Pay Off Debt or Invest?

Which is best?

There are so many different opinions on this subject — should you pay off your debt, or start investing for the future? Well, as is the case with most financial questions, the answer is, “It depends.”

Photo by  NeONBRAND  on  Unsplash

Photo by NeONBRAND on Unsplash

Each person’s financial situation is unique, compounded by the fact that all money decisions are emotional decisions. This is why there is no straight answer to a question like this.  So, to help you answer that question for yourself, let’s review the basics.

Invest?

Saving and investing appropriately for retirement can help you earn compounding interest on your money. Here’s an example. You invest $2,000/year for 30 years, and earn an average 8% return per year compounding… you contribute $60,000, and end up with ~$226,566.


Pay Off Debt?

On the flip side, perhaps you have $150,000 in student loan debt at 5.5% interest. Wouldn’t it make sense to invest and get 8% to “outpace” your loan? Not really. This assumption is based on the idea that you would distribute money from that investment account in order to pay the loan (so if it’s a qualified retirement plan or IRA, you’d likely lose money to taxes and penalties for early withdrawal).  Additionally, the annual return of an investment portfolio is not guaranteed… whereas the interest on your loan is. So if you pay off your student loan a year early, that’s a guaranteed 5.5% return back to you. 


Conclusion

At any rate… do the math. Know your numbers. Weigh the pros and cons of your situation and reach out to mentors for help. Should you pay off debt or save for retirement? Your answer to this question likely involves a little of both.