Should You Pay Down Debt or Start Investing Your Money?

by James on May 10, 2017 · 0 comments

investingDebt comes in many forms—student debt, mortgages, auto loans, and personal loans among others. Most people would have at least one debt situation (there’s good debt) that they are servicing with repayments and interest. Interestingly, people save up a tidy sum or they get a surprise windfall that could have a huge impact on their finances.

However, you’ll most likely be torn between using the money to pay off debt or investing the money to unlock other streams of income. You can invest the money by starting a business or buying equity in an existing business.  Putting your money in paper assets such as stocks, CFD trading instruments, bonds, and commodities are smart ways to put your money to work without incurring the startup capital required to run a business.

Below are insights from three schools of thought that can help you decide if you should pay off debt or apply the money towards investments

The logical school of thought

The logical school of thought lends itself stoicism that suggests a mathematical approach to solving the riddle. The mathematical approach suggests that you should use your money to an end that will have the biggest positive impact on your finances. Hence, you can decide on paying off debt or investing based on how the result will affect your finances in the grand scheme of things.

If the interest rate on your debt is lower than the ROI you can expect from the investment; then, it makes more sense to invest and postpone paying off the debt. You can use the ROI from the investment to pay the interest on the debt and you’ll still have some money left over for yourself. The legendary Warren Buffet didn’t pay off his mortgage even though he could – he figured that the money could be put to better use in his investment portfolio.

Conversely, if the investment yields a lower return than the interest rate you’ll pay on your debt, it might make more sense to pay off the debt. You’ll be debt free, your credit score might improve, and you’ll have more discretionary income from your future earnings.

The emotional school of thought

The emotional school of thought on paying off debt VS investing takes into consideration the fact that humans make decisions based on their feelings. You are the most important variable that could determine if you should pay off debt or use the money for investments.  For one, some people do not like owing money and they’ll most likely be losing sleep if they have a debt problem. Others seem to enjoy the rollercoaster highs and lows of investing to increase wealth.

Hence, you need to honestly ask yourself how you’ll feel if you take one option over the other. If you choose to pay off the debt, will you be able to rest, knowing the opportunity cost in the investment you did not make? If you choose to invest, will your be at peace knowing that the investment could fail, you could lose your money and still be left with an unpaid debt? You are in the best position to know the best course of action based on how you’ll feel after you make your decisions.

The hybrid compromise

The hybrid compromise solution seeks to create a two-pronged approach to solving the investment VS debt-freedom riddle. With the hybrid compromise, you’ll pay down a part of the best and you apply the remaining funds towards investments. The hybrid compromise helps you to locate the delicate balance between paying off debt and making smart investments. Hence, you won’t have to worry about opportunity cost or lose sleep on the possibility that the investment could fail.

For the hybrid compromise to be effective, you’ll need to conduct excellent due diligence on your investments. Your due diligence will help you to make educated investment decisions so that you’ll reduce the likelihood that your investments will fail. You may also want to apply automatic standing orders on your account – the standing orders automatically apply a predefined part of your earnings toward paying down debt and towards dollar-cost averaging investments each month.

Like DINKS? Subscribe!

Screen_shot_2017-04-25_at_1.36.57_pm

Subscribe to get the latest DINKS Finance content by email.

Powered by ConvertKit



{ 0 comments… add one now }

Leave a Comment

This blog is kept spam free by WP-SpamFree.

Previous post:

Next post: