It is never too late to start investing. However, there are instances when investing should not be on your radar, especially when you are drowning in debt. This begs the question of whether you should invest or pay off debt. There is no right or one-size-fits-all answer for this.

Investing vs. Debts

Investing is the act of putting money aside, not saving, in an investment vehicle that allows it to compound in value. It could be through individual stocks, mutual funds, real estate, bonds, or other investment assets. 

On the other hand, debt is usually the money you have borrowed from any creditor and spent. This is money you have to pay back mostly with interest. This could range from student debts and personal loans to mortgages, credit card debts, mobile loans, auto loans, and payday loans. 

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When Should You Invest or Pay Off Debts?

The rule of thumb is always to invest your extra money if the investment provides you a higher return than your debt costs you. 

For example, if you have a bank loan with an interest rate of 8% and a mutual fund returning 14% per year, you will gain from investing in the mutual fund. 

That said, keep in mind that the market is always volatile, and a slight dip can cause your investment to plummet a few months or years after an excellent performance. So, consider your risk tolerance before deciding to put that extra income in an investment instead of paying the debt. 

Will you lose sleep when the market is volatile, or are you willing to let your investment ride it out? If you are in the former category, consider a more conservative investment asset. 

Unfortunately, most of these investment opportunities that pay a fixed amount of return will have a lower return than what your debt is costing you. For instance, if you have a mobile loan at 20% and a mutual fund with 14% interest per year, you would rather pay the debt first before investing. In that case, it is best first to repay your debt.

Debts like mobile loans, credit card balances, and payday loans attract high interest, sometimes up to a tune of 100% and more in the case of digital and payday loans. So if you have extra money after meeting your necessities, put that into repaying these debts. 

Doing Both

Yes, there are instances when you can invest and pay off your debt. In fact, it is advisable to do both. 

For instance, setting money aside for your retirement is investing. You should be doing it every month. First, it lowers your tax liability. Second, it allows you to compound your money over a long period. So, if your employer has a pension scheme and matches your contribution, ensure that you contribute. If your employer doesn’t provide such, set up an individual pension account.

The second example is if you don’t have an emergency fund. After making the minimum payments for all your loans, focus on accumulating at least 6 months of your living expenses. While you can put these in your bank account, other options include highly liquid and less risky investment accounts like Money Market Funds. 

Debt Management Options 

What if you are too deep into debt and don’t have extra money to spare? Or what you have isn’t enough? Below are a few options:

• Debt payoff – list your debts and choose the best debt payoff strategy. You can start by paying debts with high interest as they become more expensive over time (debt avalanche). But, if you want to build moment and some motivation, you can use the snowball method where you focus on clearing debts with lower balances first. Whatever payoff strategy you choose, ensure you are paying off the minimum balances for all your loans to avoid accumulating fines and penalties. 
• Debt consolidation – consider consolidating your debts into your one loan, especially you are struggling with meeting the minimum payments for all of them. This might come with lower interest and repayment amounts and a possible extended repayment period that you can manage. 
• Talk to your lenders and see if it is possible to negotiate the repayment terms, like lowering your monthly payment to something you can afford. 
• A balance transfer allows you to transfer your credit balance to another lender. It is pretty common with credit cards where some lenders allow you to transfer your current balances to a card with a lower APR.

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Conclusion

Paying down debt and investing are critical financial goals. Before deciding whether to invest or pay off debt, you should consider factors such as debt interest rate, the debt amount, investment interest rate, risk tolerance, and credit score. If possible, try to do both. But, if you have more debts and are barely managing, focus on repaying the debts, contribute to your pension scheme and look for the best debt management solution for you.