It seems that if you explore the websites of five different financial advice gurus, you’ll get five different, and sometimes competing, opinions on the “right” way to allocate your savings. Are those funds better spent on gaining freedom from past expenses, or planning for future goals? Specifically, should you be investing, or paying off debt? There is no one right answer for everyone. When it comes to making that all-important decision for yourself, here are some things to consider:
Calculate Both Sides
You’ll want to sit down with data from all of your debt accounts, as well as from what you’ve identified to be your best investment options. Calculate the amount of interest you currently pay on your debts, and then calculate the long term total of what that debt will cost you in any number of repayment scenarios (six months, one year, five years, etc.). Next, calculate the returns you can realistically expect from the investment options you’ve chosen to compare. Weigh both sides out against each other—debt interest versus investment return—to determine exactly how much it will cost you (or save you) to go with each option.
Look into the Future
Sure, it’s impossible to know exactly what the future holds, but it’s not impossible to take inventory of your circumstances and make plans for altering them in the future. For example, you might be stuck in what feels like a dead-end job right now, but you may also be only six months away from earning a college certification that can significantly bump up your income. You will need to take this type of foreseen growth (and, conversely, setback) when determining which is better, investing or paying off debt.
Assess your Goals
There’s no practical way for you to accurately determine which route you should take if your aren’t looking at the big picture. This means you must take some time to think about what your goals are, on both a short term and long term basis. When you do all of your calculating and projecting into the future, you can use these goals as a yardstick for measuring where you should be in regards to your debt interest/investment return ratio at any given point in time.
For example, if it is your goal to qualify for a home mortgage within three years, then you will have to get your debt down to a reasonable level (so to prove to the lender that you can afford your monthly payments) within that time frame. However, you will also need to have enough savings for a down payment. Both of these elements will factor into your decision of when to invest versus when to pay down debt.
There is no easy answer to the question of whether or not you should be investing or paying off debt. Even pros like Timothy Sykes and Dave Ramsey know you have to take this question on a case by case basis. Your circumstances are unique to you, and so are your goals. Take all of these things into consideration when making important decisions about your financial future.