Should You Pay Off Debt or Invest?

Should You Pay Off Debt or Invest?

Managing money is no less than a mental workout—especially if you are torn between debt and investment ideas. People desire to turn their hard-earned cash into investments. That's pretty logical - but what if you have debts?

What's the best way out? Both options have their benefits, and your answer depends on your financial situation. Let's break it down to help you make the best decision for your wallet.

How Much Debt Do You Have?

Are you dealing with a small balance, or is your debt a mountain that keeps you up at night? If your debt is getting out of control, this has to be your immediate action. It can bring immediate peace of mind. Smaller balances can give you the flexibility to invest while still making regular payments.

According to Experian, the average American carries $96,371 in debt. Compare yours to the average to know where you stand and what you should do next.

Is It High-Interest Debt?

Interest rates are what mostly decide the answer. High-interest debt, such as credit card balances, can quickly grow out of control if you do not pay it off. Low-interest debt, like mortgages or student loans, is mostly manageable.

Credit card debt comes with an average APR of 20.68%, according to the Federal Reserve, making it an urgent priority to pay off. Mortgages have lower interest rates - around 6-7% in 2024. This is less pressing to tackle.

You must weigh the interest you are paying on debt against the possible returns you could earn from investing. Paying off a loan with a 7% interest rate is equivalent to earning a guaranteed 7% return.

What Kind of Returns Can You Get from Investing?

Investing grants you the opportunity to grow your wealth. The stock market has provided an average annual return of about 10%, though returns can vary.

If the return on your investments will possibly outpace the interest on your debt, investing is right for you. For example, long-term investments in a superior portfolio can outperform the interest rate. Don't forget about inflation: it has averaged 3.2% annually over the last decade.

How Much Extra Cash Do You Have?

Your cash flow is a huge consideration when deciding between paying off debt and investing. If you have a steady surplus of income that covers the essentials, you can split your funds. Allocate a part toward debt repayment and a part toward investments.

What if you have a tight budget? Your to-do task is debt repayment. It can free up future cash flow for other financial opportunities.

When to Pay Off Debt?

High-interest debt: Anything with an interest rate above 8-10% should be tackled first.

Stress relief: If your debt causes emotional stress, it is better to pay it off.

Low financial cushion: If the emergency fund is non-existent, pay the debt to overcome financial risks.

When to Invest?

Low-interest debt: If your loans have interest rates below 6%, investments are better.

Long-term goals: Investing early for retirement or other milestones gives your money more time to grow.

Final Words!

Should you pay off debt or invest? The answer depends on your financial picture. If you have high-interest debt, paying it off should come first. But if your debt is manageable and you can get higher returns by investing, growing your wealth may be the smarter move.

We are here to provide financial assistance based on your conditions!