Best to pay off debt or invest

What’s next? You minimize your tax bill, which means more money in your own pocket. We show you ways to invest on a small income.

The Framework: If This, Than That

Whether it’s a dsbtpersonal loans, credit cards or all of the above, more tp more people are drowning under the burden of their debt, and for those with enough income to keep their heads above water, the only logical choice may seem to be paying off their debts as quickly as possible. But wait —is that always the best financial game plan? While it certainly feels good to be debt free, in some extremely rare situations you may be better off simply maintaining your debts i. Fortunately, there are some basic principles you pa use to help you determine whether to invest or pay down debt. This article was co-authored by Michael R. Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas.

Debt, Emergency Funds, and Investing

This is the question we get at LMM most often. What should I do first, invest or pay off debt? Today Andrew has done the math. There is a lot of emotions involved when it comes to making financial decisions but this framework largely removes emotion. This is straight up what you should do to optimize your finances. One debt, one rule. And the most important part of any debt repayment plan is focus.

The Framework: If This, Than That

Whether it’s a mortgagepersonal loans, credit cards or all of the above, more and more people are drowning under the burden of their debt, and for those with enough income to keep their heads above water, the only logical choice may seem to be paying off their debts as quickly as possible. But wait —is that always the best financial game plan? While it certainly feels good to be debt free, in some extremely rare situations you may be better off simply maintaining your debts i.

Fortunately, there are some basic principles you can use to help you determine whether to invest or pay down debt. This article was co-authored by Michael R. Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas.

Log in Facebook Loading Google Loading Civic Loading No account yet? Create an account. Edit this Article. We use cookies to make wikiHow great. By using our site, you agree to our cookie policy. Article Edit. Learn why people trust wikiHow. Co-authored by Michael R. Lewis Updated: August 9, There are 10 references cited in this article, which can be found at the bottom of the page. Make a list that includes all of your liabilities. Gather your financial statements and make a list that includes all of your debts.

The list should include the following: The name of the company that you borrowed the money. The outstanding balance on the loan. The monthly minimum payment.

The expected date when the loan will be fully paid off. Create a list of everything that you bought with borrowed money. You probably used most of your debts to make purchases. Write down a list of everything that was paid for with a loan. If you can’t remember everything you bought with your credit card, simply write down «Credit Card Purchases. Combine the two lists.

Create a master list that connects your debts to your purchases. For example, if one of your debts is a Visa credit card, list the purchases you made with that credit card under its heading.

If you bought a house with a mortgage, list the house under the mortgage heading. Anything you labeled as «Credit Card Purchases» from the step above is considered bad debt.

Very rarely do people use a credit card to buy something that increases in value over time. Separate your good debt from your bad debt. All of your debts will fall into one of two categories: good debt or bad debt. That’s based on the following criteria: [2] If the purchase involves something that typically increases in value over time, then it’s good debt. Examples of good debt include: your home, your college education, renovations, and fine art. You accumulate bad debt when you use credit cards or other debt to establish or maintain a lifestyle you could not otherwise afford.

Purchases that you no longer remember or use, such as entertainment, travel, or basic living expenses, are examples of bad debt and living beyond your means. Going into debt to purchase a new car is considered bad debt, since its value quickly depreciates and the interest rates may be very high.

Eliminate all of your bad debt before you invest. The reason that you should eliminate your bad debt before you start investing is simple: you have a double expense associated with bad debt. The purchases made with bad debt include items that go down in value over time, so you’re losing money as those items depreciate in value.

The purchases made with bad debt may have a high interest rate associated with them, so you’re losing money by paying an interest expense. In the case of credit card debt, that expense can be quite high. However, just because something is interest-free it does not make it good debt.

An interest-free loan on an expense or depreciating asset could be bad debt. If you invest while you still have bad debt, you’re taking a risk with money that could add to the losses you’re already experiencing. Consider investing once you only have good debt. If all the debt you have is good debt, you can invest because you’ll typically see an appreciation in value of the things you purchased with the debt. If you purchased a house with a mortgage, that house will usually increase in value over the long term though this is not guaranteed.

That increase in value will offset, to some degree, the interest that you’re paying for the mortgage. If you still have college loans, you invested in your professional career. Consider the risks of investing. Even if you are free of your bad debt, remember that there is always a risk involved with making an investment, and you will need to weight the best to pay off debt or invest risks and rewards of investing.

For instance, consider that good debt doesn’t always give the returns you hope for — the real estate market has proven to not be as steady as was once thought, and more and more college graduates are finding that their degrees aren’t guaranteeing a good job. For example, it might be better to pay off a good debt with a high interest rate if your potential investment return is less than the interest on the debt. Avoid incurring more bad debt once you’ve started investing.

If you have to, liquidate some of your investments to purchase items that go down in value. However, avoid incurring more bad debt with losses that will offset the gains from your investments. A car, for instance, may be a necessity where you live, or for your lifestyle. But going into debt to buy the newest, shiniest car is considered a bad debt — they are expensive, quickly depreciate, and the interest you pay is a waste of money.

Look at the big picture. Debt can be scary and stressful, and, for the most part, it is best to get out of debt completely as soon as possible. However, paying off certain debts is not always the best decision in the long-term. Don’t become so obsessed with paying off debt that you don’t look at the big picture. But, in fact, you must pay taxes to take money out of your retirement plan — it may actually be better to have a mortgage on the house and get a tax break.

Most people are retiring with some debt. This is okay, as long as you have carefully planned your finances post-retirement to be able to pay those debts. This may mean you have to work a few years longer than you’d like, but you’ll be saving yourself stress and financial hardship in the long run. When yields are given on an investment is the annual expense to have that investment taken into account?

Generally, yes, but you should discuss this with the person selling you the investment. Yes No. Not Helpful 0 Helpful 1.

At 55 years of age, I have no assets, no house, and have student loans of my children in excess of two hundred thousand dollars. My children also have their own student loans.

I can pay off one hundred thousand dollars but that will only leave me with seventy five thousand dollars. Should I pay it? Generally speaking, it’s a good idea to pay off debt as soon as you. However, instead of relying on advice from a forum like this, it’s much better to seek advice from someone familiar with your specific circumstances. Not Helpful 1 Helpful 1. My father gave me money. I am now thinking whether to pay off a portion of my housing loan with that money or invest it at 1.

Which is better? Make a payment on the loan. Consider, however, that there are many safe investments — mutual funds, for example — that could pay you well above 1. Not Helpful 0 Helpful 0. I have the funds to pay it off.

Should I instead invest the funds? You can take your time paying off a no-interest loan although it can temporarily hurt your credit score a little.

A zero-interest loan is very nice to have! I am comfortably retired. Should I use my inheritance money to pay off line of credit or invest it? That’s «free» money you inherited. Whatever you do with it will be to your advantage. If you can realistically expect to earn a higher return on an investment than the interest rate you’re paying on the LOC, go ahead and invest.

Debt, Emergency Funds, and Investing

If you meet the eligibility guidelines, fully fund a Roth IRA for both you and, if you’re married, your spouse. Personal Finance. These funds are available in a full spectrum of return and risk profiles. The company will return periodic interest payments to the investor and return the invested principal when the bond matures. Partner Links. A common situation people face is dwbt between paying off debt or investing. A debt avalanche is an accelerated system debf paying down debt that is based on paying the loan with the highest interest rate. If you are a low-risk person, pay off the debt. Both are admirable and necessary.