When you find yourself in the trap of debt, it can be tricky to figure out where to go next. Paying that money back is one thing, but how do you make sure it doesn’t happen again? And furthermore, how do you make sure you’ve got the money to spend on everyday necessities while you’re unburdening yourself from debt?
Some people opt to invest their money in the stock market as opposed to paying off debt immediately, and we’ll go over some of the reasons why that’s both a good and bad idea right here. Don’t make a decision until you read our list of pros and cons for each option!
The Pros of Paying Off Debt
The most obvious advantage of paying off your debt immediately is pretty self-explanatory: no debt means, well, no debt! Unshackling yourself from the money you owe doesn’t just mean you have the cash to pay for everyday expenses and luxuries, it also takes a gigantic psychological weight off your shoulders that no one can put a price on. Resolving your debt quickly and efficiently frees you in both body and mind.
The spending and repayment plan that you use to repay your loans and credit is also something that you can control directly, which is an important element of anyone’s financial life. You won’t always have a direct opportunity to affect your financial future, and when that opportunity arises you should definitely jump on it. If you have the option to pay off debt quickly, the smart money (literally) is almost always on doing so.
The Cons of Paying Off Debt
Where you may find yourself at a disadvantage with this strategy is in the general unpleasantness of having to pay off your debts. While being in control of your finances does give you a certain boost from the autonomy of it all, it doesn’t make it any less aggravating to have to cut down on things like foods you enjoy or streaming apps that help you unwind after a long day at work.
Paying off the money you owe in the present can also be a distraction from concentrating on what you can make of that money in the future. If you’re always worried about just keeping your head above water, it makes it that much more difficult to spot the shoreline. Pressing debts should obviously be paid off as quickly as possible, but having to deprive yourself over the long term can cause a weariness that financial freedom doesn’t always solve.
The Pros of Investing
If your debts aren’t critical or on the verge of becoming so, it might be a good idea to hold off on paying creditors right away and put some of that money into reinvestments or low-cost index funds. There are a couple of reasons why you may wish to go this route. Firstly, investments are a fantastic thing to have on your side if you run into trouble with your career or other emergencies pop up. If you’re working with the proper experts, invested money can be a great thing to fall back on if the unexpected should occur.
Chairman and CEO of Berkshire Hathaway Warren Buffett agrees.
“Consistently buy an S&P 500 low-cost index fund,”
the legendary investor tells CNBC.
“I think it’s the thing that makes the most sense practically all of the time.”
But investments aren’t just for keeping you level: they’re also crucial for building your wealth over time. After all, we’re pretty sure that your dreams don’t start and end with simply staying where you are in life hassle-free. Putting your money directly into your future can create an even greater sense of financial stability than being rid of debts in the present moment. When you have the pleasure of looking forward to more money, it can even motivate you to pay off the debts you have now as a win-win!
The Cons of Investing
Investing your money for the future has the obvious drawback of meaning that you’re still stuck with your debt in the present. The human mind is wired to solve immediate problems as opposed to thinking long term, so it can feel kind of silly to be putting away your cash in stocks if the IRS is already at your door with their palms open. Paradoxically, sometimes having faith in your future can create greater anxiety for you in the present.
There’s also the undeniable fact that reinvesting your money in things like real estate, and even in certain kinds of safer seeming bank accounts, can be a risk if you’re not sure what you’re doing. If you aren’t accustomed to the world of finances, you can put yourself in greater debt and make your present situation much worse if you reinvest improperly. Playing the financial odds is something that sometimes takes out even the experts, so it definitely isn’t something you should go into half-cocked.
Which Option is Right for Me?
There is a myriad of factors that go into deciding whether you should choose to pay off your debts immediately or invest your money for a long term nest egg. Ultimately, the two deciding considerations should be how much money you’re making and what kinds of debts you owe.
For example, if your debts are at the point where you’re at risk of having your car, home, or other objects repossessed, this is an obvious indication that you should forego reinvestment for the time being and take care of your loans immediately. The sooner you start living below your means and making the most out of every cent, the sooner you can get back to your life’s real priorities. If, on the other hand, you’re in something like the early stages of a credit card loan, it might not be a bad idea to take some of the money you’ve reserved for that and put it in an account or stock that will grow your wealth over time. Obviously, you shouldn’t wait for that debt to balloon to an intimidating degree before you start paying it back, but putting some money into your future so you can pay off other loans that might come down the line is a good idea too.
Of course, this option presumes you have a steady source of income from which you can pull money to resolve that debt later. If you’re unemployed or living paycheck to paycheck, debt can be a far more punishing experience than it is for those who are better off. Resolving the debt spiral as quickly as possible should be your top concern if this is your situation. On the other hand, if your career allows you to live comfortably and you have a certain level of disposable income, taking some money out of your debt fund or day to day expenses in order to make a financial cushion for yourself might be the way to go.
The Bottom Line: Ultimately, only you can decide for yourself if you should pay back your debts immediately or if you should take that money and reinvest it into something else. The prudent option is most likely to pay off your debts as fast as you can, but if you have a little bit of flexibility and are willing to take on a small amount of risk, a reinvestment could be just what the banker ordered. Whatever you decide to do, make sure that it provides for you and your loved ones, and that it won’t put you further in debt than you already are.