To Pay Off Your Debts First Or To Invest?

One very crucial issue is having to choose between paying off your debts while also striving to meet up your needs, or going into the building process of saving and investing.

In advising those who have never invested on when to commence the investment process, we often say “invest now” or “start today.” However, the reality of life is that it might not always be as convenient as it seems.

One very crucial issue is having to choose between paying off your debts while also striving to meet up your needs, or going into the building process of saving and investing.

With whatever decision you make, there is a compromise you have to deal with. Here’s what happens with any one of them:

Repaying Debt First

Nobody likes to be in debt. Nobody likes to be burdened with financial obligations especially because of how embarrassing it can get if it does get out of hand. As such, this is the most common option taken.

The positives of paying off debts first are that you let go of the financial burden that it comes with and be free as soon as it has been taken care of.

However, this reality too is not as it seems. For one, a focus on debt repayment can cause you to have the urge to pay a little too much from your income. In an attempt to pay off debt, you might overestimate your ability to manage the funds you set aside to meet up other needs, and end up borrowing again to move on.

Also, if the debts are huge like home mortgages or college debts, by paying off only debts, you end up spending years without actually trying to make things better for yourself.

Work will eventually seem like a burden that is yielding little or no gains and you might entirely lose the will for it. It might make you feel better, but it will not propel you to your financial goals.

Investing First

If you choose to invest first, there are also upsides to it. Your investments will give you a sense of financial stability and you will have the opportunity to exponentially multiply your funds.

The disadvantages of this are numerous, however. The first and most apparent disadvantage is that your creditors will not wait for years to get their funds back.

Interest rates might rise as a result of payment delays, and more drastic issues like reputational damage and loss of collateral might arise. Most importantly, you end up placing your investments under undue pressure to grow and will ultimately end up pulling out funds prematurely to pay off pressing debts.

The Solution Is A Healthy Balance

In order to make the best out of the situation, you need to find a healthy balance between the two and to do this you will need a budget. Determine what your expected income is and split into percentages covering debt allocation and investment allocation, while also setting out a logical portion for your day-to-day operating expenses.

Pay up the most pressing debts or the littlest ones (if using the debt snowball method), and invest a portion of your income towards your future. By making this healthy balance, you leverage the gains of both factors and reduce the impact of their risks or disadvantages.

Written by Lawretta Egba.