If you have debts the common course of action would be to concentrate on paying off the debt first before any thoughts of investment or saving money.
However, there are some situations where it is worth considering doing both and this is the purpose of this article. 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. In this instance your money may be 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 very low monthly interest rate, especially if it is around or even lower than the current inflation rate in your country. Now firstly it depending on whether 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.
As an aside if you are employed by a company that offers a pension plan which matches your contribution, you are turning away free money by not enrolling.
Saying “no” to such a plan is essentially turning down free money so if you can afford the maximum contribution it is well worth doing
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 19% to 30% (or even higher in some cases), and trying to find investment options that yield such a percentage in earnings is almost impossible.
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 (Doing Both!)
So one of the keys to good money management is making the right decisions as to when to invest and when to pay off.
Finding a balance where you are paying off your high-interest debt while investing in stocks or savings accounts that also provide a high percentage in returns is ideal. The investments will be more cost-effective than paying off your low-interest debt.
Remember as a general rule if debt is crippling you then then the best course of action is to deal with the biggest debt first – and that does not necessarily mean the biggest balance – rather the debt with the highest interest rate.
If you’re still deciding on whether to pay off your debt or invest/save, then 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.
You of course need to take into account whether you can afford to invest, but your plan of action should then fall out of your analysis