A very common situation faced by many is deciding between investing and paying off debt. Both are important options and both of them are necessary. Repaying your debt means eliminating stress, reducing risks and providing you with a great ability to overcome and handle any kind of personal emergencies. When you live debt free, you will also make it simpler and effortless for you to endure economic depression or recession. You will also have flexibility of your personal finances which can maximize your happiness.
Investing includes building a reserve which can safeguard you and also your family and offer you with a passive source of income. Above all, it can include enough money for you to be able to retire in peace. But if you have too many online installment loans to repay, how do you know whether to invest or pay off debt first?
Which debts should you repay and which investments should you fund?
As per what the experts have to say, here is the hierarchy which they suggest you to follow:
- You should fund any retirement account which you and your spouse have started at your workplace, whether it is 401(k) plan and make sure you save up to the amount of free money which you receive. For majority of the companies, the matching amounts can range in between 50% and 150% of the initial (x)%.
- If you have an emergency fund, you should make it highly liquid like savings account, FDIC-insured checking, comparable account or the money market.
- In case you’re able to meet the eligibility guidelines, you should fund a Roth IRA fully and if you’re married, your spouse should also do it. You’ll have to check the contribution limits in effect from the given tax year. In the year 2018, a married couple will earn an amount $135,000 and you can contribute to $5500 of earned income per spouse.
- High interest debt should be paid off first like student loan debt, credit card debt and all other liabilities. You should always prioritize student loan debt because this is the biggest form of debt which you will find it tough to discharge through bankruptcy. Keep paying your student loans when you’re debt free and stop adding to all such costs.
- In case you’re serious about saving for retirement, you can take into account the strategy which involves Health Savings Accounts as there are different types of de facto IRA on top of Roth IRA.
- You should also start building assets in the taxable brokerage accounts , mutual fund accounts which are directly held and dividend reinvestment plans or you can even purchase cash-generating assets which are within the expertise area. For instance, a real estate investor could buy apartment buildings, industrial warehouses and office buildings. On the other hand, you can consider funding a 529 college savings plan for your grandchildren or children.
If you behave by taking the above listed steps, you can achieve the following:
- You can minimize the tax bill which means extra funds in your pocket
- You can create considerable bankruptcy protection for the retirement assets. Your 401(k) account, which is an employer-sponsored retirement plan, you can get bankruptcy protection under the rules
- You can reduce your debts over a long period of time. There will arise a point when this will be repaid entirely and the free cash flow will go through the roof.
Therefore, now that you know whether to invest or pay off debt, you should focus on them depending on their priority in your life.