Should you Pay down Debt or Invest more

Investing your money when you have debt to pay off can be challenging. You want your money to work for you and grow as you get closer to retirement. Holding onto debt for years, however, will cost you more money. That extra money you pay could have been put to better use in an investment account. Earning interest on your money feels much better than paying interest to someone else.

In a perfect world, any money you invest would earn more interest than what you pay on debt. Unfortunately, we don’t live in a perfect world. It is common for an individual to have debt that forces him to pay interest far higher than any interest he may earn on an investment. This doesn’t have to be the case. Earning more than you pay is the foundation for financial stability and an important aspect when deciding whether to attack your debt or begin investing more.

Let’s first answer a simpler question: should you hold off investing until your debt is paid in full. The short answer is no. Paying your debt in full needs to happen, but not to the detriment of investing for your future. As mentioned earlier, the longer you hold onto your debt obligations, the more expensive the debt becomes. Making timely payments will reduce your debt, keep your interest payments low, and improve your credit score. This will also help keep the cost of future debt low.

While you make your debt payments, you should also allocate a portion of your income to be saved and invested for your future. There are several options for you to approach investing your funds. Look to your employer first. They may offer an investment plan, such as a 401K, which allows you to invest some of your gross income, i.e., income you earn before income taxes are paid. Beyond that, you could also look to financial advisors to help guide your investing. If you would like a more hands on approach, there exist plenty of online discount brokerage firms that allow you to invest yourself, such as Sharebuilder and E-Trade.

Now, if you have the good fortune to receive a raise, you should take the same approach. Use the extra income to make higher payments on your debt as well as invest more. Of course,there may be instances where it makes since to pay more toward your debt than to your investments. Still, doing both simultaneously will pay off your debt quicker while you set more money aside to earn interest.