In a society where things are being offered with credit cards and EMI, the fear of debt seems to be an unending one. Indeed, there are tons of Americans who are under debt and they don’t know what to do. Neither they have savings nor do they know how to invest, smartly. Therefore, right in this article, you will know to Pay off debt or invest in the simplest way.
If you are someone who has got extra cash that flows each month, you must be wondering what’s best for you. Well, the answer can be complex as it involves tons of different factors to make such an equation work perfectly.
Also, most of the things depend upon your financial condition and stability in your life.
Hence, let’s go ahead and unwrap the steps you can take to make the true decision to Pay off debt or invest.
Table of Contents
Table of Contents
Pay off debt or invest: Access Financial Line
Before you can start putting your money into investing or paying off debt, you must have your finance basics covered. In this case, the prominent way to do the same is to create a budget.
I have seen plenty of people who don’t have their very own budget. With this, they lack clarity and end up buying the stuff they don’t need.
This results in debt for which, your sleep will vanish and you will find ways to escape the trap of debt.
Now, if you are serious to create your budget, there are different budget-oriented tools available online. From your end, you can make use of each of the tools and create a budget as per your needs.
Within the budget, you can eliminate the stuff you don’t need and include the ones you want.
This will create a balance and help you to invest in a lot better way.
According to some experts, you can make use of the 50/30/20 rule to create your budget. In this scenario, 50% of your income will go to the food, shelter, utilities while 30% will go through the optional expenses.
Out of which, 20% of your income will go through savings and other additional debt.
Now, you must note that the above things are just starting point and you got to do more than that.
On the other hand, you will have to reduce your expenses to the lowest point. You know that the debt is high and with this, you cannot really afford to spend on expenses.
It’s important to consider and analyze your present date situation from every angle. Once you know the amount you are able to keep aside for investing and paying debt, then options will open up for you.
As and when you think about the best strategy, you got to consider the below basics.
Pay off debt or invest: Basics
Given below are some of the true basics you got to understand before you can pay off the debt or even invest.
Indeed, whether you are thinking to save money, invest, or even pay off debts, keeping an emergency fund is the basic step.
For any individual, an emergency fund is a thing one should keep, without any delay. We live in times where things are not certain and in such a scenario, medical emergencies can arise, out of nowhere.
Whether it’s any sort of job loss, medical emergency, or even any sort of repairs, you can fall short of money in any scenario.
According to the experts, you must have at least three to six months of expenses saved aside as an emergency fund.
However, for some people, it can take years to generate cash and achieve those goals.
At the start, you can keep $1000 to $2000 as a buffer and as and when your income grows, you can increase that thing as well.
401 (k) Contribution match
If your employer is someone who offers 402 (k), it can match up with the retirement accounts.
For example, the common match percentage employers keep that ratio to 3%. Therefore, if you can contribute 3% of your annual salary to 401 (k) accounts, employers will chip in the same amount.
This eventually will save up your boosting rate to a massive 6% a year which is commendable.
Further, taking the true advantage of 401 (k) is important regardless of your current debt condition. Essentially, this thing offers the rate of 100% which is another good thing.
Plus, it eventually reduces the taxable income, and most importantly, you can prepare for your retirement in the best possible way.
Thinking to Pay off debt or invest, past due debts is another important thing in such a scenario. We all know the disadvantages of those high-interest debts as they can add up the load to some good extents.
It can also affect credit card score along with the financial life for years. Therefore, if you have any sort of high debts, you should work off to pay those debts, as early as possible.
Keeping such debts into your bank account will have serious damage on your overall credit score.
Debt APS vs. Investment Expected Return
Once you know that the basic needs are taken care off nicely, the easiest way to decide whether to Pay off debt or invest is to look at the interest of both ends.
Yes, If you know that the rate of your investment portfolio is good, you can go ahead in this case.
Also, if you are someone who invests in the stock market, you might have a clear idea on the debt scenario.
For example, if your portfolio yield is 7.5% and if you have you have your credit card debt at 17%, you could be earning 17% in the form of different interest savings.
