How To Decide Between Paying Off Debt and Investing

by Cato Conroy about a year ago in personal finance

So, you need to decide between paying off debt and investing, do ya? Here's one opinion on the subject.

How To Decide Between Paying Off Debt and Investing

Most people in the United States have some amount of debt that they're trying to discharge. That's why people are looking for lists of student loan debt forgiveness programs, why credit card debt has reached $1 trillion, and why so many Americans end up declaring bankruptcy due to medical issues.

Debt is a part of the American way of life, but so is prosperity. Investing is a great way to make your money work for you and let yourself prosper. That's why a lot of people find it hard to decide between paying off debt and investing their cold, hard cash.

Truth be told, no one can tell you what will be best to do with your money simply because there's no "one size fits all" with income. Not sure where your money should go? Let's take a look at 10 factors that can help you figure out what's best to do with your situation.

First, let's look at the debt load you're carrying.

The biggest and most obvious factor when it comes to how to decide between paying off debt and investing is how much debt you have. Sometimes, it's okay to let debt wait a while—but if it's starting to get worrisome, you need to cut that debt down.

Getting rid of debt at any cost should be your number one priority if any of the following apply to you:

  • You are barely able to make the minimum payments on any of your cards. Nope! Not acceptable. This will only get worse if you leave it be, and in some cases, can actually make it impossible to pay off the debt you've accrued.
  • The debt you have is teetering on the point of becoming a major issue. Also not a good sign. If this is starting to ring true, it's not too late to avoid having a serious problem on your hands.
  • The debt you have makes it hard or impossible to survive on your own. At this point, you are not doing yourself a favor trying to invest. Depending on how far you're gone, your best bet might even be to declare bankruptcy.

If the debt is a strain, focus on the debt. Period.

Your credit score might also be a good indicator to watch.

It's amazing what a credit score can tell you about a person's financial situation—and how good it can be if you are currently deciding between paying off debt and investing.

Credit scores will begin to dip if you're taking on more debt than you should be, especially when it comes to credit card utilization. Generally speaking, you shouldn't have more than 30% of your total credit card limit being used at a time.

For people who are trying to decide between paying off debt and investing a certain amount of money, your credit score might be a good indicator.

Generally, if your credit score is sinking, you might want to spend some money to raise it by paying down debt. If your credit score is good, investing is probably a better option. If it's just decent, you might do well by splitting the money into investment pools and debt reduction.

Another thing to consider is whether you can get the debt written off.

Not all debt is equal, you know. Some debt is much harder to reduce than others. Student loan debt, for example, is nearly impossible to discharge unless it's through a federal program. Not even declaring bankruptcy will get it removed.

If it's student loan debt that you're worried about, deciding between paying off debt and investing is pretty simple. You should pay off as much as you can of your loans early, and put a small portion aside for your investments.

The interest rates that you're dealing with can also give you good input.

On a more holistic note, it's a good idea to take a look at the interest rates that you're paying on debt and the money returns you'd get in investing. Sometimes, math alone will tell you whether or not you should choose to pay debt or invest that cash.

Interest rates on credit cards can be as high as 29 percent. If the interest rated is extremely high and the investment returns you'd get are low, then you might want to rethink investing.

Sometimes, saving yourself from having to spend more money later is just as good as investing.

If you're young, investing might be a better long-term decision.

Time is a huge deal when it comes to investing. Only time can make the amount of money you get in returns increase several times over. The longer an investment has to accrue compounded returns, the better off you'll be.

If you're 50 and have to decide between paying off debt and investing, it wouldn't make as much sense to invest unless you had insane returns. On the other hand, if you're 20 and all the other factors remain the same, investing would be a no-brainer.

Crunch the numbers to find out what would happen.

A good idea when it comes to deciding between paying off debt and investing is to see what would happen in the future if you went through with each one.

If you paid down $100 to a 29 percent interest rate credit card that you were going to pay off in four years, would it save you more money than a $100 invested in stocks would give you in ten? The only way to know for sure is to do the math.

A lot of people will tell you that it's not a wise choice to go at financial problems alone. They will often suggest having a book that can help you fix your finances up, like Dave Ramsey's Total Money Makeover Workbook.

Ramsey himself is a huge fan of paying off debt and easy, simple investing methods. If that sounds like a good option for you, then you should check him out. (Really, though, any of the best books about money management will help you out.)

If you use apps to manage your money, you might want to see what the app would suggest you do. Either way, a little personalized guidance that works with your financial belief system will do wonders.

It's also important to realize when an investment might end up being valuable in non-monetary ways.

When deciding between paying off debt and investing, it's important to realize that not all investments will have returns that are entirely monetary.

For example, going to college might put you in debt, but it will give you connections, knowledge, and new opportunities. College is valuable—if you look at it the right way.

You don't have to *entirely* decide between paying off debt and investing.

The fun thing about figuring out what to do with money is that you don't have to choose one or another. You can split the money into equal parts, or focus more on debt, or focus more on investing, if you so choose.

If you can't choose which is best, it's okay to dip into both pools to strike up a happy medium. At times, it might actually be the best of both worlds—and could help you straighten up your finances immensely.

No matter what you choose, it's still a better decision than wasting it.

The fact that you're trying to decide between paying off debt and investing is a great sign. It shows that you are the type of person to care about learning how to improve your credit score, how to pay down debt faster, and how to make money while you sleep.

These are great things, and no matter what you choose to do, it'll be more responsible than what others are doing. Feel good about your decision; you deserve to have that peace of mind.

personal finance
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Cato Conroy

Cato Conroy is a Manhattan-based writer who yearns for a better world. He loves to write about politics, news reports, and interesting innovations that will impact the way we live.

See all posts by Cato Conroy