Should I Pay Off All My Debt or Invest?

Posted by Grace under Investing on July 14, 2015

A reader asked a question regarding investing. Should I pay off all my debts or invest? Mr. Johnson from Florida, USA. Mr. Johnson has debt from private financial institution amounting to $75,000. Now, he got a good high paying job. He don’t want to waste even a small amount of money he earned.

According to Mr. Johnson, his goal is to become financially free. Nothing to worry about debt, nothing to worry about “not having money”. He has an idea, he wants to invest. But, the problem is he had debt amounting to $75,000. What should be the best decision and action to take?


Should I Pay Off All My Debt or Invest?

Our Response: It is better to pay all your debts before investing money. However sometimes, your risk profile can help you determine whether you will invest money and at the same time lessening your debts.

Example, if you are earning $5,000 a month. You can set aside $3,500 for your family. $1,000 for your debts and $500 for your investment.

That means, after 6 years and 2 months will become a debt free individual. It depends on when do you want to get out of debt. Is it 3 years, 4 years or after a year? If your answer is after a year, you need to increase your income and always pay all your debts.

The question now is, did you “pay yourself first” when you received you income? If not, ask yourself how to pay yourself first? Of course by saving and investing.

Should I Pay Off All My Debt or Invest

Image Credit: Quazie on CC 2.0 on Flickr

Tips and Warning:

Most of the time, investing money can be your solution to pay all your debts. And, it is a fact that if you want to achieve financial freedom, you should invest.

Take a look at this situation. Assuming you invest 5,000 and doubled it after 3 years, That means you have total investment amounting to $10,000. Enough money to pay debts, right? (in Mr. Johnson’s Case).

Starting your own business part time can also help you make enough money fast to pay all your debts. If you are not familiar with this, try to make some profit from stock market investing. However, it is not ideal because you are putting yourself in a more risky situation.

Important: Do not forget to negotiate or make a certain agreement. Ask the private financial institution to give you the lowest interest rates from your debts. If they didn’t allow to change the payment scheme (especially lowering the interest rates), the best way is to pay your debts as fast as you can. That way, you will save a lot of money by not paying for the big interests obtained if you will only pay your debts for a long period of time.

The complicated situation of Mr. Johnson can be a lesson for all of us. Try to study investment tips for beginners to have a full idea on what to do, pay all debts first or start investing?

If you were Mr. Johnson, what would you do? Would you pay all your debts in one year or slowly pay your debts and start investing? Your comments and opinions are highly appreciated.

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