On the other hand, if you only have the auto loan as a debt, you can easily pay off such debts and invest at the same time.
Debts like payday loans, auto loans, and personal loans charge much higher interest rates. Therefore, being a smart consumer, you should first pay off such debts, as early as possible.
This should be done right before your investing where you can pay off the debts and live a stress-free life. Then, you can think about investing in different areas from where you can generate more amount of money.
In other cases, you can have an interest rate instead of the APR. However, both of them are not the same and there are some sorts of differences.
While the interest rate represents the amount of interest, the lender is charging, APR represents the full cost of financing which includes all the fees and charges.
Further, you can make use of an online APR calculator for finding out what you can truly expect to pay the debt.
How you can pay off Debt?
Now, in the process to pay off debt, you got to take different equations into place. Also, if you got to pay those high-interest debts, you can easily follow different tips that can help you in achieving the goals.
Check Credit Report
Before you can begin the process of paying off debt, you will have to take a look at the credit reports. Yes, with the help of a comprehensive report, you can have a look at your debt accounts.
Now, checking the credit will easily help you understand the balances of your loans along with credit cards.
Along with that, you can have a look at other credit account and keep those things into consideration.
Further, if you have got the accounts in the collection along with credit cards, chances are high you will max out. These accounts can become your priority when you are moving forward to paying off the debt.
Also, you can get a free copy of your credit card with different sorts of online reports.
Decide on the amount you can pay
In the midst to Pay off debt or invest, deciding on the amount to pay is one crucial step. Here, you got to take a look at the budget and then determine your paying based on the monthly income.
In such a scenario, you got to be pretty much realistic and know the capacity for how long you can pay.
Also, it’s important to give yourself buffer at equal intervals where you can easily manage your earnings.
If you will overextend yourself, chances are high that you will end up going bankrupt. Therefore, each of the things has to be done in a calculative way.
Therefore, if you can pay on the basis of calculations, you will find no issue to pay off debt and invest in later stages.
See whether you can reduce the rates or not
Speaking about yet another phenomenon, you will have to see whether you can reduce the interest rates or not. There will be tons of opportunities where you can find a way to lower your interest rates.
For instance, in the case of credit cards, you can call over and request for a lower rate. However, in such cases, there is no sort of guarantee whether these things will work or not.
Therefore, for the things to work, you got to have the right communication skills. You must be able to convince the company where they can reduce your interest rates.
On the other hand, you can even make use of the debt consolidation loan and replace debt which carries a lower interest rate.
With a lower interest rate, you will have less burden for each of those interest you are paying which will result in a positive outcome.
Make use of the Debt Avalanche Approach
Speaking about the meaning of the above sentence, it’s one of the simplest ones. In this scenario, you must make at least all of your minimum monthly payments without delay for avoiding any sort of late fees.
This will not damage your overall credit card score and you can easily start investing or paying off other debts.
Also, using this method, you can take stock of your current debt condition by listing cards in your account. After this, you can tackle the accounts where the interest rates are much higher.
With this, you can reduce the higher interest rates and then go ahead to pay all smaller debts, one after another.
Moving ahead to Pay off debt or invest, you must make minimum payments on each of the debt. Still, it doesn’t apply on higher debts as those things will take time and you got to pay off higher debts, as early as possible.
Once the debt is paid off, then you can apply that amount to regular pay and on the debt with the next high oriented interest rate.
Thereafter, you can continue with a similar process until the entire debt is paid off. Yes, having such sort of debts will take off time to pay.
If you can pay off debts with a lot more planning, things will get easier for you. In this scenario, all you need is the right set of calculations and with those, you can pay off debts, as early as possible.
Be Alert on avoiding higher interest debt in Future
Paying debt is an essential step if you are eager to improve your financial condition. Therefore, in such cases, you must be alert in avoiding the higher interest rates in the future.
Initially, you may find that the interest is not that much but if you will not pay off interest, those rates will truly climb above.
This will result in those higher interest rates and you will start facing those debt problems.
