia Staron has been working as a writer, editor and literary coach for 5 years. She contributes articles about the role of finance in the strategic planning and decision-making process. You can find really professional insights in her writings. We hope the below article benefits you. Thanks Lidia!
Should I Invest Or Pay Off My Debt Early?
Should you invest or pay off your debt early?
It’s a tough question really.
Suppose you have an outstanding balance of $8,000 in your credit card. You actually have the money in your bank account now to pay it off and avoid the interest rate of 10%. But then your friend made an offer to you to invest in a business with a 30% earning rate. Should you pay off your credit card or invest?
Both decisions have great benefits. Paying off your debt reduces your financial stress while investing helps grow your money. You wish you can do both at the same time. But if you have limited fund, deciding between which to prioritize can be challenging.
Thankfully, there are some factors that allow you to decide better.
Which gives you a higher return?
When deciding between investing or paying off debt, there are two things that need to be considered: the interest rate of your debt and the return you expect from your investment. This means that if you can earn more from your investments than the interest on your debt, then you should go for the former.
Verdict: If your investment has a higher return rate compared with the interest you will save from your unpaid debt, it’s a great time to invest.
Do you have high tolerance for debts?
Some people are not just comfortable letting their debt stand. Another factor you should take into account is your attitude towards debt. How comfortable are you having one? If like many people, you don’t mind being in debt for a long time, you can carry on with your investment. If you dislike being in debt, the more likely you should pay it back. Your risk tolerance really matters in making a decision. When determining your risk, there are some things that you should consider. These include your age, income, earning power, tax situation, and time horizon, among others.
Verdict: If you have low tolerance for debts, prioritize paying them off first before investing.
Do you have an emergency fund?
It’s a real challenge when you don’t have emergency fund. Anything could happen when you least expect it – sickness in the family, urgent home repair, calamity, and any other emergency. Unfortunately, if you don’t have enough money in your savings account, you might find yourself being more indebted, which could cause more stress than ever. Having a buffer gives you leeway to grow your money while not worrying about getting into more debts.
Verdict: If you don’t have an emergency fund, you should start saving and pay off your debt first.
What kinds of debt do you currently have?
The type of debts you have at the moment can help determine whether you should prioritize paying them off first before making investments. The money you borrow to purchase a home or pay for your tuition fees are good debts because they put you in a better financial status. There’s no need to put a pressure on yourself on paying them off as long as you are able to pay for the monthly installments. However, if you have short-term loans such as a cash advance, or your credit card dues, you should allocate funds for them to maintain a good credit rating and avoid penalties.
Verdict: If you’re saddled with a lot of high-interest credit-card debts, it is much better to pay them off first.
What’s your financial situation?
Your financial situation does have a bearing on your decision too. If you have multiple loans that could put your credit score at risk, it might be a smarter move to pay them off first. However, if you have enough cash cushion to grow your funds or a 4-figure portfolio, you may want to invest. Sometimes though, it’s best to do a combination of both by paying off debts with the highest interest while investing at least as much to take advantage of any matching contributions offered by your employer. And as your debt decreases, you can invest some more.
Verdict: If you’re in a good financial state, it would be less risky to invest and put your debt on hold for a while.
Paying off your debt and investing are both important financial decisions. However, determining which you should do first greatly depends on your financial circumstances. There are several factors that you must consider, such as which one gives you greater returns and puts you at a lesser financial risk. It is also important to check whether you have enough cushion to cover your current and future financial needs once you choose to invest first. By taking time to think over your financial situation, you can end up making the decision that benefits you most.