Should I Pay Off Debt Or Invest? What To Focus On First

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For years, money nerds like us have argued about whether it is more important to pay off debt or invest. With the rise of popular personal finance personalities and gurus, it seems like the debate has heated up even further.

So, what’s the real deal – should you focus on repaying debt or start investing first?

This is a great question! Simply asking the question means you are invested in improving your financial situation. That’s the first step to making your money work for you. 

Still, there are several things to consider when it comes to the best use of your money.

I want you to make an informed decision, so let’s look at some ideas that should factor into what you choose.

Debt is Dangerous

Being in debt is not fun. In fact, you should never underestimate the power it has in your life. 

Unfortunately, being in debt often snowballs into more debt. When you are in debt, your money no longer belongs to you. It makes it hard to make good financial decisions because it limits your options and makes it difficult to save for the future. 

Even if you’re comfortable with your current payments, what if something happens and you lose your job? What if you want to make a career change? In these all too common situations, your debt can suddenly become a massive burden.

Besides, debt can affect more than just your finances. If you have debt, you know how it can affect your whole life. It adds stress and can feel like a weight you carry around all day.

Sometimes, the added stress can start to affect your personal life, your work, your sleep, and your well-being – which is never a good place to be.

You can consider repaying debt as basically a low-risk investment. When you pay off your debt, you save money because you are no longer paying interest.

Yes, you could be missing out on a bigger return from investing, but you’re effectively “earning” the interest rate you would have otherwise paid on that money.

should i pay off debt or invest

The Case For Investing Your Money

While I’m all for dumping your debt and moving on, it’s not always the best mathematical decision. First, it depends on the type of debt you have. 

Credit card debt is a killer and almost always comes with high interest rates. Getting rid of this debt quickly may make a lot of sense.

However, if you have student loan debt or a low-interest mortgage, it may make more sense to invest first. If you’re able to earn a higher return through investing than the interest on your debt, investing could be the way to go. 

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So, You’re Saying Tackle Your Debt First? 

Yes. And no. 

Paying off your debt is often a smart decision to make. If you go this route, focus all your efforts on getting rid of your debt as soon as possible. That way, you can get back to investing quickly.

With that said, if you have access to a retirement account like a 401(k), it might be a good idea to fund your account to at least make whatever your employer will match.

This is free money you don’t want to leave on the table. Also, because this is a pre-tax investment, it will lower your taxable income, which could save you even more. 

So, it’s possible to repay your debt and invest for the future at the same time. 

Let’s take this one step further and build a solid plan for taking charge of your money.

Here’s my suggestion for the order you should follow with your money:

  1. Create a basic emergency fund. Try for $1,000 minimum. Most experts suggest keeping an emergency fund that’s the equivalent of 3 to 6 months of expenses. I agree you should do that eventually, but for now, just get a starter fund. 
  1. Contribute to your employer-sponsored retirement account and take advantage of matching funds.
  1. Pay off your debt. There are many ways to approach this including the Debt Snowball and the Debt Avalanche. Pick something that works for you and pour all your available finances into repaying your debts. 
  1. Finish your emergency fund. It’s not a matter of “if” something will happen, but “when” something will happen. 
  1. Look at other investment options. This could be a Roth IRA, a Health Savings Account (HSA), mutual funds, real estate, rental properties, or a host of other options. Now that your debt is paid off, your increased cash flow is ready to go to work for you. 

Obviously, this is a simplified “to do” list for your money. If this was easy to do, nobody would have debt.

It takes discipline and the drive to get to where you want to be with your money. While it’s not easy, I can assure you it’s completely worth it. 

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What About Student Loan Debt?

If you have debt related to student loans, refinancing those loans is another option that could save you money.

When you refinance your loans, your old loans are paid off by a lender and they create a new loan with different terms and interest rate. Depending on your credit history, you could lower your interest rate significantly.

Because of that, refinancing your student loans has the potential to knock thousands of dollars of interest off those loans. 

There are many reputable lenders who can refinance your student loans. A great way to find the right lender for you is to check out Credible.

This is an online marketplace that helps borrowers compare rates from multiple lenders to find the best deal.

Based on the amount you want to borrow and your credit history, Credible can connect you with lenders who handle student loan refinancing. 

One thing to note is that if you have federal student loans, refinancing your loans turns them into private loans.

You will lose access to federal protections, like deferral and forbearance, as well as access to Public Student Loan Forgiveness (PSLF) and income-driven repayment (IDR) plans.

Be sure to weigh that into your decision before refinancing any federal student loans. 

The Bottom Line

The decision to repay off debt or invest your money isn’t an easy one. In fact, it’s typically different for each person.

Making the right choice depends on your personal financial situation, your credit history, your career, the amount of debt you have, the type of debt you’ve accumulated, and your loan interest rates. 

No question, there’s a lot to think about, and there’s no good reason you can’t do both. 

Thanks for reading and good luck!

Do you think it’s best to focus on paying down debt or to start investing? Leave your thoughts in the comments below!

Kevin Payne is a freelance writer and staff writer for Club Thrifty, a website dedicated to helping people dream big, spend less, and travel more.

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