Debt is a fact of life. It’s pretty much impossible to pay cash for everything, and a bit of debt is essential for building up a good credit record. Should I invest or pay off debt? I guess you will have to read to find out for yourself.
If you have some extra money after you’ve paid all your bills every month, you might be wondering which is better: Invest it or use it to pay off your debt? Here are the questions you should ask yourself to figure out what’s best for you.
- What interest rates are you paying?
- Are you earning more than you’re spending?
- Do you have an emergency fund?
- What are your financial goals?
Pay off the highest interest debt
The moment you have settled the highest interest debt, focus on saving for emergencies. An emergency fund will keep you out of further debt when you have sudden expenses, for instance repairs to your car.
Some times seeking help is not a sin. There are reputable debt counselling and debt consolidating companies that can help you.
Paying off debt will mean that you have more money to invest in the future.
Create an emergency fund
As a rule of thumb, this emergency fund should always be enough to cover your expenses for 3 to 6 months. But as a starting point, you can save up R5 000 to R10 000 as a buffer before paying more money into your debts.
Insure your assets
One thing you need to take into consideration is insuring yourself and assets incase something happens to you or your assets. For instance, let’s say you’re car gets into an accident or your home gets hit by a heavy storm and you don’t have an insurance to pay for the damages. That means you are going to take out a loan or worse sell some if not of your investments if not all.
Insuring your assets can give you a breathing room incase something happens to you. Insure yourself and your assets. Make sure you do some research on a company you will use insure your assets. At the moment you can check out solvency insurance and see if it aligns with your goals.
Live below your means
Going forward, make it a rule to live within your means. In other words, never spend more than you earn. It’s bad enough paying back a student loan or mortgage without owing money on a store account, too. If you’re thinking about buying something you don’t need, but can’t pay for it in cash, then don’t buy it.
Do best of both worlds
You’ll have noticed by now that the best approach when it comes to investing or paying off your debt is to do a bit of both. A blended approach lets you take care of your most urgent debts (particularly any ‘bad’ ones), while still building up an emergency fund and investing towards your longer-term financial goals.
Start small
Say you have R1,000 to spare. You could, for example, set up a debit order to automatically contribute R500 to your debts, while putting the other R500 into your savings. (How you ultimately balance those amounts will depend on your personal circumstances.)
Yes, you’ll lose a bit more in interest by not being completely debt-free straight away… but at least you’ll know that you’re steadily building your wealth. Paying off debt is important, but you need to invest in your future.
So, should you pay off debt or invest for the future? The truth is, the answer to this question depends on where you are in your money journey.
Whichever route you decide to go, be sure to explore all potential outcomes. I would recommend speaking to your financial advisor for a plan that best suits your specific requirements.
You can also enroll in our free courses that will teach you how to invest and how to pay off your debt.
