Home Personal Finance Debt Management Should You Pay Down Debt First or Invest? Should You Pay Down Debt First or Invest? Should you pay should i pay down mortgage or invest your debt before you focus on investing?
This is one of the most important questions in personal finance, and the decisions you make now can greatly impact your financial future. The sooner you start investing, the more time your investments have to grow. The effect of compound interest creates a big incentive to start investing as soon as possible. Compound interest is responsible for the “snowball effect” that grows your small investment into a substantial sum over time. But what about paying off debt? Debt grows through the same effect of compound interest that fuels investment growth.
The longer you take to pay off debt, the more it costs you due to compound interest. High interest credit cards have interest rates that likely exceed the best returns you will get in the stock market. So what is the best money move — pay off debt or invest? The Simple Answer Mathematically, the best choice is to put your money where it gets the best return on investment.
For example, if you have credit card debt at 12. However, there is a complication with this simple answer right off the bat. There is no way to know the rate of return from your investment accounts ahead of time! You could get huge investment returns, even higher than your credit card interest rate, or you could even lose money in the stock market and get negative returns. You have to make an assumption about your rate of return to decide where to put your money. No one knows what is going to happen in the stock market, so a reasonable assumption is that you will get returns consistent with the long-term average over the long run.