There is an age old question about investing versus paying off debt. A lot of people want to know if they should begin to invest or pay off their debts first. They hear about how important it is to invest and what it could mean for their future. At the same time, many of them have debts just like the rest of us. The question that they come to is which activity should they put a priority on? The answer has to do with the expected rate of return.
Paying Down Debts
Every dollar that you contribute towards your debts can be thought of as yet another dollar saved. Also, you can tack on whatever percent interest rate you have been paying on all of those dollars this whole time as well. Since you will not have to pay the interest on the dollars that you pay off today, you can think of this as being your rate of return when it comes to the advantage of paying off debts.
For personal debts such as credit cards and the like it is pretty obvious that paying them down makes a lot more sense than investing. You can save sometimes as much as fifteen, twenty, or even twenty-five percent on your money by doing this. It should be a priority to pay off these high-interest loans before you ever bother with investing.
There is an advantage to investing wisely, and that is that you can expect a good return on your money. It will certainly do better for you than the money would if you just had it sitting in a savings account somewhere given current rates. Thus, it is a good idea to try to invest early and often. That being said, it is also understandable to want to pay off debts as much as you can as well. When you do not have debts to worry about, you tend to have more freedom and flexibility when it comes to how you spend your money and how you can invest into the future.
Most people require professional guidance to select the best investments for their portfolio. The truth is, a lot of us do not have the time or patience to bother with getting too entangled in the levels of research necessary to know which companies are good investments and which are not. Therefore, we seek out those who know what they are speaking about and go with what they say. There is nothing wrong with that so long as you can see the wisdom behind their words.
The short and sweet answer to the question of paying off debt or investing is that it all comes down to those precious interest rate numbers. If you can justify paying less on debt because your interest rates are incredibly low, then perhaps now is the time to invest. However, if you carry around high interest rate debt as many of us do, then it is time to pay it off as quickly as possible.
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