A common battle takes over the minds of millions of consumers who are near the beginning of their wealth building life. Debt, which comes at a cost, and investing, which has the potential to pay off significantly in the future, are two financial tools often at odds with one another, and not much direction is provided by the financial powers that be on which to tackle first. While both serve a purpose, it can be daunting to determine which is the right path for you and when. Fortunately, there are several questions to ask yourself that will help in making the best decision for your specific financial situation.
How Much is Debt Costing Me?
The first question you should ask yourself when it comes to paying down debt or investing is how much your debt is costing you. High-interest rate debt, like credit cards and some short-term loans, should be your focus before dipping your financial toes into investing waters. That’s because, over time, compounding interest on a debt costs you tremendously, especially when you’re only paying the minimum amounts due. While you could be earning a high return on your money in an investment account, more likely than not, it won’t be as high as the interest you are paying to a lender. Focus your energy on paying down that debt first.
Do I Have an Emergency Fund?
If you’re considering taking some funds away from your debt repayment plan to put toward investing, you should take a look at your rainy day fund first. Everyone needs an emergency savings account that can be easily accessed when a financial emergency or unexpected bill pops up. Counting on credit cards or loans to manage a big bill in a hurry isn’t always the best option, as it could cost you quite a bit over the long haul. Set aside some of your discretionary income to build your emergency savings to an acceptable level before you start investing.
How Well Do I Understand Risk?
Hands down, investments are the sexiest part of a financial plan. That’s because some investments boast high returns with little risk, along with access to your cash without any withdrawal penalties. However, all investments carry some degree of risk; without an understanding of how that affects your bottom line, you could be headed for financial trouble. Before you get seduced by investments, you have to ask yourself if you’re prepared to take on risk. Investments fluctuate in value (yes, even the safer ones), and if you can’t stomach volatility right now, it’s best to work on your debt first and then explore investment options when you have more discretionary cash.
Can I Do This Alone?
Just about any financial strategy can be implemented – and championed – on your own. Resolving your debt issues may take some time to calculate and fit into your budget, but it’s manageable without the help of a pro. Investing, on the other hand, can be a complex strategy to grow your money, and as such, getting expert help from a financial professional may be your best move. Figuring out the balance between paying down debt and investing for the long-term can be done easily by employing the help of someone who’s been there, done that, or an expert who is actively helping others accomplish the same thing.
Before rushing down one path or another, it is important to understand that everyone has unique financial circumstances that should be considered prior to making a significant financial move. Ask yourself these questions to get a better understanding of what your priorities are, and then develop a plan to get to the next level of your financial life in a balanced, logical way.