Investing vs Paying off Debt: What Should be Your Priority?
Mon, 08/04/2014 - 12:18pm | by Karleia Steiner
Most people when asked whether they want to invest their money or pay off debt would probably respond that both should be a priority at some point. Those who fail to invest could reach retirement without enough in savings to maintain their standard of living. Those who fail to pay off their debt could wind up needing to use a bankruptcy firm like D Thode & Associates
Here are some things to consider when thinking of the investing vs. debt-free debate.
What Type of Debt is Present
One of the most important questions to ask is related to what type of debt a person has. Some debt is very affordable to carry. For example, recent home purchase and refinance loans have had interest rates that are in the 4 to 5 percent range, and some are even lower. Because these loans generally take between 15 and 30 years to pay off, getting rid of them quickly could be a good way to free up money for investing.
Credit Card Debt Should Go
Some people have spent enough on credit cards to buy a starter home. Credit cards have notoriously high interest rates that can sometimes reach 20 or even 30 percent annually. Only in the best years would the stock market provide a higher return. The first outstanding debt that consumers should dedicate themselves to knocking out is credit card debt. In this instance, paying off debt would be more cost-effective than investing.
Investing in a Retirement Account
Many companies will provide a self-funded retirement plan for individual employees. Some will match the first few percent of an employee's annual salary. Those who have this option would do well to take advantage of the employer match. In many cases, the match will be a 50 or 100 percent return that shows up automatically just for saving money. That rate of return would be hard to beat. Additionally, the earlier a person starts investing in this type of account, the more time they have to earn interest on their interest and build a nice nest egg.
When looking to decide whether to invest or pay off debt, it is important to look at the potential cost of carrying the debt and the opportunity cost that can be lost when choosing not to invest. If the interest rate on the debt is lower than the return that can reasonably be expected from an investment, paying off debt early could wait. In the case of high credit card interest, paying off debt early could make the most dollars and cents.