Pay Off Debt or Invest?

Credit & Debt, Investing Basics
on September 28, 2012

In a “got to have it now” society, debt has become a problem for millions of people around the world. While most would seize the opportunity to get out of debt if given the opportunity, many are choosing to instead invest their money in hopes of a higher payout to satisfy their debt and have some left over. This method has worked for some, but it is not a good strategy for everyone to follow.

Interest Rate Comparison
The first thing that must be taken into consideration is the interest rate on the debt owed. In many cases, the rate is higher than the expected return on the investment. If the interest rate is higher than what can be earned, the best choice is to pay off the debt.

Those with multiple debts should prioritize them. An effective strategy that has helped many is to pay off smaller debts while making minimum monthly payments on the others. When a smaller debt is paid off, the money that would have been used to pay the small debt can instead be applied toward a larger debt.

Consider the Risks
Many investments do not guarantee a return. For example, investing in a start-up business that is expected to return 30 percent would be an optimal choice compared to paying off a credit card with 7 percent interest; however, there is no sure way of knowing if the return will be as much as projected. In this event, the potential investor should carefully consider the risks and understand the chance the business has of flourishing.

Create a Detailed Budget
It is crucial to understand funds availability before making the decision to invest. Prior to an investment, the investor should ensure they have enough money to cover all bills and at least the minimum monthly payment on any debts to keep their credit score optimal.

Other aspects should also be considered including money for food, gasoline and other necessities that often get overlooked when creating a personal budget. Once the essentials are accounted for, the investor will have a much better idea of whether investing is a realistic option.

Don’t Forget About Taxes
If an investment option sounds like a good idea, the investor should consider the potential tax implications that follow. It should be understood if the interest on the investment is taxable and tax-deductible. Tax laws can become confusing, so investors should ensure they have an understanding of the tax rules for any particular venture prior to vesting their money.

Proceed With Caution
Investing money rather than paying off debt can be an effective route to financial freedom; however, the investor must proceed with caution. Investments can be risky, and there is no guarantee of a return. Therefore, money should never be borrowed with the expectation of receiving a large enough return to pay off debts. Careful research should precede any investment considering all risk factors to make the endeavor a successful one.

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