Got Some Extra Cash Laying Around; Should I Invest Or Pay Off Debt?
Have you ever put on a pair of jeans or a jacket and found a surprise $20 in there? Let’s say you’re lucky to stumble upon some extra cash, or ended up with more than usual after budgeting; should you use that extra to invest in stocks or use it to pay off your debt?
Should you use this money to invest to earn a high return to cover for the interest accrued on the debt and pocket the leftover gains? Or would it be better to pay off your debt completely to avoid having any interest charged on your balance?
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? Continue reading and hopefully, this blog post will help you decide if you should invest or pay off debt!
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Learn how to pay less interest on your credit cards by understanding how it’s calculated
Think About The Rate of Return When Considering Whether To Invest Or Pay Off Debt
The first thing you need to consider when deciding whether you should invest or pay off debt is about the rate of return vs the interest rate.
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 accumulated.
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 the loan. Let’s say you earn a return of 10%; then it makes sense to invest.
Here’s the catch,
Investing is very unpredictable and can be very volatile. The return on your investments is unsure and you can never guarantee what the outcome will be, but the interest that you accrue on your debt is guaranteed. I’m no mathematician, but if you have a balance of $1000 on your credit card at an APR of 20%, you will be accruing 20% interest on top of that balance.
If you’re deciding whether to invest or to pay off debt then consider your risk tolerance. If everything goes well, your investments will provide you a greater return than the interest accumulated on your debt which will allow you to either pocket the rest or to pay off your debt faster than you anticipated.
On the other hand, if things go to shit then your investments will not cover your owed interest, and worst-case scenario you lose out on your investments entirely. This causes your debt to accrue even more interest, putting you in a position where you’re worse than before. It’s a double wammy, and not one you want to get yourself into.
Note: Always pay off your credit card balance first. Credit card rates can go up to as high as 20%, and the chances of you earning 20% on your investments is not impossible, but it is very difficult. Play it safe and don’t fall into credit card debt. Pay it off before thinking about investing.
How Much Time Do You Have When Deciding To Invest Or Pay Off Debt?
Time is the biggest factor in any investment and, also, debt. The longer you hold your investment, the greater the return with the compound effect and the Stock Market Gods on your side. The longer you hold onto your debt, the more interest you will accrue; and no, it’s not the good type of interest.
Generating a high return on any investment takes time. 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. The stock market is very unpredictable and you’re better off playing it safe. If you decide to invest, and the stock market crashes, then it’s game over for you.
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.
You should only decide to invest if you’re looking to stick with it for the long haul.
Which Will Bring You More Happiness and Better Health?
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.
According to this article written in Independent, one of the top things that worried married couples were financial issues. A good percentage of divorce was due to having money issues relating to their partner either not sticking to a budget or overspending.
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.
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.
Don’t bother trying to invest your money in the stock market to earn a higher return than your accrued interest. If your health is on the line then definitely tackle the biggest thing that is causing you to become unhealthy and unhappy. 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.
Investing? My tips to help you get started.
Should I Invest Or Pay Off Debt? Conclusion.
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.