If you notice that you have extra cash in your bank account at the end of the month, it can be a tough decision whether to pay off (or pay down) your debts or to invest in some new stocks.
How do we go about determining which is the right choice to make and is it always the same choice?
Both things are important to our financial health so let’s find out which is better, investing or paying off debt?
Most people have found themselves saddling some form of debt or another in their lives.
This can be a mortgage, a student loan, car payments, credit cards, or payday loans.
Sometimes you get unexpected expenses and you have to pay off a medical bill or a vehicle repair.
The reason we take on debt is because we don’t have the money we need readily available so we must borrow from our future income to pay for what we need.
It’s easy to lose track of all your debt and find yourself overwhelmed by how you owe in total.
Keep in mind that not all debts are the same.
And the way you can determine this is by their interest and if the interest on those loans is tax-deductible.
For example, home loans and student loans aren’t as burdensome because you are able to write the interest off as a tax deduction.
Now if you have debt in the form of a high-interest credit card, you might have an APR of 28%
…And If you thought that sound extremely high, the average payday loan APR is 398%
Never ever use a payday loan unless it’s a life or death emergency.
To put these interest rates in perspective, the average investor makes a return on their money of about 7% every year.
Imagine they made 398% every month. They’d be unbelievably rich in a couple of years no matter what amount they started with.
But when you take out a payday loan, this is what you are giving away.
Almost 4 times what you borrowed.
So you can see why it’s so important to pay off debt as soon as you can, it’s a negative force on your money that multiplies every month to an unmanageable degree.
Avoid debt altogether by having a good amount of money saved up (at least $1000) and always pay with cash. If you want something, save for it.
When you invest your money, you are buying assets that essentially cause your money to make more money.
This is done by investing in stocks, bonds, real estate, among various other forms of securities.
The purpose behind investing is to give yourself an income that grows over time.
If you invest for a long time, you could easily find yourself becoming a millionaire or even a billionaire depending on how much is invested.
It’s always better to start early as the earlier you start, the longer your money can compound on itself.
You can start with as little as $100 and you can even start as a minor, with the help of a parent.
Okay so the way to determine this, figure out the interest rate on both these figures
Would you have a higher interest rate on your investments or a higher interest rate on your loans?
Take all your debts and determine how much interest you are paying in total.
Take all your investments and find out what your returns are in total.
Are you losing more money every month than you are earning in returns?
Pay down debt.
Are you earning more money in returns than losing through debt?
Now, this isn’t to say you are all in on one or the other, you should be paying down debt and investing in both situations.
It’s the ratio that you are playing with.
If investing is more beneficial, then do a 70/30 split between investing and debt, respectively.
If paying down your debt is more beneficial, then do the opposite.
Debt is an uncomfortable burden on your finances that feel like a snake continuously constricting your wallet every month, on the other hand not many things feel as great as watching your money grow through investments.
Ultimately it’s up to you whether you love the fulfillment that comes through investing or if you want to rid yourself of the psychological stress that is being in debt.
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