Should you pay down your debt or put that money to good use by investing it?
It’s a tricky question, especially if you’re also saddled with thousands of dollars of debt. You’ve only got so many dollars to spend. On one hand, you may have a pile of debt that’s eating away your money and racking up interest. On the other hand, you’ve got the opportunity to put your money to work for you and earn something back by investing it in the market.
Both are appealing. So what’s the best use of the money you have?
The decision usually comes down to one specific number: your return on investment (ROI). And that magic number is usually based on your rates.
Here are some questions to ask yourself to help you decide whether to trim down your debt or beef up your investments:
- Do I have any debt with high interest rates that I need to tackle first? When it comes to simple ROI math, you should always take care of your high-interest debt first. While your investments may return an average of 8 percent in the long run, your credit card debt could be accruing 15, 20 or even 25 percent interest today. If you do keep a balance on any outstanding cards, you could be losing out on some serious money. Make sure to tackle this “emergency” debt first.
- Are you working toward building your net worth today and tomorrow? It’s tempting to want to throw all of your money on your pile of debt and just be done with it. After all, if you’re reducing your debt, you’re effectively increasing your net worth. But don’t act so short-sightedly: you could be missing out on an opportunity to grow your net worth in the long-term, too. Long-term investing works best when it can grow over time, which means starting as early as possible.
- Can I pay off debt and invest at the same time? As appealing as an either/or approach may seem, it is entirely possible to pay down your debt while still building an investment portfolio. Just be sure that you’re tackling any high-interest “emergency” debt first so you’re not losing money on ridiculously high interest rates.