On the surface, this question may seem like a no brainer. Why wouldn’t you pay off your debt first before you begin investing?
If you are drowning in debt, especially high interest debt, that may be the better decision. However, if you have some debt at a low interest rate and are making all of your payments and still have money left over, the answer to the question of whether or not you should invest if you still have debt is not as clear cut.
Using the extra in your budget to pay down debt will obviously save you in interest payments on that debt, but you also lose out on any money that could have been made from wisely investing that extra money instead. Here are some things to consider about paying off debt vs. investing.
How Much Debt Do You Have and How Much Interest Are You Paying?
First of all, take a look at just how much debt you actually have. Are the interest rates on what you owe higher than what you could gain if you invested the money instead? If the answer is yes, you should start paying on that debt right away. But if your debt carries a low interest rate, it may be ok to instead invest that money for a potentially greater return.
What is Your Current Age?
Another factor to consider before making a final decision is your age. When you are young, any possible losses you might sustain from investing can still be made up. Sometimes investments can lose money one month and then turn around and more than make up for the losses in the next month. If you are older or averse to placing your money in a higher risk investment, paying debt might be the correct choice for you.
Do You Make a Good Income?
What about income? Do you have a steady, dependable income? Does your salary fluctuate throughout the year? If so, you might want to keep some money in reserve to help you cover your bills during lean months instead of either paying down debt or investing it. On the flip side, if you are making a good, steady income with the expectation of continuing to do so, investing for your future can be a financially sound decision.
Is Your Employer Offering a 401K Plan?
When someone offers you free money, you should take it. That is exactly what most company-sponsored 401K plans do. When your employer offers this plan, you must match their investment up to a certain point to be able to claim their investment. This investment is pre-tax, and you get to decide whether to invest in higher risk, higher return investments or lower risk investments with a lower return. 401K’s are a great way to get your feet wet with investing if you have never done any investing before.
Are There Other Considerations?
What if you get sick and have to take a leave of absence from your job? Do you have a cash reserve set aside for this? This is something to consider when you are deciding whether to pay debt or invest the money instead.
The answer to the question of whether you should invest if you still have debt or not is clearly not going to be the same for everyone. But, taking some of these factors into consideration should help you to make the best decision possible for your personal financial situation.
Can you think of other things to consider when deciding if you should invest if you still have debt or not?