Invest Money or Pay off Debt First?

If you can’t tell from our blog title, we love the idea of investing money. The primary reason is that it is essential for long-term growth of building wealth. It’s often that simple. Either invest money and grow your value or don’t and just let the money sit there. It may mean it is more secure, but you will be losing the race to beat inflation. Even with a decent interest rate, you will lose more years than not.

Yet, the situation is significantly more complicated when you also have debt. Many people face this question on a regular basis. Should you pay off your debt first before investing or should you invest money and pay the minimum required payment. It may be a difficult dilemma, but there are important things to consider when making your decision. If you include these factors, your decision will be much easier.

Interest Rate – What is the interest rate for your loan? Is it a high interest rate? If the debt is consumer debt and is on a credit card, this makes a big difference than if it were a low interest rate on a car. The basic idea is to consider if you could beat this interest rate with your return on your investment. If it is small enough, you can probably beat out the interest rate. Credit card rates can be 15% or more (especially if they are reward credit cards). This kind of return is quite difficult to beat. If the interest rate is .9% on a new car loan, then you should consider investing the money that you would pay extra to pay off the loan early. If it’s somewhere in the middle, consider paying it off early because that means a guaranteed return. Investing money in the stock market is never a guarantee.

Length of Term – Is the term of the loan pretty long? Or is it short. This matters because it could keep you from investing now, thereby restricting your early retirement capabilities. For example, if you are focused on paying off your home loan before investing money, it may be another 10 years before you invest. While this will drastically increase your cash flow, you will also lose 10 years of growth in the market and the experience that you could have gained from investing for that period of time.

Desire for Larger Surplus – Many people are obsessed with their monthly cash flow. This means that they would rather have a large surplus in their money budget than have a lot of investments performing well. This can be a legitimate approach to retirment if you have assets producing income. For example, if you own several rental properties that produce a cash flow of $3,000, then your goal may be to minimize your monthly expenses to $2,500 in order to retire early. Then, you can live on that amount without having to work.

Regardless of your situation and preference, you need to make the best decision for you. The decision will only be the best decision if you decide to consider all of the facts and go from there. If you are making your decision based on your feelings toward debt or fear of investing, then it may not be the best decision.

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