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Should You Pay Off Your Debt or Invest?
It may seem like a no-brainer to some people, but actually this question poses some interesting answers. Depending on your situation, investing the money put aside for your debt may be the clever thing to do. In others, not so much. Letís take a look at some of the different scenarios in which you may face the question: Do I pay off my debt or invest?
The first thing you need to consider is the interest rates on your debt. The lower the interest rate on your debt, the more likely itíll be more sensible to invest. However, you need to weigh up the costs of borrowing and investing after tax. Look at whether that payable interest is taxable as well. Can you deduct the interest on your mortgage payments through federal tax? If so, it is worth factoring that into your equations. You need to work out whether the return on your investment is going to be greater than the interest rates youíll be paying on the debt. All taxes included.
The Risk Factor
As with any investment, you need to consider the risks involved. Say you have $10,000 set aside for your credit card debt, which is ticking away at 10% interest. You could pay your debt back fast. Youíve been presented with an investment opportunity for $10,000 that could make 30% profit. Of course, it seems as though the 30% is the one to go for. However, what are the risks involved in this investment opportunity? The 30% is only a possible, not a guarantee. For some people, they make their 30% and are happy with their choice. Others could lose it all. It is up to you to determine whether the risks are worth taking.
The answer to the risk question will be different for everyone who reads this. A young man in his twenties, with a medium-high earning job, may be happy to take the risk. Someone who is due to retire soon, may not be so happy. Those with a higher risk tolerance are more likely to invest aggressively, which means not paying off debt. Those who donít have high paying jobs or are nearing retirement will have a much lower risk tolerance.
One of the key ways to manage risk is by diversifying your portfolio of investments. Those who invest in equities and a fixed income are likely to find themselves making more of a return. Learning how to invest in gold and other alternatives could be the key to maximizing your ROI. You may also want to consider putting money into a new business, which can then generate a fixed income. There are many ways to diversify your portfolio, which can help to reduce that risk factor. Just remember to work out whether the return on investment is greater than the potential interest rates.
Everyoneís situation is different, and so there is no real answer to the question. If youíre worried about your credit rating or the risk of investing, then pay the debt back. However, if you want to take a gamble, then investment opportunities may just be for you. Remember, you should always pay back urgent and priority debts before anything else.