Is It Smarter To Invest My Money Or Pay Off Debt?

Looking At The Full Picture

To answer this question, you must decide how your money can work best for you. While having a savings account is a way to plan for the future, becoming debt-free is an excellent strategy for creating long-term financial health.

Take a look at your savings account statements to see how much interest you’re earning. Now take a look at your creditor’s statements for the debts you have. You are probably being charged more interest on your debts than you are earning on your savings.

When you’re deciding between paying off debt or investing in savings, the best choice depends on the interest rate of each account. For example, if the interest rate on your debt (say a credit card) is 13 percent, you would have to find a savings option with an interest rate equal to or greater than 13 percent to make additional money.

An easy way to get a big picture view of your debts is to write them down. Make a list of your debts by creditor name, amount owed, and interest rate. List them in the order of highest interest rate to lowest interest rate.

Now how can we eliminate this high interest debt?

• Putting the card away so you don’t put additional charges on it

• Paying more than the minimum amount due each month

• Transferring the balance to one of your lower interest rate cards

• Getting a lower interest rate debt consolidation loan

• Enrolling in a credit assistance program

• Borrowing money from family or friends to pay it off sooner

Let’s Look At The Options That You Have

So far it may sound as if paying off debt before investing in savings is the best option. Keep in mind, most financial experts recommend budgeting 5 percent to 10 percent of your income each month for savings. So what should you do? Here are some options:

Pay off debt before investing in savings. This will look good on your credit profile, but you won’t have a financial cushion if you need it.

Make the minimum payment required on your debt and create a savings account. This will give you a financial cushion, but it will prolong the life of the debt and may cost you more money in the long run.

Find a balance between paying off debt and investing in savings. Paying off debt now while working toward building a savings puts you in control of your money. You may want to pay a little more than the minimum payment required on your debt and put the rest into your savings.

Now the solution becomes very personal. You must look over your “big picture view of your debts” because yours is yours alone. And only you know the monthly income for your household.

You can also download a free “Pay Down Debt Or Invest”, calculator for Windows from Wheatworks Software, which is helpful. Or, if your debt is getting to the point where it is difficult to manage, you might consider debt consolidation. Otherwise, the above information should pretty well sum it up for you.