Should You Invest or Pay Down Debt? 5 Questions to Ask Yourself

dollar-653254_1920The age old question. Paying off debt and investing are both super important and crucial to do if you ever want to improve your finances. But which one is more important? And which should you prioritize?

The answer to this question truly depends on a variety of factors including your current situation and your future goals. While I can’t tell you exactly which option to prioritize at this time in your life, I can however, make suggestions and prompt you to ask yourself some important questions that can help you determine the best solution for you.

1. How Much Debt Do You Have?

This is one of the most important question to ask yourself. Debt can be hard to ignore if your monthly debt to income ratio is high. While most American households have some form of debt, if you create a plan and commit to paying if off, you could very well be debt free one day.

Not having any debt payments will free up plenty of your income to save and invest. I can’t wait until I get to that point, but for now paying off debt aggressively helps me feel like I am digging myself out of the hole. If you plan on making extra payments toward a large amount of debt that you don’t feel comfortable living with, you may find yourself prioritizing debt payments over investment contributions.

2. What Type of Debt Do You Have?

Your answer to this question can really help you decide whether you want to pay off debt or invest. Some people prefer investing first if they have low interest debt in the hopes that the return they get from their investments will outweigh the the debt payoff in the long run.

If you only have a small amount of student loans, it may make sense to invest more if you are okay with taking your time in terms of paying off your debt. Taking your time while paying off student loans can actually build your credit and payment history.

On the other hand, the return you’ll get on your investments is never guaranteed and if you have high-interest debt at a rate of 6% or higher, your debt may end up costing you more money over time which may prompt you to want to get rid of it faster.

3. Does Your Employer Offer a 401(k) Match?

If your employer offers a 401(k) program and offers to match your contributions, it would be in your best interest to invest enough each year in order to get the match which is basically like free money.

Your 401(k) will be one of your best allies in terms of being able to retire when you are tired of working or can no longer work. You want to get as much money as you can into that account, Plus, you don’t know how long you’ll be at your job with those benefits so don’t overlook a match program if your employer offers it.

4. How Old Are You?

Success with investing has a lot to do with your age. While I believe you can pay off debt at any age, you can’t always reap the full benefits of investing and compound interest if you start when you’re older.

Time is the most important factor with investing and you must allow enough of it to go by in order to see your money compound and turn into passive income. If you are in your early or mid twenties, you may want to prioritize debt payments for a few years to get it out of the way, then start investing heavily in the market.

If you are older however, you must ask yourself how many more years you’d see yourself working. If it’s less than 30, consider investing first, then paying off debt as a secondary priority especially if your debt is low interest.

5. Can You Do Both?

You can certainly invest and pay off debt at the same time, but I think one would still have to be prioritized over the other. Consider the pros of both options and which ones are more important to you. It’s also best to find a balance between living for now and preparing for the future.

Living until retirement age isn’t promised for anyone, but we should still pretend that it is and prepare accordingly. Since paying off debt aggressively can help you save money and free up your budget, you may want to cut your spending and invest what you can while you pay off your debt, then continue to max out your retirement accounts and invest in the market as soon as you are debt free.

If early retirement is a goal, you’ll want to invest and save more than 50% of your income each year to prepare for this lofty goal.

At the end of the day, both of these options are responsible ways to handle your money and improve your finances. As long as you’re making progress with one, you’ll be moving closer toward achieving the other goal as well even if it takes some time. They key is to start setting money aside for one of both of these goals today. If you work to increase your income over time, you’ll have more options and make even more progress.

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