Should I Invest or Pay off Debt?

WHAT YOU SHOULD KNOW

SOME ASSUMPTIONS

1. If you’re at the point, whereby you’re asking yourself whether you should invest or pay off debt, I’m going to assume you have excess cash to either pay down/pay off your debt or invest.

If you don’t have excess cash to invest then your focus should be on increasing income or lowering your expenses so that you’ll have the excess cash to either pay down your debt or invest.

2. The second assumption I’m going to make is that you are currently contributing to a retirement account of some kind. Either through one offered at work or if your employer doesn’t offer a retirement account or you’re self-employed and you’ve set up a retirement account. If you are not currently contributing to a retirement account, please make sure to start doing so today. Once you start contributing the minimum (i.e. enough to get your employer match or have at least 10% of your gross salary going toward your retirement account) then you can focus on investing.

If the above assumptions are true, then the next question you should ask yourself is what type of debt do I have and can I get a higher return on my investment than the highest interest rate debt I have? In other words, if you have a credit card that has an interest rate of 12%, do you think you’ll be able to get a net return of 12% or higher? If the answer is no, then focus on adding any excess cash toward paying off debt. But if your highest interest debt is 5% or so or if you have no debt, then you can use your excess cash to invest?
So before you use any excess cash to invest, makes sure that you can get a higher return on your investment than what you’re being charged by your creditors. No point in investing and getting a rate of 5% if you’re paying a creditor 20%. Got it?

As always, send me your questions and I look forward to seeing you at future ITBFW in-person or online workshops. Until next time.

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