Paying Off Debt Vs Investment
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Paying Off Debt vs. Investing
Deciding what to do with extra money?"paying off debt or investing?"can be a common dilemma. Financial expert Joshua Kennon offers some guidance on this topic.
Understanding Debt Types
Debt generally falls into two categories: high-interest and low-interest. Credit card debt, with its high interest rates, is a priority to pay off before considering investments. By eliminating such debt, you avoid accruing further costly interest charges.
Low-interest debts, like certain mortgages or student loans, allow for more flexibility. If your potential investment returns are higher than the interest on these debts, it might be worth investing instead.
Factors to Consider
Kennon suggests evaluating:
1. Investment Return Rate: Will your investment yield substantial returns?
2. Debt Interest Rates: How do your debts stack up in terms of interest?
It’s crucial to determine whether paying off a particular debt will ease your financial burden and boost your savings.
Strategies for Debt Repayment
Debt adviser Steve Bucci recommends two strategies:
1. Target Small Debts: Start by paying off smaller debts with similar interest rates. This can be motivating and provide a sense of accomplishment.
2. Focus on High-Interest Debts: Prioritize paying off debts like credit cards, which demand higher interest. Reducing these first frees up cash for other payments or potential investments.
Ultimately, choose an approach that best fits your situation and provides the most convenience. Bucci also highlights the importance of reflecting debt repayments in your credit rating. Regularly paying off debt improves your credit score, which is beneficial when seeking larger loans for future investments.
In summary, whether you decide to pay off debt or invest should depend on personal financial goals, debt types, and potential investment returns. Making informed decisions will set the foundation for a more stable financial future.
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