Everyone carries debt. (It’s ok, you don’t have to hide it). It’s just a simple fact of 21st century life.

Everything from credit cards to student loans, to household mortgages all come with that dreaded financial baggage attached. It is our jobs to carry that debt, chipping away at it month after month, until we reach the blessed goal of paying it all off.

Should I Pay Off Debt or Invest?

(shameersrk / pixabay)

But with constant outgoings, it can seem impossible to put anything aside — whether you are saving for some big purchase, or just trying to provide a good fund for your retirement.

And so rises the question:

Do I put that hard-earned moolah to work for me with investments? Or do I use it to clear out some more of that ever-present debt?

Why pay off debt?

The problem with accruing debt is that it HAS to be paid off. It would be nice to borrow and not give back, but we’re honest and fair and know how to repay that courtesy.

Of course, not all debt is bad. Debt accrued from loans and credit cards — when paid off regularly — actually helps us with our financial standing. Improved financial standing means our chances in the future of getting bigger loans with better rates increases. Which brings us more debt.

See? Vicious cycle.

But the key to dealing with debt is correct management. Paying off at least the minimum repayments leaves your finances looking stronger than they were before. Further, keeping on top of these interest rates helps to prevent you from falling deeper into debt.

If you don’t meet minimum repayments, this will only lead to compounding interest rates and cost you more in the long run.

Why invest?

We invest to make our money work for us. Making smart investments in various types of stocks, real estate, commodities, etc. can provide us with monthly or quarterly dividends. Wise investments allow us to build powerful streams of passive income that we can enjoy now and into the future. They lead to better income, and better income can lead to better investments.

Look at that, a much-less vicious cycle—as long as you make wise investment choices.

Which to choose?

Here’s the thing: Investment costs money. Likewise, paying off debt costs money.

So how can you do both?

Should you invest and put only the bare minimum into clearing that pesky backlog of owed money? Or should you forego investment in order to clear out that debt entirely.

You may find my answer unsatisfying, but the truth is that it all depends on your individual situation.
What I can share with you are the key things to consider before making your decision.

Consider your interest
Each debt comes with a specific interest rate. It can range from 3.73% for student loans to an average of 16.17% for credit cards. Ideally, you should determine which of these is the most pressing and focus on that.

Ideally, you should clear any debts with an interest rate above 10% as quickly as possible. This will ensure that your debt won’t get out of control and snowball into something much more problematic.
Once you have that cleared, any debt you have below 5% will usually be for mortgages or vehicle payments. You can clear these off in the usual manner.

Any interest rates between 5-10% can get a bit tricky. Since they aren’t as dangerous, one option is to split out some of your saving funds to help chip away at these and get yourself cleared.

Put Aside 20% of Your Income
Roughly 20% of your monthly income is generally considered an ideal amount to invest into an asset or stock. With your basic costs covered, if you have 20% or more of your income left, you can pat yourself on the back. If you have a house and a good car already sorted, look to buy yourself some shares or make larger payments into your 401(k).

It also helps to put aside some emergency funds. Most people I know prefer to save between 6- and 12-months’ worth of income so that you can be sure you are protected in case something bad should happen.

What Kinds of Investments Do You Want to Make?

Depending on what you’re considering investing in, investing first to shore up your debt repayments may be more profitable.

If you have the opportunity to make some strong investments that will net you some handy extra income, then this could be to your advantage. Any well-planned investments could provide you the extra income you need to help eliminate your debt.

With this approach, you can find yourself simultaneously investing in the present AND the future.

In short, whether you choose to invest immediately or focus on clearing out your debt is a personal choice. But you should find it easier to improve your financial situation with a few handy suggestions from yours truly.

If you want one-on-one help creating indestructible wealth through investing and debt management, I can tell you more about my financial coaching services. We can discuss debt payoff strategies and ideas for leveraging debt for profitability.