Should I Invest Or Pay Off Debt?
Have you ever put on a pair of jeans and found a $20 bill in there? Let’s say you’re lucky to stumble upon some extra cash; should you use that to invest or pay off debt?
One method has a higher risk, but a potentially higher return over the other, but the other is safer and guaranteed. Which shall it be? Ask yourself these three questions to help you decide whether you should invest or pay off debt.
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3 Questions to Decide When To Invest or Pay Off Debt
1. Forecasted Rate of Return
The only time it makes sense to invest rather than pay off any debts is when you can earn a higher return to cover for the interest charged on your debt(s).
For example: If you decide to invest in the stock market and your portfolio only earns you a total return of 3% while your personal loan is charging you 5%, then you’re better off paying off the loan from the start.
Here’s the catch,
Investing is very unpredictable and can be very volatile. You can’t predict how your investments will perform in the future, but the interest on your debt is definitely predictable. I’m no fortune teller, but I can definitely say that the 20% APR on your credit card is going to come knocking at your door.
Speaking of credit cards, these content might be useful to you!
- How to get out of credit card debt FAST!
- Credit Cards 101: Everything You Need to Know
- My current credit card that earns me 3+% cash-like rebate without any fees.
2. How Much Time Do You Have
Time is the biggest factor in any investment and, also, debt.
Don’t put all of your money in the stock market and expect to be able to pay off all your debt and retire within the same year. It takes years and years of dividends, gains, and compounding before you see any massive results.
So, what does that mean for you?
If you’re old and looking to retire soon, then definitely pay off your debt first. It’s better to retire without any debts attached to your neck.
If you’re young, you have many years ahead of you for the market to bounce back. Your room for error and tolerance for risk is not as sensitive than someone who is nearing retirement.
3. Happiness and Better Health
According to this article written in Independent, one of the top things that made couples divorced was due to financial issues.
Everyone is so caught up with the dollar figure to the point that not many people think about their personal and physical health when it comes to their personal finances.
Debt is stressful, and stress is pretty much a common feeling amongst all of us, and it’s not a good one. If this baggage is weighing down on your happiness, then deal with your debt first and worry about investing later.
Your health is #1 priority; if being in debt is causing your marriage to be broken, affecting your health, or simply because you’re not happy then take out the debt first rather than investing.
Break those chains and shackles off of you, and you can finally feel at eased and free when you get rid of that nasty debt.
Note about Credit Card Debt
Credit card debts are among one of the worst types of debts that anyone can have. Depending on your credit card, your APR can go up to as high as 20%. Earning a return equivalent to that kind of interest rate is considered spectacular when investing in the stock market.
What’s the chances of you earning a 20% return in the first year? It’s possible, but very unlikely.
You’re better off paying your credit card first before investing.
Note about Paying off Your Mortgage Early
Unlike credit cards, mortgages generally range around 4% annually. Can you earn a return higher than 4%? Definitely.
Putting your savings into an online bank like EQ Bank already gives you 2.30% guaranteed without any risks.
- STOP USING YOUR BRICK AND MORTAR BANK! Learn how you can earn more interest on your savings with NO RISK.
When it comes to mortgages, it’s not just about how much you can earn with your funds, but how much it’s worth “now”.
Due to inflation being around 1 to 3% every year, the value of your dollar decreases.So it’s actually better for you to make monthly payments towards your mortgage instead of paying it off right now.
Don’t get me wrong, there are benefits to paying off your home early like owning equity, no debt, and peace of mind, but it depends what your main goal is.
If you’re deciding whether you should invest or pay off debt then consider:
- The potential return
- The time frame
- and your overall health.
If you can tolerate risks, have many years ahead of you, and you’re perfectly healthy and happy, then you can take the chance to invest. However, if risks make you uneasy, or you don’t have much time on your hands, then take out the culprit causing your potential stress: debt.
This is just my opinion and I hope you found this helpful! Let me know what other factors you look into when deciding whether to invest or pay off debt first