You're sailing through the month with no financial worries. You've applied successful saving strategies and stopped wasting money. Now that your savings are starting to grow; you'll discover new challenges about making decisions for the best use of those funds.
In most cases, the tough decision is between using the funds for investment or paying off debt. While both are essential for your financial health, all you need to do is prioritize what's more important at the time. Before moving further, let’s take a look at what paying off debt and investing for your future means, one by one.
Pay off Debt or Invest?
When you pay off your debts or even begin to pay them off, you may experience some sense of relief. So once you’ve paid off all your loans, credit cards, and title loans if you live in Phoenix, you can live a debt-free life. Moreover, the debt you hold and your ability to withstand personal emergencies are usually inversely proportional to each other.
On the other hand, investments can help you to increase your wealth over the long term. Although, the return on your investments could assist in pulling you out of a financial rut or let you live your life after retirement the way you want; starting an emergency fund does not fall under the investment category.
Since both a debt-free life and earnings from investment have a pleasant ring to them, you may think that opting for either way is safe. Some of you may also want to use the extra funds for both at the same time. Others might think of using maybe slightly more funds they have for debt than investments or the other way round. While it's best to choose the most appropriate option based on your needs and financial situation, here are some approaches that could be beneficial in making your decision firm:
Approach 1: Know Your Interest Rates
The interest rate will tell you whether to use your funds for dissolving your debt or boosting your investment portfolio. You'll need to compare the interest you pay on the borrowed money and the expected rate of return you can earn from an investment. If the rate of interest you're spending on your debt is higher than the predicted rate of return you receive from your investment, you should try to eliminate your debt. Otherwise, you can go ahead and invest your funds. Keeping this in mind, if you learn how to stop wasting money unconsciously, perhaps you could then choose both. Also remember, it’s called Personal Finance for a reason. This means, how to manage your money, save or invest can vary from person to person.
Approach 2: Settle Debts before Investing
If you are planning to go completely debt-free, then that's not a bad idea at all. You're trying to protect your assets from getting seized or repossessed, especially when you've borrowed money against your property. Some people have given investments a wide berth until they've paid off all their debts, including a mortgage. If you haven’t had a sound sleep in a long time, you can also choose to pay off all your debts as early as possible and then jump into making investment decisions. Settling your debts early will allow more to let your investments grow. Ultimately, with more money compounded over the years, you are likely to have increased your earnings.
Approach 3: Begin Your Retirement Savings First
Contradicting to the second approach, this one will suggest you begin your retirement savings first and then move on to paying your high-interest debts. If you start saving right from your first paycheck, you could have more than thirty years until you retire at, say, 65. Moreover, you can start with small investments and see them multiply to a sizable amount. Even better if your employer offers you a retirement plan and contributes an equal amount of money towards your retirement fund. Your second priority should be paying off debts that have high-interest rates while keeping a certain amount aside for emergencies. Again, you can start building your emergency corpus with merely $100 a month and then increase the amount over time. Although this approach requires you to put your lowest interest rate debts at the bottom, you can never afford to skip the payment dates and have your debt growing. Once you have your priorities set straight, you'll find it easy to manage your finances every month.
The Final Say:
Since everyone’s financial standing is different, we can’t apply the same theory of money management on all. The same applies when the decision is choosing between investing and paying off debt. Whichever you decide to tackle first, eventually everyone’s goal is to have no debt and ample funds to handle any emergency even after retirement.