Investing vs. Paying off your Debt

by Michael Klein

I often get asked the question, “I have some extra money should I pay off my debts or do you think I should put the money into an investment?” I always look mystified as I calmly answer them, “Isn’t paying off your debt a smart investment?” Needless to say most people don’t get it.

Doesn’t it make sense to you, if you keep yourself from paying the interest on a debt, you are making future money. The money is of course a future savings, which by definition is an investment.

A lot of people who invest money would like to see a good return over the life of an investment. Let’s say an average return on a moderate mutual fund over a 20 year span has returned 10%. The average Credit Card interest rate is 12.99%. Are you beginning to see where I’m going?

One of the key differences between paying off debt and investing in a stock (investment) is risk. With the debt you are guaranteed to make interest payments over the life of the debt, however, with the investment there are no guarantees.

The problem is most people don’t know anything about investing, and most people don’t know how to speed up paying off their debt. For isn’t paying off a principle balance faster, much like having a stock skyrocket?

So now we are coming to a highly important point. Having an investment make huge gains is much like paying off debt quickly. The question remains, how do we as people in debt, pay off our debts at an accelerated pace?

There are only a few ways. One is to decrease the rate of interest. Another is to decrease the term, which will of course increase our payments, or the final way increase the payment activity and payment amounts.

If you learn how to leverage your lines of credit against one another you will be on your way to paying off your debt at an accelerated rate. We have determined this is a fantastic way for you to invest your money until you are debt free.

About the Author: