To invest or repay debt – Which should you do first?

To invest or repay debt

Many people are deciding whether they should invest their money or pay off their debt. Both options have their pros and cons.

Investing allows you to build a nest egg that can make you and your family more financially stable. It can also provide you with passive income. When you invest early, you can save up enough money to retire in comfort.

On the other hand, repaying all your debt reduces your stress and help you tolerate personal emergencies in the future. You can easily weather out depression or recession. It also provides you flexibility with your finances.

The question is what you should do first. The answer depends on two factors. You should consider the after-tax interest rate of your debt, as well as the benefits Return-On-Investment (ROI) of the MONEY.

If you are going to get a higher return through your investment than the rate of your debt, you should choose to invest. If it is the opposite, then pay off your financial obligations first. A good example of someone doing this properly and with great results would be Warren Buffett. He didn’t pay off the mortgage on his home first. Instead, he used his money to improve his investment portfolio first.

However, this is not usually the case. There are instances in which you should think of other factors when making the decision.

Types of Debts

One thing to keep in mind is that not all debts are the same. The type of loan you have plays an important role in your financial decision. As stated earlier, you should compare the after-tax return of the investment and the after-tax cost of the obligation. You should also look into the tax benefits of your interest payments. This may sound complicated, but it’s not.

Student loans are tax-deductible, and help you save money over time. You can deduct the amount you paid for your college debt or $2,500, whichever the lesser amount.

If you have a portfolio that contains a variety of investments, your return on your investment after taxes is probably more than the cost of your debt. If you are an owner of a new business, it is also advisable to invest in your venture first instead of paying back your obligations.

However, you should choose to get rid of your debts first if you have only a few years left before you reach retirement age. If you have a conservative investment portfolio that doesn’t grow quickly, you should repay the debts you owe first.

Look at Your Financial Situation

If you have high credit card balances, then you should pay them off first. That way, you will save money and improve your credit rating. You should repay your obligations if you are having a hard time balancing between improving your rating and making monthly payments.

If you enjoy low-interest rates and the balance is manageable, though, try investing your money. Experts suggest putting your money in long-term investment plans to enjoy lower risks.

Before you make any decision, you should establish an emergency fund first. Funds that you set aside in an investment are hard to access for a certain period. If you do withdraw the funds early from some types of investments like IRAs or 401Ks, you will be charged with penalties that can eat up your returns.

Why Investing is Better

There are many reasons why you should consider investing your money instead of paying back your loans taken from short-term lender which you found via credit matching service like The first reason is that earnings from an investment like a CD are compounded. You should not compare the percentage you earn in the first year of investment to the costs of your financial obligation.

It doesn’t matter what year you start investing; you will always get your first-year earnings. The only thing that will change is when you are going to get it. That’s why it is important that you start investing early.

When you start a year late, you don’t earn the potential earnings from the previous year. If you wait for two years, then you lose the potential earnings from the last two years.

Retirement funds are often connected to the calendar. Once you go past a specific date, you can’t go contribute. If you managed to put money in before the date, the money becomes part of the compounding for that year. However, not contributing before the date means you missed out adding the compounding for the entire year.

To get the full benefit of the returns, you need to contribute regularly. Most retirement investment funds don’t allow catch-up contributions. You can only get the contributions you made for the current year. Some do, though.

Research this before deciding

If your employer provides a match to your 401 (k) plans, then you should grab the opportunity and max out the match. The match is free money that you can’t get anywhere else. You should take full advantage of it before making other investments or getting rid of your debts.

On the other hand, there’s no limit on how much debt you pay off at any given time. You can repay 20 or 30 years’ worth if you can afford it. While it is not guaranteed that you will end up with a huge sum in your lifetime, but you will be in better financial condition if you choose to invest your money wisely. You can use any extra income to pay back the money you borrowed.

You can’t achieve financial freedom unless you start investing. Even if your investment doesn’t make a lot of money, it is the best way to grow your wealth. Make sure that you generate passive income so that you gain more money to can use to pay your financial burdens in the future.

Ideal Situation

In the ideal world, you don’t have any debt, and you invest your money. However, not everyone can be that lucky. There’s no one-size-fits-all solution to the problem. Investing is the best choice as long as your income source is secure.

Your financial situation will dictate whether investing or paying off debts is the better choice. Whatever your choice might be, however, make sure that the decision aligns with your long-term plans.

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