Should You Pay Off Debt Or Invest Your Cash?

Ryan Thompson March 24, 2020 0

There are times when having debt is good and necessary and times when your personal debt becomes an anchor around your neck. When people are able to get ahead of their debt, they are usually happy to pay that debt down even if they are living with it comfortably.

Is it always the best idea, however? What if you were to take your extra cash and invest it? There are cases to be made for both, of course. There is a risk to investing so you could find yourself losing your investment and still being saddled with debt.

In this article, I will go over some of the things to keep in mind for either case so you can decide what you think is going to be the best scenario for you.

How to invest

There are a lot of places to put your money and they all carry some form of risk. Which one is best is going to depend on how much of a return you can expect considering you are paying interest on the debt.

You want to find a balance between the risk and the return so you can have that potential profit work to outpace what you are paying in interest on the loan.

If you are paying high interest then you may need to take on some extra risk and go for a higher reward type of investment. That could be by putting money into an IPO from a company going public, or you could invest in cryptocurrency like Bitcoin.

An IPO can take off like a rocket and then come back to Earth pretty quickly so you’ll need patience and nerves of steel.

Bitcoin can be volatile, but it has shown to be a money maker if you can ride out some of the dips. You should look at a Bitcoin calculator to see that the current exchange is.

Paying off debt

When you are in debt your decisions usually hinge on that fact. When you have no debt you have more wiggle room to take on a new job, or buy that dream house. You could also be faced with an emergency and unable to face it due to your debt.

It seems like it would always make sense to just pay it off and get rid of it.

The type of debt matters as does the interest. For example, if your debt is primarily from credit cards then it is a good idea to pay them off assuming you aren’t dipping into your emergency fund.

Interest on student loans and mortgages are tax deductible and your interest on those loans may be low. If the interest is low and you were to park your cash in index funds instead of paying the debt off, then you potentially could have more money at the end of the term.

If your interest is high, then you should consider paying it off as you are not likely to end up with more money later. You would have to go for high risk investments which may not be great if your loans are more than a few years away from maturing.

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