Should You Invest or Pay Off Debt? Top Tips To Manage These Important Financial Goals
Investing or debt repayment—how can you choose? What if we told you that you don’t have to?
When looking at your financial goals, if you’re asking “this or that,” you’re likely cutting yourself off from important connections and opportunities. Instead of pinning your financial goals against each other, start to think about them in terms of your values and long-term vision for your life.
The key to striking the right balance is intentional prioritization.
Everyone’s situation, lifestyle, and goals are different, but here are a few things to consider on your financial journey when making this decision.
Invest or Pay off Debt—Why Choose, Do Both
When looking at these two goals, a good rule of thumb is to structure your money to pay off debt and invest simultaneously. It’s all about prioritizing and understanding that these two things can, and should, work together in harmony. Let’s take a closer look at both goals.
Investing has innumerable benefits, not least of which it helps you build wealth. It comes in many shapes and sizes like brokerage accounts, 401(k), IRA, etc., that aim to grow in value over time. By building wealth early on in your financial journey, you pave the way to a more secure future.
While investing actively builds wealth, paying down debt frees up your cash flow, which would allow you to invest more, and by proxy, increase your net worth. With incurring interest, debt can grow exponentially, so it’s not something you can simply put on the back burner.
If you over-commit to one, you could leave the other hanging.
- Only making the minimum debt payments could lead to more interest over the life of the loan.
- Only stashing away a few dollars a month doesn’t take advantage of compound earnings.
There is equal power in investing and paying off debt with a strategic plan in place.
Set Smart Investing Goals
Before you can design an investment plan, you have to solidify your goals. Your goals will depend on your age, income, and financial experiences.
As you create long-term investment goals, focus on utilizing the SMART methodology. Your goals should be:
- Specific: each goal should be clear and well-defined.
- Measurable: goals should include precise amounts or dates so you can measure success.
- Achievable: goals should be challenging, but attainable.
- Relevant: goals shouldn’t be obscure but should directly relate to your life.
- Time-based: set a goal end date to better frame your achievement.
SMART goals bring more purpose and intention to each goal you set. Investments shouldn’t be arbitrary. Say you want to invest $500 a month. When you know that $500 is growing in a 529 plan that will eventually help send your child to college, it takes on a whole new meaning and role in your financial life.
Your investments can be aligned with short and long-term goals and values. One of the most important long-term goals you need to account for is retirement. Focus on maxing out 401k contributions, making the most of IRA and Roth conversions, and utilizing brokerage accounts.
Create A Debt-Repayment Plan
Before you place all of your eggs in your investment basket, it’s prudent to get clear on your debt picture. Know the debt you have and understand the differences between your debt. For example, credit card debt is radically different from mortgage debt.
When creating your debt-repayment plan, concentrate on tackling high-interest debt first. There’s a huge difference between a 3% mortgage interest rate and a 20%+ credit card debt interest. High-interest credit card debt skyrockets over time, and it’s easy to get lost in the shuffle of minimum payments and ever-increasing bills. By focusing on eliminating that bad debt first, you’ll save hundreds or thousands of dollars over time.
You can also utilize the debt snowball versus debt avalanche strategies.
In the debt snowball method, you pay the smallest debt first and then work your way up, while with debt avalanche, you pay off as much high-interest rate as possible first.
With the debt avalanche method, you also put in any extra funds towards paying off debt. Both strategies require strict discipline, so you have to be committed to the plan.
Throughout the debt-repayment process, you’ll discover new ways to reallocate funds to pay off debt faster. You may consolidate subscription plans, eat out less, live more simply, or earn some cash from investments.
Make Confident Money Choices That Move You Forward
Working with an advisor can help you strike the right balance between paying off debt and executing an investment plan. They are two essential goals that work better together and help you live the life you want and deserve.The important thing is that you don’t have to do it alone. Our team at Pro Wealth is committed to helping you pave a path to a secure financial future. Get in contact with our team to get started!