To Achieve… To Succeeed…

Millionaire Money Habits

July 1st, 2009 at 10:55 pm

Should I Invest or Pay Off Debt With My Extra Money?

If you are lucky enough to find yourself with extra money these days, the first question is whether to invest it or pay off your debt. Ultimately, the decision depends on how much extra money you actually have, as well as your current personal situation.

If investing sounds like a good idea, you’ll want to take a hard look at the interest you might be making on your money. Is your investment considered safe or risky? Is a decent-size return all but guaranteed? You want to make sure that the amount of the return is high enough to justify your investment. If the odds are better that you’ll either remain steady or lose money, investing may not be worth it. On the other side, how much debt do you have? Will the extra money you have available make a difference if you put it towards your debt?

First, make sure that this truly is extra money. You don’t want to assume it is and hand it off either to an investment or your creditors and find out that you suddenly can’t pay your usual monthly bills. It’s too late at that point. Make sure that you also have an emergency savings, especially if you’re seriously considering the investment option. If you don’t, start building that up before you do anything else.

Compare how taxes will affect your extra money. The interest you gain on your investments is taxable, while the interest on some of your debts may be tax-deductible. Which one will benefit you more? If taxes would negate most of your gain, paying off your debt might be the way to go. But if your tax return would be significantly better if you could deduct interest charged to your debts, investing might be best. This is where the decision is extremely personalized: which direction will make you the most money?

For me, paying off debt seems the safest and easiest way to go. You can start by paying off your smallest debt. Then take the amount you were paying to that lender and add it to the minimum payment of your next smallest debt, and slowly but surely, you’ll be debt-free. But if you really know your way around the stock market and high-return investments, you could potentially make enough money to pay off most or all of your debt in one shot, so go with whichever idea is the most comfortable for you personally, the one you feel will make you feel more financially sound as you put your money to work for you.

See what USA Today had to say about whether or not you should invest or pay off debt.

Tags: , ,


RSS feed for comments on this post | TrackBack URI

  • 6 steps to financial freedom

    6 Steps to Financial Freedom
    free when you subscribe to my newsletter.
    *I respect your privacy and will never share your email.