Should You Pay Off Debt Or Invest- Which One Is Best For You?
This is a common question that many people ask themselves but do not have the answer. The reason for that is because it is very difficult to come up with an answer as your personal answer will be subjective depending on your personal situation. What I mean by this is that one individual may have tons on loans that accrue high interest while another individual may only have a few low-interest loans.
Where many people get confused is how to place a value on which option is more important. I cannot personally give you an answer as this is personal finance and every situation is different, but I can weigh out the pros and cons of each based off of different scenarios.
So, should you pay off debt or invest?
Before we even talk about that I would like to talk about emergency funds. An emergency fund should be one of the first things you establish before even thinking about investing. Yes, I understand loans have to be paid but an emergency fund is very important to maintain at all times.
I know what many financial bloggers say about keeping 6 months of expenses, but that is not necessarily true. I recommend having an emergency fund of at least $1,000 while still paying off debt. Of course, when you are debt free I recommend more but $1,000 is enough to cover or help out with any hidden expense that comes about.
For more tips, tricks, and ideas, read more at How to Build a Successful Emergency Fund – Emergency Fund 101
How fast do you want to be debt free
When deciding if you would like to be debt free or start investing, you have to ask yourself how soon would you like to be debt free? You also have to access how much having debt bothers you or stresses you out. I say this because, if you are like me or many people I know, having debt is a huge burden and it is always something in the back of many peoples head.
Me personally, I did both. I invested and paid off debt at the same time. After saving a comfortable emergency fund I started to alternate. One month I would pay the minimums on all of my loans, and put all of my extra money towards investments and the following month I would not invest any money but I would put all of my extra money towards loans. This approach satisfied both of my needs and wants and allowed me to have a peace of mind that I was heading in the right direction.
For more information about Stocks, ETF’s and Mutual Funds read Investing 101
Interest Rate
Everyone should not automatically think it is safe to invest and pay off loans at the same time. One thing you would want to pay close attention to is the interest rate that is attached to the loan. If your interest rate is high, you may want to pay the loan off more quickly than if your interest rate was low. The reason for this is because, by the time you are done paying on a high-interest loan, you end up spending more than what you took the loan out for which is money that could be used for investing.
Some loans that could carry high interest are credit cards, auto loans, school loans, personal bank loans, and leases for furniture or electronics. In my opinion, anything over 6% is considered high and I usually pay those off immediately.
Company Match or Not
When trying to decide what is more important, one thing that you should factor in is a company match. Most employers give company matches if you invest so many dollars into their 401k/Retirement plan. This is an incentive from your employer which is essentially free money that you will be leaving on the table if you did not take advantage of that benefit. If your company match outweighs your loan interest than it may be a good idea to invest in your 401k and pay of loans at the same time.
Personal Preference
While I chose to invest and pay off debt at the same time, many may implement a different strategy. My strategy where I alternated weeks and months allowed me to pay off more than $20,000 in student loans, and invest my first $10,000 within two years. Just because this worked out for me does not mean it will work out for you. Access your personal situation by evaluating your expenses, loans, and income and create a plan that you can be consistent with to reach your goals.
Remember, both choices are good choices so do not worry about stressing to much. If you are in a bind where you do not know, do both and invest and pay off debt.
For more information about investing, budgeting tips, and personal finance visit www.moneythemillennialway.com