It’s that time of the month!
You have a heavy feeling in the pit of your stomach.
You hate doing it but have no other choice. You try to put it off as much as you can. But can’t delay anymore. If you delay it, then you will be penalized. You can’t afford to get penalized.
You wish you could do this.
Paying bills is the one task that you can’t stand to do.
Luckily you got promoted at work and now have some extra money.
You can’t help but wonder – Should I pay off my debt or should I invest it for my future?
Student loans, mortgage payments, car loans, credit card payments..these are the common payments that we all seem to be bogged down with.
Should your primary concern be to repay debt or to invest any extra money that you have to work with?
It can be hard to determine which course of action will best benefit you at any point in time. If you have a sum of money, such as a tax refund or the money that came with your promotion or a new signing bonus, it’s best to consider the most effective way to use that money with your future in mind.
Deciding whether to pay off debt or invest is a scenario that you’re likely to face many times. The best decision for you will depend on your own unique financial situation.
Here are two paths to consider when making this decision:
- Rate of return. This path involves looking solely at the numbers. What’s the most profitable use of your extra money? Since not all debt is created equally, the solution isn’t always clear. Student loans, mortgages, and similar debt may have low interest rates and you could profit more by investing rather than seeking to pay these off early.
- Credit card debt, on the other hand, costs you more. It typically comes with an exorbitant interest rate, making it wise to pay this debt off as soon as you can. The rate of return on paying off a debt like this would often be better than investing that money.
- Check your credit card interest rates, or interest rates on other lines of credit that may be costing you money before you decide what to do with your windfall.
- Saving for retirement is also essential, however, so consider the options available here as well. Does your employer contribute matching funds to what you put into your 401(k)? Consider investing at least the amount that your employer will match in order to double your money immediately.
- How you feel. You should look at more than the numbers, considering your own feelings as well. Where do you think the money would be best used? If you have a significant windfall, do you feel best investing it or using it to repay a large portion of your mortgage? The best answer for you will fall in line with your highest priority goals.
- It’s important to make the decision that you’ll be happiest with, so consider all options before applying money to one or the other.
- You may want to speak with an investment professional or your family for advice. They may point out options you hadn’t considered.
Two Important Considerations
Before you begin to pare down your debt or invest, there are two important things you should consider:
- The first is to ensure that you have an emergency fund so you won’t have to rely on credit in the future if a financial emergency occurs.
- If your company has a 401(k), begin investing in it as soon as you can, even if you cannot invest a lot at first. At the very least, invest enough to receive matching funds from your employer.
Keep in mind that very rarely do you have to rush to a decision. Take your time and make choices that will benefit you both in the short term and for your future. Ultimately, it’s up to you to decide how you want to spend your money. Follow these tips to help you make a decision you’ll be happy with.