You just got your paycheck and have some extra money left over, what do you do? One difficult question that you may have at the moment, is should you pay off some loans and other debt that you have? Or should you invest and make your money work for you? As always, the answer is that it depends. There's a lot to consider including the state of your debt and your risk appetite. While investing your money (smartly) may always be a good idea, it may not always be the best idea.
When to invest? When to pay off debt?
While you ponder which of these you should do, you have to figure out if investing your money will earn you a higher return than the interest on your debt. Let's you have a loan that is gaining interest at 2% a year. You can either pay it off or invest in a bond that gains interest at 3% a year. In this situation, it would be best to go with the bond, because the risk is low and it grows at a higher rate than your loan.
If you have high interest debt, like a credit card, it can be almost impossible to get a higher return than the interest on the card. In this case, paying off the high interest debt would come first. You also never want to miss a payment, so if you do choose to invest over paying off debt, remember to at least make your minimum monthly payment.
What about risk?
The stock market typically grows at a rate of around 10% per year. However, this comes with a lot of risk. You can risk losing some of your money, while you also have interest growing on your other debts. When you compare investing against paying off debt, you also have to think about if the returns are worth the risk. Investing your money is great if you have the cash to spare, because it will typically earn good returns. However, there is always risk and a chance that you can lose your money.
In general, if you're risk averse, you may want to pay off loans first and take the safer route before investing. If you're a risk taker, you can take a calculated risk in the market. Remember to use good investment practices and don't put all your eggs in one basket, because you risk losing your money.
If you're worried about debt in general and have student loan debt, Defynance can refinance it to a debt-free income share agreement. An ISA doesn't have interest and the payments are tied to a percentage of your income, so they're always affordable. With an ISA, you can take the budget work out of debt and focus on your other financial goals.
The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
