If you’ve found yourself with a healthy bank account balance or a little extra cash lately, you’re probably trying to decide how it should best be spent. Besides completely blowing your funds on a soft-top sports car or betting it all on black, investing your money or paying down debt are two of the more sensible options to consider.
But, how do you know if you should invest or pay down debt first?
The answer is not exactly straightforward and differs widely from person to person. To make the best decision for you and your finances, we recommend you speak with a financial advisor or planner. Vexxit can match you with a suitable professional who fits your needs and can help you reach your investment goals. Find your perfect professional match today.
Let’s look at a few of the big considering factors when deciding to invest your money or pay down debt first.
Look at the rates
Look closely at the rates for either option. If the rate of return on your investment is guaranteed to be higher than what you’d save from the interest payments on your debt, perhaps investing is your best option. However, if the ROI is not guaranteed or is much less, it might be more worthwhile to pay down your debt first.
As mentioned above, interest rates are important to consider. As the interest rates of credit card debt and certain loans can be quite high, it’s usually in your best interest (no pun intended) to pay them down as quickly as possible. However, taking on certain types of debt, like mortgages and other investments is not a bad thing, and are necessary for building equity. Here, the interest can also be tax deductible.
Look at your lifestyle
Your lifestyle may ultimately decide whether you choose to invest your money or pay off debt first. Investing your money can be a long game, in which you might not see much of a return for two, five or even 10 years. It requires a little patience and a whole lot of time on your side. Will your lifestyle allow it?
Some investments require minimum net worths and high initial investments. Can you afford to invest this way? Do you have a cash cushion of at least six months’ expenses?
You might not be a skilled or practiced investor, but the psychological benefit to starting an investment account can be a powerful one. Greater confidence, having more control over your finances, and a better understanding of investment portfolios, markets and shares are all important skills that come with investing.
On the other hand, paying off debt might be the best choice for you if the interest rates are subject to change without warning, like with a credit card, and you find yourself living paycheque to paycheque, only able to pay off the minimum amount owing. It’s important to get yourself out of this less-than-ideal financial situation as soon as possible, and worry about investing later.