Many investors constantly face the dilemma of choosing to use their money to invest in their retirement accounts or pay down some of their outstanding debts. Paying down debts quicker can save you money in interest. Alternately, investing your money can yield you greater profits compared to the interest you would have saved. However, if you invest wrong, you could lose everything. Below are some considerations to take to heart before you make your decision on what to do pay off debt or invest. In the meantime, when you need a small loan and have bad credit, you should consider how easy it is to apply and get approved for car title loans.
Pay off Debt or Invest?
In truth, all debts are certainly not created equal. When trying to decide whether or not to invest your money or pay your debts down, the type of debts you have can play a major role.
The amount you owe, the interest you are paying and more will greatly affect whether you can save more money by paying off a debt early. If you have many years left before retirement, you will have a bigger buffer to be able to assume the risks that come with investing the money instead.
Determining Your Risk Tolerance
When you are trying to determine your risk tolerance, you are figuring out what your degree of variability with possible investment returns that investors are comfortably able to withstand. Below are some of the things to consider when you are determining your financial tolerance for risks in investing.
- Time Horizon
- Your Current Age
- Earning Power
- Tax Situation
- Other Criteria Which Is Unique To Your Situation
Another component to determining your risk tolerance is figuring out what your willingness to assume such risks in investing is. The point at which you fall on this spectrum can greatly help you decide what is best for your situation. Aggressive investors may find it best to use excess cash to pay down debts rather than invest. However, there is always a chance for any decision you make to backfire.
Managing Debts and Building A Cash Cushion
Financial advisors believe it is in everyone’s best interest to have at least six months of cash for monthly expenses saved up in the event of a job loss. Additionally, they recommend not having more than 25 to 30 percent of a monthly debt-to-income ratio at any given time of pretax income.
If you are wanting to invest or reduce the amount of debt you have, they recommend you first save up your six-month cushion of cash first. This can help you get through any rough events that may pop up in your life.
Balancing Budgeting Methods
You can find a variety of different methods of budgeting your money that will account for both investing and paying off your debts. Some of the top financial experts recommend you using a back-and-forth type of approach for investing your cash and paying down your debts.
Dave Ramsey, a financial expert, recommends this method only after you have at least $1,000 set aside for emergencies.
The Bottom Line
The decision on whether you should pay money towards your debts or invest is a difficult one for some people. The decision can come down to the economic environment, your current financial situation and your personal preferences in handling your finances. All in all, it is best to tackle the decision pay off debt or invest in a way that makes you feel best.