One of the many not-fun things about having a limited pool of funds is deciding what exactly you should do with your money that isn’t covering the basics such as shelter, food and transportation. Many of us get to the point where we ask ourselves if we should pay off debt or invest money.
In an ideal world, you won’t have any debt to pay off, but rather few us of live in that world. And there isn’t a one-size-fits-all answer to the question of debt vs. investment either.
Some of you might owe a lot of money at high interest rates. If this is you, you are likely not going to get a higher rate of return on your investments than you pay to service your debt each month, so putting much of your focus on decreasing your debt is a good idea. But, if you never save for a rainy day, then when unexpected costs come up, you invariably end up going back to your credit card or line of credit to replace your broken washing machine or fix your roof. Some people also feel stressed at having no investment income and having no money put aside for a rainy day. Therefore, any plan you create needs to consider your emotional state in regards to your money.
For many of you, your best bet is likely doing a combination of both debt reduction and investment. Pay off that debt but also build something for the future, even if most of your cash is going to debt relief. To figure out exactly how much should be going where, talk to your financial advisor. They can help you figure out a plan of action that will make the best use of your funds.
And when it comes to debt repayment, try to get the most bang for your buck. This usually means paying down debt with the highest interest rates first. For example, target your credit card balance where you are paying 17.99% interest first, instead of your line of credit with a 6.50% interest rate. Although, if you tend to run up your credit card balance immediately after paying it down, you aren’t necessarily helping yourself with this strategy. Again, you need to know yourself when creating your plan.
Should You Consider Debt Consolidation?
You can look to consolidate your high-interest credit into either a consolidation loan or by rolling it into your mortgage, but this only works if you are going to stop running up your credit cards after the consolidation. If you look at your new zero-balance credit card as an excuse to buy more, debt consolidation will only worsen your problems.
So, you can see that your strategy will not only depend on how much you owe and need to save, but it will also depend on your own spending habits and vices. This is where I can help. If you are feeling overwhelmed and don’t know where to start, I can help you figure out a plan that you can stick to. Because that’s the only type of plan that actually matters.