Investing one’s money has tremendous upsides. While risk exists with investing, the potential to increase one’s net worth also exists. The annual interest returns on an invest do wonders to increase the volume of assets a person possess.
In order to maintain a positive net worth, assets are weighed against debts. Debts are obligations that must be subtracted from the value of stocks, bonds, real estate, cash, and other holdings. Debt, combined with the interest on the debt, can drag down net worth significantly. This is why so many make prioritizing debt repayment over investing their main fiscal strategy.
Is this the right strategy to maintain, though?
Controversies and Conventional Wisdom
The conventional wisdom among most people is to simply get rid of the debt that has been amassed. Doing so would seem to make sense. Once all the debt and the various payment responsibilities associated with it are eliminated, the resultant greater cash flow could be directed towards all manner of different investments. While this conventional wisdom seems to make sense, not everyone completely agrees with it.
Interest exists with both investments and debt obligations. If the return on an investment yielded more interest than the interest charged on the debt, then investing could be a better plan. If a person has debt on a car loan that is 6% and a mutual fund could pay 8%, then investing in a mutual fund might as opposed to paying off the debt could be a good idea.
The interest on an investment compounds so the sooner money is put into the market, the quicker the compounded return on the investment may be realized. This is something to ponder and not overlook.
Do not overlook “missed opportunities” with certain investments. A 401(k) and an IRA are two examples of investments that cannot be “backdated”. In other words, if you miss the cutoff point to put money into the investments, the opportunity is lost. With the opportunity goes all the returns on the investments one would hope to acquire.
So, there are some benefits to sticking with investing as opposed to paying off debt. This does not mean the conventional approach of paying debt first is automatically a bad idea.
The Specter of Debt
The specter of debt can truly haunt someone and continually create havoc for a person’s finances. This is absolutely true when the interest rates on debt are enormous. Someone saddled with 20% interest rates on a credit card is not likely to find any type of investment capable of paying such a massive return. With excessive and costly debt, repaying the debt should be a high priority.
A split approach is also a possibility. That is, money could be directed towards paying down debt and also investing in reliable strategies. Taking this approach does require careful thinking. Those who are not sure how to go about it or what to do should think about discussing their situation with a credible financial planner and/or credit counselor.