Money choices are really confusing. A question that usually comes to people’s mind is, whether to invest or to pay off their debt first. Both ways are great benefits but the most effective one depends on your situation.
Today in this blog, we will understand these two points about whether to invest or pay of the debts first. Let’s break it down step by step so that you understand and make the right decision.
Understanding Your Financial Situation
Know your financial situation before you decide whether to invest or pay off. For instance, consider the following factors as crucial:
1. Debt
Debt is actually money you borrow and must repay. This will often come with interest. There are two kinds of debt:
Good Debt – This includes student loans, mortgages, and business loans. It can help you grow financially as it forms part of a direction of increasing things’ value over time.
Bad Debt – High-interest debt is like a credit card, a personal loan that consumes more of your money in the long run and can be a burden.
2. Your Savings and Emergency Fund
- Do you have an emergency fund?
- If yes, how much savings do you have in an accessible bank account.
- According to experts, a person must save 3 to 6 months’ savings for the worth of living expenses in an easily accessible bank account.
- Make sure to prioritize savings before investing or paying off debt if you don’t have emergency savings.
3. Your Investment Opportunities
- Some investment ideas return quickly, while others are stable but grow slowly.
- The stock market, for example, can bring good returns over time but entails risks.
- Buying government or company bonds may give fixed returns.
- Investment in real estate property for sale or for rent can be a great opportunity to make more wealth.
The Case for Paying Off Debt First
Lets consider if you want to pay off your debts first, you must consider below points –
Pay the debt first for, if one of your high-interest debts, it might be advisable for you because;
1. You Save Money on Interest
- You will be saving the interest money as paying the earlier saves you all that money wasted as interest when paying for much more time with it.
- Paying off debt early reduces the amount of money you lose to interest.
2. It Reduces Stress
- Debt is scary. It does hurt.
- Becoming debt-free does a lot; gives you the financial freedom of no debt with that peace.
3. Guaranteed Return on Your Money
- Carrying high rate interest debt means paying more. If you have high interest rate debt such as credit cards (Which have rates often above 15-20%), it is better to pay off debt first. You will get sure return equivalent to the interest rate of the debt.
4. Better Credit Score
- Try to reduce your debt, it will make your credit score better.
- A good credit score helps you qualify for better loan rates in the future.
The Case for Investing First
Sometimes making an investment plan is more important than paying off debt. it can be the better choice. Lets see why investing first is better choice:
1. Higher Investment Returns
- Investing in the share market provides higher returns than your debt’s interest rate.
- If your debt has a low interest rate and your investments can grow at 7–10%, investing makes sense.
2. Employer Matching in Retirement Accounts
- Many Employers sponsored retirement Plans such as EPF or NPS. Using your employer can be a good option.
- If your employer offers a match, always invest enough to get the full match — it’s free money!
3. Building Wealth for the Future
- Early investment builds good wealth over time.
- With compound interest, small investments today will grow into large amounts in the future.
4. Keeping Liquidity
- You may end up spending all the cash you have on repaying debts but will not have enough in case of emergencies.
- Investing can help maintain liquidity while allowing your wealth to grow.
5. Tax Benefits
Opting for tax benefits investment plans such as NPS,EPF or PPF helps you to save more money.
Finding the Right Balance
Most people find a middle ground in the form of a combination of paying off debt and investing. Here’s how you can do both:
1. Start with an Emergency Fund
- Save enough for emergencies before tackling debt or investing.
- Save over time toward 3–6 months of expenses.
2. Pay Off High-Interest Debt First
- If your interest rate on your debt is more than 7-8%, pay that one off first as quickly as possible.
- High interest rates demand that credit card debt be considered a priority.
3. Take Advantage of Employer Matches
- If your employer provides a retirement match, make sure you are contributing to the point where you get every available match before directing your finances towards the debt.
4. Invest While Paying Off Low-Interest Debt
- If the interest rate on your debt is low (less than 7%), you can invest and make minimum payments on the debt.
- You have an opportunity to reap investment growth.
5. Make Extra Debt Payments When Possible
- Once you’ve secured employer-matched investments and built savings, put extra money toward debt to become debt-free sooner.
Conclusion
Hope you’re now clear about “how to save money”. Only after checking your specific circumstances would you know whether investing or paying the debt is feasible. In case of high-interest debt burdening you, usually it’s best to focus on paying this off first; if you owe low-interest, then investing for the future should be a consideration. The important thing is a balance that suits you so you can achieve both financial security and future prosperity.
Making a plan and sticking by it will set you free toward financial freedom as well as future security. Any action taken now, whether investing or paying off some debt, will help the long run.
Understanding the pros and cons of both, investing first or paying debts, and finding the right balance between both of them based on your financial status and future goals is the best way to make this choice. Assessment of financial goals and risk appetite by an expert before finalizing a suitable choice is a good strategy.