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How To Invest and Save Money
Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance.

Things to Consider When Deciding Whether to Pay Off Debt or Invest

Things to Consider When Deciding Whether to Pay Off Debt or Invest

By Britt Erica Tunick

The importance of saving for retirement cannot be overstated. In an ideal world, everyone would have more than enough money to sock away some each month to ensure that they can comfortably maintain their current lifestyle, once they are no longer working. In reality, however, life just isn’t that simple. After paying for day-to-day living costs, most people have a limited amount of money remaining, and are forced to choose between paying down debt and investing for the future. But how do you know which is more important?

There is no set rule of thumb for whether it is wiser to focus more on paying down debt or saving for the future and the best route for you will depend on your own personal circumstances. There are, however, several things to keep in mind when deciding which approach makes the most sense for you.

Following are a few things to think about when weighing whether to allocate more of your disposable income on paying off debt or saving for retirement:

  • Before allocating any of your disposable income to savings or paying down debt, make sure that you have built up an emergency fund large enough to enable you to cover your day-to-day living expenses in the event of any unforeseen circumstances–such as the loss of a job, a serious illness, or even the death of a spouse. Financial advisors suggest squirreling away the equivalent of six months of salary to provide yourself with enough padding to get back on your feet in the event of any such situation.
  • It is always a good idea to eliminate credit card debt as quickly as possible, as failing to do so can leave you paying multiple times the amount of the money you initially borrowed from a credit card lender, and could leave you repaying that debt for years to come. According to creditcards.com, as of November 20, 2019, the average credit card interest rate was 17.21%, which is actually one of the lowest points for interest rates over the past 12 months. Comparatively, between 1926 and 2018 the average return of the S&P 500 Index was just shy of 8%, according to Investopedia.
  • While eliminating mortgage payments or student loans may be attractive, don’t forget to consider the impact of losing the mortgage interest deduction when it comes to paying your federal taxes. If you can earn more money through a conservative, low-risk investment such as municipal bonds than you will save by eliminating your mortgage payments, it may not make sense to expedite repayment of your loan.
  • If your company offers a 401(k) plan and any sort of matching incentive, the best thing you can do is to allocate at least the minimum amount to your portfolio that your company will match. Otherwise you are just leaving money on the table.

These are just some of the factors that you should consider when it comes to paying off debt versus investing for the future. Depending on how much debt you have, or what kinds of assets you have, you may want to consider speaking with a financial advisor to help determine the best approach for your individual circumstances.

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