Should You Pay Off Debt Or Invest Your Money?

This is something that A lot of people who have some kind of debt under their name are stuck trying to decide so today, I will explain in rational way which option may be the best for your situation.

First thing first.

Personal finance, is a behaviour. It’s all about creating the correct behave with money which will help and guide you in the direction you need to go towards your financial goals.

A few things to know about debt

1. Debt can be extremely stressful

Depending on the amount of debt you have vs the amount of money you have available to pay that debt can be extremely stressful.

Bad debt is the reason why most marriages and relationships end.

50% of marriages end due to financial problems/conflict in the relationship

2. Having Bad debt can lead to you making bad decisions

Because of such financial stress, it can lead you to make decisions which are probably not in the best interest for yourself financially, because of that debt.

I’ve seen people who gambled money they thought would triple in hopes of paying of a certain debt, the gamble goes wrong and then they up getting themselves in an even deeper financial situation.

However DEBT is not always a bad thing. There are ways you can make debt work in your favour.

Go and rewatch the video I made on “bad debt vs Good debt”

When it comes to investing or paying off debt first, people tend to fall on what side or the other.

I believe you can do both. AS LONG AS YOU HAVE THE CORRECT BEHAVIOUR WITH MONEY AND YOU HANDLE DEBT RESPONSIBLY

Here are 4 questions To answer for yourself to help you make a decision if you should pay off debt first or if you should be investing.... or both.

1. “What are my financial goals?”

Rich people have enough active income coming in, where they can have debt but they can also afford to be investing as well.

Most people are in the middle class. They don’t have a lot of money left at the end of the month after they’re done taking care of their necessary expenses like housing, food, transportation, insurance.

Then if you have debt, do you use the remaining money you have after taking care of necessary expenses to pay off the debt you have or do you invest it and keep making the minimum payments on the debt

I believe you answer that question based on what your financial goals are.

You have to sit down and put down on paper what your financial goals are. Doing this will help your decisions easier when it comes to investing or paying off debt.

2. How old are you?

Age does make a difference.

The younger you are, the more time you have to be investing.

For example, if you’re 22 years old and have £10,000 worth of debt and you decide you’re going to concentrate all of your money and pay of that 10k debt before you start investing, then that’s going to be okay at 22 years old because if it takes you 5 years to pay the debt of, you’ll only be 27 and you still have a long time to invest.

But if you’re 40 years old and have £10,000 in debt and you’re trying to decide to invest or pay of debt then that’s a different story because then obviously you’re older which means your time to be able to invest is a lot short than someone in their teens or twenties.

Age is a big determining factor in deciding if you should invest or if should take care of the debts first.

3. Do you know HOW to invest?

I’m not talking about listening to people tell you which is the next “hot stock”

Or picking a small book on investing

I’m talking about really understanding the core fundamentals of investing Where you have to understand your risk tolerance.

Are you an aggressive investor who like high risk - high reward stocks?

Are you a moderate investor who wants to achieve good returns but is uncomfortable taking high market risks?

Are you a low risk / conservative investor?

A "low risk investment" is an investment in which there is thought to be just a small chance of losing some or all of your money. Typically, a "low risk investment" has a low amount of upside.

Savings accounts, cash ISAs and savings accounts are considered low risk investments. Cash is the most stable investment option, but the returns aren't usually as high as fixed-interest securities.

I will write up a more detailed post soon about understanding your risk tolerance when it comes to investing.

Knowing where you are on that risk spectrum will help you determine what type of investments you’ll be making.

If you’re someone who already knows how to invest and you’re comfortable with the concept of invest and you also know how to manage your debts then you can probably consider doing both.

4. Do you have money to invest?

This comes back to understanding your personal financial situation.

• Do you have budget?
• Are you living on less than what you make?

You have to know EXACTLY how much money is coming IN your account and EXACTLY how much money is going OUT of your account and then what’s left over.

Go and rewatch the video I made on "How To Manage Money"

A lot of times people won’t even have an emergency fund but they’ll be “investing” in something just because they “heard” someone on Instagram say it was a good idea.

In my opinion, that’s NOT a good idea.

THE NUMBER ONE THING YOU NEED BEFORE YOU VENTURE OF INTO ANY FINANCIAL ACTIVITIES IS AN EMERGENCY FUND.

If you live on your own, take time to put aside 6-12 months of your expenses

If you live with parents and don’t much or any bills, put aside 3-6 months of your expenses

This should be tucked away at a safe place which is SEPARATE from your main bank account.

Your first investment to make is investing into your safety net (your emergency fund)

AFTER You have established this and paid all of that bad debt THENNNNN refocus on investing on real estate, stocks, business or whatever you believe is the right investment for yourself.

If you’re on a limited budget and you have to pick between emergency fund, paying off debt or investing?

I’d pick...

1. Emergency fund FIRST
2. Paying of bad debt (car loan debt, credit card debt, bank loan debt etc...)
3. Then invest your money into things you understand in and believe you have a chance of creating wealth with. (Stock market, real estate, crypto or your own business)

That’s the order id go for if I had a limited amount of money.

I know it’s not the fancy answer but it’s the most financially responsible answer

Till next time :)