When to Invest, When to Pay Off Debt, and When to Do Both?
If you're facing the dilemma of paying off debt or investing your money, you might also be wondering if you can come out ahead with some combination of both.
Fortunately, there is a middle ground that allows you to pay off your debt while making smart investments to increase your current income.
Sometimes, investing instead of paying off debt may even be a more cost-effective decision. If your investment yields earnings greater than the interest on your debt, your money is better spent on those higher yield investments.
Let's look at different scenarios to help you determine the most lucrative options for your own situation:
1. When investing is a better option. You may have a mortgage or student loan debt that carries with it a set monthly interest rate. Whether or not the interest from these loans is tax deductible may influence your decision to invest or pay off the debt.
* If the debt costs you less money per month than you could otherwise earn through profitable investments, then it is in your best interest to focus on investing.
2. When it's better to pay off your debt. Of the many different kinds of debt, credit card debt often carries with it some of the highest interest rates in the industry. These interest rates can now be as high as 18% to 25%, and trying to find investment options that yield such a percentage in earnings may prove difficult.
* Until you find an investment option that provides you with that percentage amount in returns, it may be in your best interest to focus exclusively on paying off the debt.
3. Investing and paying off your debt. You may now be seeing the bigger picture regarding debt and investing. In essence, it is a balance of interest rates.
* Finding a balance where you are paying off your high-interest debt while investing in stocks that also provide a high percentage in returns is ideal. The investments will be more cost-effective than paying off your low-interest debt.
If debt is like a leaking boat, the best step is always to plug the largest leak first. High interest credit card debt is by far the largest leak and should be considered a top priority.
It's also important to consider the fact that many loans can be paid in advance. Paying a loan in advance is always the best return on your capital and should be done whenever possible.
If you're still deciding on whether to pay off your debt or invest, make a list with your debt on one side, and investment options on the other side. Compare the interest rates from both sides and decide which require your attention first. Then your plan will be your most lucrative solution.
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