Paying Down Debt vs Investing

Whether it's a tax return, work bonus or gift, when you find yourself with extra cash, you might be wondering if it's better to pay down debt or invest it. Both options have the potential to benefit you financially, but the best way to get the most out of your money may not be an obvious choice.

Key Takeaways:

• Interest rates matter: If your debt has a high interest rate, paying it off can save you more money than investing. For example, credit card debt often has higher interest rates than potential investment returns.
• Investment returns: If you can earn more from investments than what you'd pay in interest on your debt, investing might be the better option. Keep in mind this depends on your debt and the investment options you pick. Higher-risk options may not work out as planned.
• Psychological factors: Consider your comfort level with debt and investments. If debt causes you stress, paying it off might be the best choice for peace of mind.

Is it better to pay down debt or invest?

Investing helps grow your wealth over time. If your investments yield higher returns than your debt's interest rate, you could come out ahead. For example, if the interest rate on your mortgage is 5% but your investment earns 10%, investing is a better option, as it would earn you more than by paying extra on your mortgage.

On the other hand, high-interest debt, like credit card debt, can quickly accumulate. For example, if you have credit card debt at 20% interest, it’s better to put your extra cash toward that debt since you will end up paying more on the interest than you would make if you invested it. Additionally, reducing debt can improve your credit score, which is crucial for future borrowing.

Am I able to do both?

Not all decisions can have only one answer. Another option to explore is to split your cash to tackle debt and invest at the same time. Even a manageable amount of debt can cause financial stress. If the thought of investing money that you could use to pay down debt stresses you out, explore the outcomes of doing both.

What if my debt isn’t manageable?

If your debt feels overwhelming, there are actions you can take right now to help:

• Revaluate your strategy: What strategy, if any, are you using to pay down debt? If your current plan is no longer working, explore other strategies to find a better fit.
• Consider a balance transfer: Transfer high-interest debt to a credit card with a lower rate. Balance transfers at Credit Human offer a fixed rate and no balance transfer fee.
• Debt Consolidation: Consider a consolidation loan to combine debts into one payment with a lower interest rate. Find more information about Credit Human’s credit cards and personal loans available to help consolidate your debt.

Whether you choose to pay off debt, invest or a little of both, making impactful changes to your financial health starts with access to information and resources. Visit a Financial Health Center for personalized financial guidance.