Choosing whether to pay off debt or to invest are two common dilemmas for most people.
Paying off financial obligations such as debt is essential. However, ensuring your financial status and building your portfolio is equally important too. It is not ideal to invest when you’re close to retirement.
What goes first: Paying-off debt vs. Investing?
Should you clear your debts first or should you invest first? Or maybe do both at the same time?
The answers to these questions vary and often tricky. It is a case to case basis because every situation is different.
But as a general rule of thumb, it is always a good idea to start fresh-that is to say, clear all of your debts first as it is not ideal to invest when you’re in debt.
Keep in mind that debt has interest rates that can accumulate if you neglect it. Unpaid debts can lead to a financial crisis. Moreover, debt is a financial commitment that you must fulfill, so manage it first.
You should also have an emergency fund just in case something terrible happens. Without a stash of money set aside for emergency use, you risk yourself open to loaning regrettable amounts of cash which can further increase your debt. To quote the former President Benjamin Franklin, “By failing to prepare, you are preparing to fail.” Remember, prevention is better than cure, so creating an emergency fund is a must!
Before investing, you should do these two things:
- Clear your debt
- Have an emergency fund
Paying off debt and creating an emergency plan are your priorities before you start to invest. It is wise to allocate at least 10% of your income in creating it BEFORE you begin investing.
If you’re having a hard time paying off your debts due to lack or insufficient income, consider getting a side hustle or doing a part-time job. Also, keep track of your finances, sum up your expenses, and subtract it from your income. It is crucial to create a budget and stick to it until you clear your debt. Furthermore, you can sell used stuff that you no longer need to increase your cash flow.
By clearing off your debt and having an emergency fund, you then have the freedom to center your attention towards building your wealth and financial stability.
Michael started with a master’s degree in finance before he went into technology and coding. He is now a freelance journalist and video producer living in Berlin, Germany. When he doesn’t write, he will travel many countries.