Pay off debt or invest
One of the most common questions people ask me is whether they should pay off debt or invest?
Well, the answer is……. it depends.
Actually, the answer could be a little bit of both.
Let’s look at an example.
Michelle has $500 per month after all her spending needs are taken care of. She has a loan to pay down but would also like to build an investment portfolio.
What to do with the $500?
Let’s assume that Michelle is happy to invest in the stock market and that her interest rate in her loan is 3.5%. It comes down to a simple question. Will an investment in the market make more than 3.5%?
If Michelle pays the $500 of the loan, then she is effectively earning the interest she would otherwise have paid, 3.5% on that $500. If she invests, then her returns will be volatile but over time may outperform the mortgage rate.
Does this mean that she should invest? Well no, not necessarily. Michelle needs to consider how much risk she wants to take. The loan saving is definite. The market return could be higher or lower.
Many areas of finance do not have absolute answers. What we search for is the best way to proceed to reach a client’s goals, and that is what you should consider too. What are your goals? Some people just hate debt and need to be out of it, some people are fine with debt as long as it’s manageable.
Either way, get some advice and run the numbers. You will make the right choice!
Want more info? Book a quick call with Smart Happy Money
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Financial Advisor - Smart Happy Money
Given the complexity of Australia’s financial system, financial planning is more important now than ever before. Ben has 17 years’ experience in the advice industry. He has a passion, drive and commitment to ensure clients receive quality advice helping them to achieve their goals through careful planning, coaching and education.
Not only is Ben an experienced financial advisor, he is also a father to 3 wonderful kids. He understands the stresses of family life associated with mortgages, budgets and the balance between work and family commitments. This is why he is so passionate about helping families to achieve, not only their financial goals, but lifestyle goals as well.