Should You Pay Off Debt or Invest?

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paydebtsavemoneyMany people in debt wonder if they should be investing while paying it down. As an indebted person myself, I understand the urge to halt the debt payoff process in favor of investing. While it’s nice to watch my liabilities go down each month, my assets staying stagnant makes me feel behind. If and how much you should invest truly depends on your personal situation.

When You Should Pay Off Debt

If you have high interest debt, like credit cards, it is likely the best idea to concentrate completely on debt payoff. Most credit cards have APRs between 10.99% and 29.99%, and while it isn’t impossible to get these returns in the stock market, it is highly unlikely.

When You Should Invest and Just Pay the Minimums

If you have very low interest debt, like a mortgage or car payment, you can just pay the minimums and invest. Statistically, you will make 5-7% in the stock market, so low interest debt will often yield you a smaller return.

When You Should Do Both

If you are working with deferred interest, like 0% APR balance transfers or the grace period before you have to pay off student loans, you can do a bit of both. I would recommend dividing your balance due by the number of months you have until interest paying resumes. This way, you’ll pay off the debt before any interest is due, and any additional money you have can be invested.

If your employer offers a match on your 401(k) or 403(b), you should absolutely contribute up to the match even if you have debt. It is free money and likely the best return on investment you’ll ever get.

Exceptions to the Rule

If your job situation is not stable, meaning your income varies wildly or you might lose your day job in the near future, you should focus on saving up money, not investing. Liquidity is king when your future income isn’t guaranteed.

If you are excited about either paying off debt or investing, do that! It’s better you do something than nothing at all. Of course, no matter what, you need to make sure you are making the minimum payments on all of your debts every month.

There is usually a good balance to be found between debt payoff and investing. Both are extremely important to your financial health, so whether you focus on one at a time, or both together, make sure you eventually get around to doing both.