Updated 6/24/2021 When was the last time you had a significant amount of disposable income? Maybe when you were 12 and you got a nice check from your grandparents for your birthday. Or maybe it was the last time you got a fat tax refund. For most people, disposable income is hard to come by. But for others, like high-net-worth individuals, disposable income is the norm. Either way, the next time you have some extra cash lying around, you may ask yourself, should I invest or pay off debt?
CONSIDER YOUR FINANCIAL GOALS
What to do with disposable income is a very broad question because there are so many options. The reality is it all comes down to your own personal finances. What are your personal goals for your financial situation? Of course, you could blow all that money by splurging on something you’ve always wanted, like a motorcycle, or a new boat, or use it as a down payment to remodel your home. Or, if you are looking for more responsible options, two of the best things you could use your disposable income on are investing or paying off debt.
ELIMINATE DEBT OR INVEST IN THE FUTURE?
Eliminating debt and investing in the future are both smart options. They might seem a little boring, but instead of splurging on something you don’t really need, you could use the money to become debt-free or invest in your long-term financial future. So which option is better? If you only have enough disposable income for one or the other, which one should you choose?
IMPORTANT THINGS TO CONSIDER
As with many questions in life, there is no simple answer. Everyone is different so there is no one-size-fits-all response to this question. But here are some ideas that could help you make the right choice for your situation.
Start with cash flow – if you have enough steady cash coming into meet your regular living expenses, it might be a good time to invest that extra money. On the other hand, if cash is always tight and you can barely keep up with your monthly payments, it’s probably wiser to put that extra cash towards relieving some of that debt.
Not all debt is equal
What about debt – not all debts are equal. Some debts cost you a lot of extra money thanks to high interest rates. On the other hand, other debts are not nearly as bad, like a mortgage. You get to deduct your mortgage interest payments from your taxes so that helps reduce your overall interest rate.
Best time to invest
Consider your investment opportunities – there’s no really bad time to start investing. For some people, the end of the calendar year is a great time. For example, you could invest in your personal retirement account. Any extra money you have right now could go toward fully funding your IRA for the year. If you haven’t maxed out your annual contribution amount, now is a good time to do it. You could wait till April 15, but why wait if you have the money now. It might be gone by April.
It doesn’t have to be one or the other
One more option to consider is to use some of your funds to pay down
debt, and the rest on investing. Savings, debt payoff, and investing all are good and needful goals, and starting on one while neglecting the others by waiting for the first one to grow can stunt the growth of the others.
So, to the question; should I invest or pay off my debt? The answer is yes. Whichever option you choose: paying down debt, investing in the future, or both at once, you can’t go wrong.
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