There’s a certain level of trickery that goes on in the investing world, and whether consumers choose to ignore the outward signs of it or just aren’t aware of it at all is questionable. Those who make a living from financial counseling and advice seem to want to make finance an egregiously difficult thing to deal with. From saving to spending and making money, we are led to believe that it’s next to impossible to deal with the financial aspects of our lives without assistance from some overly-smart, college-educated person in a fancy suit and a Mercedes-Benz in the parking lot. The truth is that finances are not at all that complicated. Once you break down exactly what it means to maintain your finances, you’ll find yourself wondering just how it was that you had trouble dealing with debt, paying bills, or any of the other things that trouble us in our modern, daily financial lives.
The benefits of paying off debt are multiple. Obviously, there’s the benefit of having extra disposable income that you can then invest. There’s the psychological benefit of not being beholden to others for your lifestyle, and the reduced stress of knowing that you only have a few bills here and there to take care of every month, rather than the servicing of a mountain of debt such as credit card bills, student loans, doctor’s bills, car payments, and yes, even mortgages.
Now, to the question concerning whether you should take on an investment or put money toward debt payment, it depends on the debt. There are some types of debt that benefit from early repayment, some that should be paid off as soon as possible any way you can, and some that might just be counterproductive to be paid off too soon.
Let’s look for example at a big debt- your mortgage. If you’re paying a little over 4% on that mortgage, you’re getting a pretty good deal, but at over $100,000, it’s a huge debt that, regardless of how you go about it, is going to take some time to pay off. Balance that against putting your 401-k investment on hold, and you’re doing yourself a disservice to miss out on that potential 8-15% return, as well as the tax benefits of both. If this is the question, then don’t do it! Keep adding to your 401-k, and if you want to pay off your mortgage early, kick an extra $100-$200 per month at your mortgage principle, and it’ll be paid off years in advance.
Now, the second side of the coin is the credit card debt, student loans, and all the other drudging debts that drag us down every month. If you’ve got more than $500 in debt servicing going on every month, then you really do need a change. Try putting those investments on hold for a while to get your debt paid down. That way, later on, you’ll be able to add still more to those investment accounts, and avoid having all those debts hanging around your neck for the rest of your days! This is extra important when it comes to servicing credit card debt. The problem with that form of debt is that regardless of how much you throw at it, the compounding interest will eat your finances alive, even if it’s a relatively small amount of debt.
Sure, investing is a great idea, and for the most part, preparing for your future shouldn’t be put aside for debt. However, as part of a solid plan for your future, it’s a good idea to get rid of your existing debt before you make any investments outside your 401-k. If you do, you might find yourself doing nothing but running around in circles.