Should you pay off debt or invest?
This is a common question, but also an extremely difficult question to answer. Every situation is different and every person has different preferences.
Besides that, everyone has a different kind of debt. You might have a mortgage, student loans, a car loan, credit card debt, or something completely different. Whatever kind of debt you have, you’ve been most likely been thinking about a debt payoff plan.
Paying off debt might be the most important thing for you right now. But where does investing fit in your plan?
Paying off debt can feel like it takes forever, so it might be good to not completely ignore your retirement savings and investments.
This is a question that you could ask yourself – should you pay off debt or invest? Should you try to do both? Or you could opt for one slightly more than the other?
So many options!
You could decide not to pay off your student loans yet, as I did. I decided that I could pay off my student loans quickly if I wanted to, but I don’t want that. I have 0% interest on my student loans at this moment, meaning that I don’t need to pay any interest over my loan principal.
In order to make the decision not to pay my student loans back yet, I had to think about where my focus was. Did I want to focus on paying off my student loans and get rid of my debt, or should I invest in my long term investment and retirement plan?
It was a tough decision to make, but I am currently solely focusing on investing and reaching financial independence and retire early.
Deciding to not pay off my debt did not make everyone around me happy. That’s okay.
That’s exactly what personal finance is – personal!
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Should You Pay Off Debt Or Invest?
In order to answer this question, we’re going to discuss a series of other questions with you.
If you’re deciding whether you should pay off debt or invest, take this into account:
- What is your current interest rate?
- How eager are you to get rid of your debt?
- Do you have a sufficient emergency fund?
- Personal finance is personal
What Is Your Current Interest Rate?
The first thing that can really influence your decision to pay off debt or invest, is how high your interest rate is.
If you have a low interest rate on your debt, this may be something to think about – investing more instead of trying to pay off your debt as soon as possible.
That is the case for me personally. I have a 0% interest rate, which means that I should get a higher return in the stock market (which gives on average a 7% return). I am not going to pay off my student loans quickly. Instead, I invest the majority of the money by investing in stocks.
If your interest rate is high, you will probably want to pay off your debt quicker. With a high interest rate, it will just keep piling up. If there’s something we don’t want, is your debt to seem unmanageable – this can make your investing goals seem hard to reach.
I think that if your interest rate is higher than 7%, you may want to think about paying off debt quicker. If your interest rate is lower than 7%, read further to decide for yourself what you feel most comfortable with!
How Eager Are You To Get Rid Of Your Debt?
Personally, I put 100% towards investing and 0% towards debt at this moment in time. I chose this option because the interest rate is so low. I feel zero pressure to pay off my student loans because I know my money will make me more money when I invest in the stock market.
This is again a personal decision.
If you’re not bothered by the debt at all and you’re comfortable with having debt, that’s okay! As long as your debt and your spending won’t get out of hand, it will be fine.
If you hate debt and you want it to be completely gone, paying off your debt quickly may be the way to go.
I know people who get very stressed out by debt, even specific types of debt. If you’re stressed out, this might affect other areas of your life. When you’re stressed out about having debt, this can impact your health, your work, or your relationships.
If having debt makes you stressed out, putting as much as you can towards your debt will make your life much lighter.
By paying off your debt, you will get more energy to focus on improving other parts of your financial life. You can choose to start investing your first dollar, you can decide to start investing in Peer-to-Peer lending, or you can work towards other financial goals.
Do You Have An Emergency Fund?
Once you have decided whether or not debt stresses you out, let’s get into another important aspect: emergency funds.
Many people are wondering if they should have an emergency fund while paying off their debt.
Let me tell you this: whether or not you’re paying off debt, you should have an emergency fund. You simply never know when you will have an emergency.
When you’re not paying off debt, I recommend an emergency fund of between 3-6 months of living expenses. I know that it can be hard to attain this amount of money when paying off debt, so it doesn’t need to be that big.
I recommend you have an emergency fund around $3000 while you’re paying off your debt. This will make sure you have a small cushion in case any surprise expenses come up.
Imagine if you have $0 in your emergency fund, you will need to go into debt immediately when an expense comes up. When you have an emergency fund of around $3000, you can stay focused on your debt repayment plan instead of adding debt during your repayment period.
What if you had a car emergency, home repair, or medical issues?
If you don’t have an emergency fund, this could lead to getting into more debt – which is exactly what you want to avoid. When you’re getting into more debt, it would be most likely be at a higher interest rate because you will probably use a credit card.
You don’t want to be in a situation like that, start building your emergency fund now and you’ll be fine!
Personal Finance Is Personal
One very important thing to remember: personal finance is personal.
Choosing between whether you’re going to pay off debt or invest can be a hard decision. Just know that you’re on a good path whatever you decide.
You have the option to choose between paying off debt and/or investing, which will make sure you get closer to reaching your financial goals!
If you’re choosing one of the two or doing both, you’re moving forward and making a positive impact on your financial future.
While it is important to decide which you want to focus on, both options are good. If you are not sure about what is best in your situation, try to put half towards your debt and half towards your investments.
Remember: personal finance is personal.
What is great for you may not be great for someone else.
Consider the options that you have and decide what is best for you in your specific situation!
What would you do, pay off debt or invest?