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Everyone can agree that saving money is an important goal. In fact, it’s the foundation of all your financial plans. Everything starts when you put away that portion of your paycheck with a goal in mind.
Your goal could be anything: a dream vacation, a new car, a boat, a retirement savings plan, a down payment on a house, an education fund for your kids, building wealth – whatever it is you envision for your future.
The trouble is that before many people start thinking about these goals, they find themselves already buried in debt. There are many sources of debt that can get in your way at any stage in life, including:
- Student loans
- Credit card debt
- Payday loans
- Mortgage debt
- Auto loans
- Personal loans and lines of credit
The question is, do you start investing now, or do you pay off your debt?
The Case for Paying Off Debt
When you’re carrying high-interest consumer debt like credit cards or payday loans, getting out of them as soon as possible is the first step toward financial health.
However, studies have shown that people are naturally bad at managing debt, especially when they’re balancing multiple accounts.
Intuitive debt management is tough, and there may be a better way. That’s why many work with certified credit counsellors on a debt management plan. They can help by negotiating with creditors to get you a better interest rate, sometimes even reducing the interest charges altogether. On high-interest accounts like credit cards, that makes a substantial difference.
But it’s not the only way that certified credit counsellors can help. They also walk you through budgeting and money management so that you can accomplish your goal of becoming debt-free sooner.
Paying off your debt will also help you achieve goals like getting a mortgage. Even if you have the savings for a down payment, lenders will also look at how much you already owe and may reject your application if you owe too much, even if it’s low-interest like a student loan.
When You Should Invest First
Paying off debt is often the first goal people have, and it’s a good one. But it may not always make the most sense if you’re carrying low-interest debt or there are penalties for speeding up payment (which sometimes apply to auto loans and mortgages).
There is a strong case for investing over paying off debt in two cases: when you need an emergency fund and when the returns on investments are higher than the interest rates on the debt you owe.
An emergency fund is something everyone should have, even if you owe money. Emergencies happen, and if you have cash on hand to handle them, you avoid going deeper into debt. If your credit cards are at their limits, an emergency can lead you to even worse options, such as exorbitant payday loans.
The case for investing becomes stronger when you have low-interest loans like student debt. If you have the extra money beyond your typical monthly payment, investing in high-growth stocks can quickly outpace the interest. It’s essential to see high growth over a long period of time if you want to retire.
At the end of the day, it’s about the math and your personal goals. Find the right financial plan for you.
Disclaimer: This content does not necessarily represent the views of IWB.