On the other hand, if you have increased debt because of overspending, you can take the steps to lower the debt, as much as possible. For example, in such a scenario, you can consider switching from credit to debit cards.
With such things, you can reduce major credit card losses and with debit cards, you pay money that is present in your bank account.
Further, it’s essential to keep a budget that can avoid you to overspend. With a budget, you can track your spending for each month and in the case of overspending, you can find different ways to minimize those spending.
Eventually, all of us know the downsides of higher interest rates and if you can tap on such thing, you can live a much stress-free life.
How to begin Investing?
Now, if you are someone who doesn’t have any sort of high-interest debt hanging above you, starting investing can be your best of all things. Indeed, investing has done wonders in tons of cases and if you can invest smartly, results will be fruitful in the long run.
On the other hand, if you have extra cash flow, you can invest that money smartly hoping for a better return.
In general, the best way to start investing is in the stock market. Yes, the stock market has made people rich and you can take advantage of a similar thing. In this scenario, you will have to first learn the basics of investing.
Once you have done that, then you can go ahead and invest in mutual funds and stock markets.
At the start, you may face some sort of issues but as and when you will climb up the ladder of the stock market, there is no looking back.
On the other hand, another better place to start investing is in your retirement funds. Here, you can basically start investing money into bank accounts that can give you higher fund value in the future.
Speaking about the other ways, there are tons of options where you can invest money and hope for better returns. Here, you can start off with an online store and sell products. Yes, this is also another type of investing where you can make good money from it in the future.
Also, while investing, you will have to take a look at risk tolerance. Here, make sure to keep the risk tolerance as low as possible. With this, you can minimize down the risks and invest money to get better returns.
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More on Investing
For example, investing in stocks is riskier than investing in bonds. In such a scenario, investing in mutual funds can be the best and prime example to invest in a safer way. Yes, if you can manage to invest into mutual funds, chances are high that you will get better investment returns.
However, you must note that investment returns are for the long term and you won’t see much in the present date.
You have to grind in the case of investing and once you learn everything. Then you can possibly go ahead and investing, a lot better.
Therefore, whenever we talk about investing, it has to be done smartly. And with calculations, you can hope for much position return.
All or Nothing will not Work
Going ahead to Pay off debt or invest, you don’t have to focus on just one thing in this scenario. If you will do such things, you can end up spending tons of your time and things can take longer than usual.
Therefore, in such a scenario, you must look to find a perfect balance between investing along with savings. Here, you must also look to pay off the debt along with different debt paying off plans.
While you are paying debt, you will have to minimize your expenses, as low as possible.
Having the basic sort of calculations, you will get a much well and balanced foundation in the long run.
On the other hand, you must keep in mind that investing isn’t a sure shot guaranteed approach. In such a process, there can be times when you may not make any money from your investment money.
Hence, if you are willing to invest, you will have to take every sort of condition into consideration.
As and when you will try to find the right strategy for you, then you can simply work with a financial advisor.
Here, the financer will help you in investing and if you can crack this thing up, things will get much better for you.
Final Word of Mouth: Pay off debt or invest
Summing up the entire article, the entire phenomenon of Pay off debt or invest is right in front of you. There are millions of people who are struggling with everyday finances and are paying much higher debts than usual.
In this scenario, the above article can help you tons and will make your mind a lot clearer than the usual.
Here, your main focus must be to increase your earnings and paying off high-interest debts. Yes, those high-interest debts can make you go bankrupt where paying them off has to be your first goal.
On the other hand, if you have got proper cash flow, then you can start investing in the stock market and other businesses. Make sure to keep the risk tolerance as low as possible that can reduce the risk factor.
Additionally, considering everything, you can pay off debt and invest at different times.
Eventually, it will take time for you to understand the different fundamentals of investing. However, after you have understood the same, then you will face no issues.
Then, you can go ahead, pay off high-interest debt, start investing, and live the best of all future life.
Founder of twomillionways.com
MBA – London
I am here to share my ideas and experience on how to make real money.