Invest or pay down debt?
That is a popular question and ultimately not a one size fits all approach
Both have their benefits & the best choice often depends on your circumstances
Here is a guide to help you decide the route to go for your situation:
(Plus 2 approaches to tackling debt)
Considerations Before Deciding:
- What are your goals?
- How do you feel about the debt? Your emotional well-being is important.
- Is the debt making you stressed?
- Do you have an emergency fund?
- Is it high interest debt? Anything over 7%-8% would be deemed high.
- What is the debt amount? Minimum payment amount(s)?
- How close are you to retirement?
- What is your income now & are you expecting a raise?
- Your risk tolerance?
- What is the interest rate currently on T-bills, CDs, money market funds? Factor in what your after-tax return would be here. T-bills are taxed differently than CDs
When you have high interest debt it oftentimes makes sense to pay it off before investing. Look at it this way, if your IR% is 10% and you pay it off, you essentially earn a 10% return & you free up that payment for other uses. There is not an investment that will guarantee you that return.
2 Debt Repayment Approaches:
- Debt snowball. Focus on paying off your debt with the lowest balance & pay above the minimum while paying the minimum payment on your other debts. Once your smallest debt is paid off, use that payment amount to tackle your next smallest debt until you are debt free
The snowball approach often keeps people motivated because they are knocking out their debts 1 by 1
- Debt avalanche. Prioritize paying off your highest interest rate debt 1st while paying the minimum payment on other debts.
This method typically saves you the most money on interest in the long run
Finding a balance between investing and paying down debt is also effective. It doesn’t have to be an either-or situation
The key is to evaluate your entire financial picture, weighing the pros and cons, then develop a game plan that suits you. Having a wealth advisor on your team can help identify potential blind spots and serve as a sounding board to help guide you.
Disclosure:
Retirement Planning Solutions, LLC is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Retirement Planning Solutions, LLC by the SEC nor does it indicate that Retirement Planning Solutions, LLC has attained a particular level of skill or ability. This material prepared by Retirement Planning Solutions, LLC is for informational purposes only and is accurate as of the date it was prepared. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Advisory services are only offered to clients or prospective clients where Retirement Planning Solutions, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Retirement Planning Solutions, LLC unless a client service agreement is in place. This material is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Retirement Planning Solutions, LLC is not an accounting firm. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.