There is a big debate on which you should do, Invest, or pay off debt. What do you think you should do?
This is a fascinating topic because I believe it is a very personal one. The reason I say that is because what is best for me might not be best for you in your situation. One of the biggest problems is if you ask a super frugal saver, they might say “pay your debt,” and if you ask that exact same questions to an investor, they would say “invest NOW.”
The problem I see with this is that to a man with a book, everything is knowledge, and that is just the wrong approach. To me, two factors will determine which course of action is best for you. The factors are as stated — debt interest rate and how much debt you currently carry.
Good debt is one that most of the time we have to incur in order for us to achieve something such as a mortgage, car loan, or even a student loan is what is typically considered “good debt.” Since usually, the interest rate is so low, your interest payments will not eat a massive chunk of your money as long as you keep that debt manageable is critical.
If you mostly have good debt and are at a manageable level, then I would say start investing and paying your debt at the same time. With good debt, you want to make sure that you prioritize what needs to be paid off first. For example, paying off your student loans as quickly as possible, and it will save you money in the long run. And it has the most significant interest rate.
Bad debt is probably the easiest and worst kind of debt that you can get your self into and carry. Most of the time, when discussing bad debt, it is credit card debt. At all costs, if you can not pay off your credit cards, then avoid them at all costs. And if you currently carry a balance, look at an option to be able to find alow interest car and or a balance transfer option that gets you at 0% so you can pay it off as quickly as possible.
If you are a credit card with a $5,000 balance and a rate of 24.99% by paying that debt off, you have guaranteed to save over 5,000 in interset, which you can use to invest in stocks.
You have to learn to develop new habits that are going to get you to the goals that you want. If you plan to invest while you carry debt, you have to do it in a very conservative way. You want to make sure that you focus heavily on paying your debts while still contributing a small amount of your income to investing and creating an emergency fund.
If you don’t currently have an emergency fund, I suggest that you work on getting one created ASAP. The whole purpose is if there is an emergency, that means you don’t have to mess with the money that you have saved or any of your investments to take care of that.
If your debt to income ratio is over 35%, I would highly recommend that you work on putting all your efforts on lowering that ratio so that you can help your self in the long run. Make sure whatever direction you decide to go. Please make sure that you work as hard as possible and make a plan to attack whatever your goal is.