The average American household has a total debt of $135,768. As a country, that’s a total of 13.51 trillion dollars in debt.
On the other hand, 50 percent of Americans own just under $54,000 in stocks, on average.
But what is the smarter move? Invest or pay off debt? Read on to find out.
Pros and Cons of Paying Off Debt vs Investing
Should I invest or pay off debt? It’s a very common question.
On the one hand, paying off debt lowers risk for financial hardship in the future. It reduces stress levels and makes you more likely to be OK in the event of a personal emergency or recession.
On the other hand, investing means looking towards the future. You can build up a reserve that can protect you in the coming years.
Investing can be an additional source of income that you don’t have to work for. Plus, it is one of the best ways you can prepare to retire comfortably.
But is it better to pay off debt or invest in your situation?
Paying off Debt Vs Investing
Many people wonder if they should pay off a car or invest. Or pay off their student loans or invest.
Before we can truly look at whether it serves you better to pay off debt or invest, we need to look at your debt. Use our free toolkits such as a debt reduction calculator to figure out how long your debt repayment will take.
If your debt has an interest rate of over 10 percent, you should refinance. You could move that debt to a personal loan or line of credit that has a lower interest rate.
Even a 1 percent point lower interest rate can save you thousands of dollars or more.
If you have credit card debt, you could look at a balance transfer. Especially cards that offer an introductory period with 0 percent APR. That means you will not pay any interest.
Some cards offer this 0 percent interest for up to 21 months. The catch is that you have to pay off the entire amount before the introductory period ends.
When your debt has under 10 percent interest, you may consider investing as well well paying down debt.
You need to consider the best futures trading system before making a decision.
What Is Your Risk Tolerance?
Investing comes with some risk. Your risk tolerance depends on several factors such as your age, your income, your time horizon and earning power.
If you are in your 20s or 30s you are likely able to invest more aggressively. That’s because you have time to recoup any money you may lose in investing.
Also, if you are young you can put more towards cash and fixed-income investments. The longer until you retire, the better the payoff could be.
Equities generally give more than 10 percent returns (before taxes) over a long time. So even though you are paying interest on your debt, you likely are still earning more than that amount through investments.
When debating between paying off debt vs investing you need to think about passive income.
One of the benefits of investing is that you generate income while you are on vacation or sleeping.
Remember, there are many options for investing. You might choose to purchase a rental property instead of building a portfolio.
Invest or Pay off Debt?
We hope this article has helped you better understand the decision to invest or pay off debt.
At the end of the day, there is no one right decision for everyone. Your unique circumstances will play the deciding factor on whether it is better to pay off debt or invest for you.
While you’re at it, download our free e-book called how to get out of debt.