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Pay Off Debts or Invest?

The decision between paying off debt or investing is a big one, but probably not as big as you might think.  Many people struggle with this decision because they feel as though they need to make the right choice, but in reality both are good decisions.  Paying off debt is great, and will help build your net worth. Investing is also great as it allows you to understand your finances and will also generally build your net worth.  The fact of the matter is that is that if you’re ignoring an employer match on a retirement plan to pay off debt you’re leaving money on the table, and if you have a high interest credit card debt that you’re hoping to outperform with investments you probably won’t get there.  So, let’s take a look at some factors that can help determine which path you should take.

  • Attitude Towards Debt- This obviously plays a role because if you’re someone that hates having any debt, you’re going to do better in a situation where you pay off your debts first.  For those who have no problem with debt, investing is probably a better road to travel.

  • Risk Tolerance- Just like your attitude towards debt, this lays out your attitude towards investments and how much risk you’re willing to take on.  If you have a low risk tolerance, then paying down debt is likely a better option.

  • Anticipated Investment/Interest Rate of Debt- This is about looking at the math to see what makes sense.  If you have an investment with an anticipated return of 12% and a debt with a 2% interest, it becomes pretty clear as to where you should put your money.  The same is true with an investment that has an expected return of 6% and a debt with a 19% interest rate. Keep in mind that this applies to after-tax and after-expense investments/debt, so debts like mortgages may have tax deductions that make them better to pay down less aggressively than those debts with no deductions.  All of this depends on your individual situation.

These are good places to start when thinking about whether to pay off debt or invest, but it will ultimately come down to what your individual situation is and how you feel about debt and investing.  If you’d like some advice on your situation, please get in contact and we can work through it.  

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