Investing vs. Paying Off Debt

These days it is not unusual to be over-burdened by debt. Whether it’s chiseling away at student loans, the monthly car payment, mortgage, credit card or medical, it seems as if most Americans have some level of debt.

Those who are just barely getting by logically conclude that paying off debt is the highest priority after the basic needs are met. From an emotional standpoint, it may be exhilarating to know that you are free of debt, but there may be another alternative: investing. Could it be beneficial to simply manage your debts by making the minimum payments, while beginning to invest your excess income? Should you pay off debt? Should you invest? Both? Here are some tips to help you decide what works best for you.

Good Debt vs. Bad Debt

Knowing the difference between good debt and bad debt will help you gain an advantage on where you need to get started. Good debt usually pertains to purchases that appreciate in value over time. Having a mortgage is a great example of good debt, because the value of your home will generally increase as the years come and go. Student loans are examples of good debt because the cost of a college education is priceless for working in a designated field. Renovations are considered good debt because the improvements on your home will increase the value for when and if you decide to sell. Lastly, purchasing fine art or rare collectables that will appreciate over time given the originality and scarcity of the product can be considered good debt.

When you are trying to live above your means by purchasing things with your credit card that you normally cannot afford, that is considered bad debt. Things pertaining to impulse buys, extravagant vacations and even little everyday joys like your favorite latté from the coffee joint down the street are considered bad debt because they have no lasting value. New cars lose their value almost immediately, so it is considered unwise to make these kinds of purchases just to keep up with the status quo.

Out with the Bad

If you think that investing might be a good option for you, then it is of the utmost importance to start paying down your bad debt first. You are already losing money because the purchases have either lost their value completely or they are slowly depreciating over time. In addition, many bad debt purchases will have high interest rates attached, so you are losing more than just the value of the initial purchase by paying that extra interest. Lastly, making an investment while harboring bad debt can be a gamble that might leave you with an even bigger mountain of debt than the hill you had before you started.

In with the Good

If the only debt you have is good debt, then investing doesn’t seem like such a risk because your purchases are only gaining in value. Hopefully over time the value for your home will begin to be more substantial than the amount you’ve invested. Those student loans that helped you land your preferred career path, will eventually be outweighed by your salary as you grow in your career placement. On the flip side, if your good debt has a high interest rate it might be more beneficial in the long run to pay it off, because it might not give you the return you were expecting.

What's the Point?

At the end of the day you have to ask yourself, what is the purpose of all of this anyway? Most people crave the peace of mind that comes from being debt free, because it means they can pursue more meaningful things in life (i.e. family, quality time with friends, financial security for generations to come, etc.). It all boils down to what you can manage, and it is important to be honest with yourself. Can you take the risk by having bad debt and investing at the same time or are you ready to eliminate some debt to free up more money for investment?

Whether you choose to invest or stick to a plan of getting debt free first is up to you. Every situation is different and you can’t always compare yourself to others. Do what works best for you to live a life that isn’t ruled by your debts, but by your own choices. For more information on whether you should invest or pay off debt or both, contact one of the professionals at Galaxy Lending Group at 602.595.1233.