Is it Smarter to Pay off Your Debt or Invest? - Frugal Living Mom (2024)
by jlpenner2 Comments
This 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 toPay 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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A less aggressive investment mix, meaning one with a lower allocation to stocks, may be expected to result in slightly lower returns (on average) over the long run. And with slightly lower expected returns on investing, paying down debt comes out ahead even at slightly lower interest rates.
Paying off debt can feel like it has to be your only financial priority. But you should do some saving while you're paying down debt. Even a small cushion of emergency savings can keep you from going deeper into debt when an unexpected expense pops up.
Using a savings account and an emergency fund for short-term expenses is important, but investing for retirement and the future is arguably just as crucial. While it may feel pointless to start investing if you don't have much money, it can still be incredibly worthwhile.
Millionaires typically balance both paying off debt and investing, but with a strategic approach. Their decision often depends on the interest rate of the debt versus the expected return on investments.
Reasons why companies might elect to use debt rather than equity financing include: A loan does not provide an ownership stake and, so, does not cause dilution to the owners' equity position in the business. Debt can be a less expensive source of growth capital if the Company is growing at a high rate.
If you have any credit card debt, that debt will increase at a higher rate, and become more expensive over time. Avoid that extra expense by taking steps to pay down any credit card debt you might have and paying off your balance each month if you can.
While money parked in savings can be used to pay credit card bills, it should only be a last resort if the bill would otherwise go unpaid. It's ideal to keep savings for emergencies or future goals.
If you have a balance on your credit card, you might have the option to pay it off in full or carry it from month to month. Most of the time, paying off your credit card in full is the best approach.
Paying off all your debt, however, doesn't always make sense. It depends on the type of debt you have, interest rates offered, investment returns, your age and, ultimately, what your bigger financial goals are.
The truth is that most investors won't have the money to generate $1,000 per month in dividends; not at first, anyway. Even if you find a market-beating series of investments that average 3% annual yield, you would still need $400,000 in up-front capital to hit your targets. And that's okay.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Investing just $100 a month can actually do a whole lot to help you grow rich over time. In fact, the table below shows how much your $100 monthly investment could turn into over time, assuming you earn a 10% average annual return. If you invest $100 a month for this many years...
“Shark Tank” investor Kevin O'Leary has said the ideal age to be debt-free is 45, especially if you want to retire by age 60. Being debt-free — including paying off your mortgage — by your mid-40s puts you on the early path toward success, O'Leary argued.
The people who have all the money often go by unnoticed, dressing well, but without flash, driving used cars and living in the first house they bought in a modest neighbourhood. The authors called them the quiet millionaires. They often work in, or own, unglamourous businesses that spin off steady streams of cash.
Which is better debt fund or equity fund? The choice between debt and equity funds depends on individual investment goals, risk tolerance, and time horizon. Equity funds offer higher potential returns but come with higher risk, while debt funds are safer but offer lower returns.
If you have low-interest rate loans and expect higher returns on the investments in your 401(k), it may be a good strategy to contribute to your 401(k) while chipping away at your debt—making sure to prioritize paying off high-interest rate debt.
SHORT ANSWER: All else being equal, companies want the cheapest possible financing. Since Debt is almost always cheaper than Equity, Debt is almost always the answer.
Introduction: My name is Dr. Pierre Goyette, I am a enchanting, powerful, jolly, rich, graceful, colorful, zany person who loves writing and wants to share my knowledge and understanding with you.
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