Debt Management

Is it better to invest or repay debt?

If there’s one positive that can be taken from the global financial crisis, it’s that more and more people seem to be thinking about how to make more of their money. Over the last year or two, various reports have indicated that many people are saving more, repaying more debt and taking more care over where and what they buy.

All of these things can help to improve your financial situation, but which is better – investing/saving or repaying debt? Should you focus more on savings and investments to increase your financial security, or should you pay off your debts first?

The answer to this depends on your circumstances. In some cases you might be able to do both, but sometimes one or the other might make more sense.

Saving / investing

Savings and investments can provide financial security by giving you something to fall back on in a financial emergency. What’s more, they can allow your money to grow faster than just keeping your money in a ‘standard’ bank account.

A lot of experts recommend keeping the equivalent of three months’ salary in savings. In truth, any amount of savings is better than nothing, but it’s a good idea to work towards this kind of savings target – to ensure you’d be able to cover your costs for a while if you lost your job, for example.

But what about your debts? If you’re focusing on saving but repaying your debts slowly, couldn’t that cause problems?

Repaying debt

Some experts recommend repaying your debts before you save, and in one respect this makes good financial sense. By concentrating on repaying debt, you’ll almost certainly pay less interest overall, because debt usually accrues interest faster than savings.

However, by completely neglecting your savings you could be putting yourself at risk. Let’s imagine you finished clearing your debts one day but then received a huge car repair bill the next day – you could be left wishing you’d put more money into savings.

With that in mind, a lot of people only focus exclusively on repaying their debt once they already have a good amount of money in savings/investments.

Some people may simply prefer to strike a good balance. Although it might cost you more in the long run, repaying a reasonable amount towards your debts while still putting some money into savings could well provide more financial security overall than focusing on one or the other.

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Comments (10)

  • For me, it is better to pay the debt before try to invest. It is hard to make the right investment decision while we still has the debt.

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  • Ah, the age old question…

    I tend to lean toward a balance, but I do so without complete satisfaction in doing so. Frankly, that’s because debt is a concept that I just don’t like to be a part of (as a borrower, anyway), and the psychological benefits of being out of debt can be very helpful to one’s overall outlook and quality of life. At least for me.

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  • Pay the debt first, and then invest if funds permit that.

    No need to being stressed in two fronts.

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  • I think it really depends on the interest. If you can earn more interest than what you have to pay on your loan then invest. That way you can use the money you make on your investment to pay off your debt.

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  • Pay off debt first! Those interest rates can come back to haunt you. Just we sure to have a grand or two in savings for that unexpected emergency!

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  • There are some vary valid points mentioned here, and I think it is important to reiterate how you mentioned each person has a unique situation. For me, it comes down to making consistent payments in order to effectively make some progress on may current debts, however I am not going to ignore the need to have emergency savings available should I one day need it. I think the secret to this dilemma is planning. Avoid being caught off guard and you will most likely steer clear of any rough financial seas in the future.

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  • I think there should be a balance between saving and debt servicing. Say you have an enormous debt, I think you should allocate a higher percentage to paying back your debt and keep a smaller amount for windfall expenses. It all depends on how much debt you have at hand.

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  • It all depends upon interest rate and where u live, Some people borrow from where they get low rate and invest in high rates, getting the apples in home

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  • Personally, I would try to repay as much debt (or make it manageable) before I invest in new things. But I’m lucky and don’t have any debt right now, so investing always is an option for me.

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  • If the interest rates are relatively low, I prefer investing. There’s no guaranteed investment, but if you’re someone who is ok will paying it off over a long period of time (even though it’ll be hanging over your head), then I say go ahead and roll the dice! It may be a slight risk, but it also may be the best financial decision mathematically speaking!

    Reply

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