It’s a tough decision with no easy answers.
There is a right answer and a wrong answer. At the same time there is no right or wrong answer. It can come down to a choice between math and emotion.
Here’s some very simple math: If the return on your investment is better than the cost of your debt, you should invest. If not, pay off the debt. It becomes complicated because paying off debts can be more of a sure thing, while there is no guarantee you will get a return on your investment.
There are complex scenarios attached to the investing versus paying off debt debate. However, a lot of it involves gut feelings (especially when you’re investing.) You have to ask yourself which consequences you can deal with:
· Would I kick myself if I don’t invest?
· Would I feel worse if my investment failed?
· Would I be better off if I were debt free?
Investing In Your Future
The good part about investing is that if you don’t have substantial amounts of money saved over a lifetime, it can be a great way to catch up. Here are some things to ask yourself and consider when investing:
· Will investing greatly change your life if it does well?
· Will the best case outcome double or triple your money?
· Consider that if you choose not to invest in something like a 401k plan, you miss out on prime opportunities for free money from a company match.
· If making an investment doesn’t go so well, can you afford to lose the money?
Investments do not show positive returns every year. However financial planners do advise that over time, a diversified portfolio should give your returns to help you reach your retirement goals.
You shouldn’t ignore your debts
Everyone should ideally be debt free before retirement. Retirement is expensive. However, paying off debt requires great discipline.
One way to determine if you have too much debt is to calculate how much of your take home pay each month goes toward paying your debts (excluding your mortgage.) If 15 percent or more goes toward debt, you should concentrate on paying that down.
There are two types of debt
· Investment Debt: Debt incurred by a mortgage or starting a business. These assets can be sold to pay off the debt. In some cases, like student loans, the interest is tax deductible.
· Consumer Debt: This debt comes from items that decrease in value over time: Cars, clothing and credit cards. Your debt remains when they are consumed. This kind of debt is usually high in interest, and should be avoided as much as possible in the future.
Pay off consumer debt first. Investment debt can be paid over time. If you’re not able to pay down high interest debts beyond the minimum, you may want to find ways to earn extra money or cut expenses.
If the debt is just too much, finding a legitimate credit counselor may be your answer.
Julian Hills is a content writer and blogger for Debt.org. His journalism career has taken him from newspapers to local television news stations and even a 24-hour cable network in the Southeast. Julian is a graduate of Florida State University who enjoys finding new ways of saving money for football season tickets.
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