Choosing between paying down debt and investing your money can be a difficult decision. There are many factors that should be considered, including interest rates and long-term financial goals. There is no right or wrong answer for how you proceed, but here are some pros and cons of each option.
Should I invest or pay down debt?
Let’s say you have $5,000 to invest or pay down debt. Before making a decision, consider the interest rate that you’re paying on your debt balance. If your cost of debt interest rate is below 6%, then it makes good sense to invest your $5,000 because the average stock market return is about 7% over the long term. At a 6% interest rate, your debt is costing you approximately $300, but you could earn $350 by making a smart long term stock investment. If the cost of interest on your debt balance is over 7%, it makes the most sense to pay off your debt because you’d pay more than $350 to keep a balance.
Despite what the math says, choosing whether to pay down debt or invest is a complex decision. Some people are incredibly risk-averse and would rather pay down medical bills or credit cards (rather than earn an extra few dollars while worrying about investment performance). On the other hand, some people are happy to borrow additional money (at reasonable interest rates) to invest in a stock with good returns.
Keep in mind, the average return on the stock market changes frequently, so this decision should be reexamined each quarter. When the stock market is paying good returns, investment is a decent wager. However, when the economy takes a downturn, finding a low-risk investment that earns you enough money to cover the cost of carrying debt would be like finding a unicorn.
All that being said, if you’re considering debt repayment, take us up on our offer for a free debt analysis. With a quick phone call, we can provide you with a reduced payment quote and a myriad of options for affordable debt relief!