The answer really depends on your current financial situation but generally speaking paying-off debt is essentially a guaranteed rate of return equal to the interest you are paying. What? First let that sink in…………… Yes! It is a return equal to the interest rate you are being charged.
Let’s go over a simple example. Let’s say you have a credit card balance of $1,000 with an interest rate of 15%. If you decide to pay-off the full balance you will no longer be charged this 15%. You get to keep this money! It is a guaranteed rate of return of 15%. Ohhh… Now I see it. Exactly.
Where can you get a guaranteed rate of return of 15%? or whatever other rate you’re being charged on your credit cards or any other debt for that matter. Nowhere. No one can guarantee such high returns without there being a high amount of risk and possible loss of principle.
A Financial Plan must include a solid debt management strategy. In some cases, depending on your needs and current situation you might be able to invest while at the same time your paying-off debt. Again it really depends on your financial situation but doing this is possible and sometime advisable as the earlier you start saving and investing the more time you have on your side for these funds to grow and weather any market down turns. You might also have a workplace retirement account where you are being matched and it might make sense to contribute this amount while at the same time developing a debt management strategy to tackle your debt. There are so many ways to look at this that it will take me forever to go over every possible scenario.
In any case what I want you to take away from this short blog post is that paying down and eventually eliminating debt is a form of investment. Need help with your finances? We can help. Let’s talk!
Hermes Conesa CEO @ Simpleivest