Should You Invest or Pay Off Debt?

Published: February 20, 2019

In today's society most people have at least one type of debt. Whether it's an auto loan, mortgage, personal loan, credit card, or student loan, it follows you around like a dark cloud. At this point in your life, you may be wondering what the best option is when it comes to your money -- do you invest it or do you use it to pay off debt?

The answer is: It depends. There are a lot of factors that play into whether or not you should be investing your extra money or putting it towards debt. Here are some of the factors you should consider when deciding whether to invest your money or to pay down debt.

Do you have a decent savings?

Having a savings account that can cover any unexpected situations that may appear. Sometimes you get sick or injured and won't be able to work. Having a savings account that covers 6 months of bills is a great goal to have before you start investing. That way, you're not scrambling to figure out how to live if an emergency takes place and you need to live off of your savings for a while.

Do you have credit card debt?

Most Americans have some type of credit card debt. This is not uncommon, but it's best to make sure that you pay it off before you start investing. This is because the interest rates on credit cards are higher than what you'd be earning by investing. All of that extra income from investing would go straight towards paying down your credit card balance.

How's your retirement savings?

Even if you just entered the work force, you should be focusing on your retirement, especially if your employer matches your contributions. By building up your retirement, you're ensuring that your needs will be taken care of when the time does come to retire. Not only are you earning free money from your work, but you're also building compound interest for years.

Which will have the greater return?

If you look at your debts and what you'd be receiving from investing, it's important to look at what has the greater return. If your debt-to-income ratio is high, it's probably better to pay off some debt before investing. This will not only free up more income to invest in the future, but it will also relieve some stress of paying bills while you're investing your money.

Do you have kids?

Whether you currently have kids or are planning on having kids in the near future, you should be considering saving up for college for them. Yes, investing could mean that you could earn enough money to pay for your child's college, but if you're too aggressive, you may lose everything. Before you start investing, consider building up your child's college savings account before investing. 

In the end, it's what works best for your ambition and your budget. If you feel like you can earn more money investing and still pay down your debt, do that. If you would rather focus on your debts first, that's a great option as well. Make sure that whatever decision you choose will not put you in a situation where you can't afford to live.