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Which is more important: paying off debt or investing?

Written by Eric Ebbert CFP®, MBA

On September 7, 2020

Most people want to save money to have financial security in the future, but achieving this looks different for everyone. Some people have a lot of money to invest. Some people have a lot of debts they need to pay off. Some people have both. 

This leads to the dilemma that many people with extra cash often face: Should you pay off your debt or should you invest? There is a simple answer to this question and an answer that is a bit more complex. We would like to explore both with you.

Paying off debt or investing? The simple answer

Investing is enticing because you have the opportunity to generate earnings from interest, dividends and growth rather than losing money to interest on your debts. However, some debts can lower your tax liability, such as student loans and mortgages. Credit card debt does not.

The simple answer to whether to pay off debts or invest depends on your type of debt. If you have credit card debt, it should be a priority to pay it off. Credit card debt usually comes with a high interest rate and requires you to pay a minimum balance each month if you wish to avoid a penalty. Living with this kind of debt can keep you in a financial hole where you live paycheck to paycheck and can find it difficult to save and invest. 

Pay off your credit card debt as soon as possible to avoid losing money to interest and to start having extra cash left over in your paycheck to invest. Once they are paid off, make sure to pay the full amount each month going forward.

Paying off debt or investing? The more complex answer

As we mentioned earlier, there is some debt that can lower your tax liability, such as student loans and mortgages, because the interest you pay is deductible from your income if you are itemizing deductions. While it is certainly a wise decision to pursue paying off your student loans and mortgage, these are not necessarily as important to eliminate before investing. It is possible to pay your minimums for these types of tax-advantageous loans and debts while using the rest of your extra income to invest.

Using this strategy, you can start generating earnings from your investments while taking advantage of the reduced taxes because of the interest on your student loans or mortgage as you continue to pay those off. 

Pay attention to interest rates. Student loan interest rates can change year to year. In 2019, student loans spiked to 6.8% in July but dropped to 3.9% shortly after. However, rates can spike again and may not drop shortly after, meaning it may be wiser to shift more of your funds toward your debt to keep yourself from falling behind. 

Talk to a ProVise CFP® professional about paying off debt and investing

Paying off debts and investing are both great strategies for saving for the future. However, deciding on when to focus on paying off debts or investing can be challenging when you are not familiar with the financial landscape. That is why you need to find someone who is, like our CERTIFIED FINANCIAL PLANNER™ professionals at ProVise Management Group.

Our team can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you to help you pay off your debts and invest. We also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about paying off your debts or investing? Contact ProVise today to schedule a complimentary consultation.

Women, you can also join us for one of our Savvy events hosted by Susan Washburn, CFP®, JD, Senior Financial Planner. These are free events designed to build a community of strong women who want to learn more about managing their money and investing.

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