Paying Off Debt Versus Investing

This is an investment blog, so you’re obviously interested in investing. If you’re also in debt, you’re probably struggling with the proper balance of paying off that debt and investing.

Why It’s A Difficult Choice

Woman holding cash

Let’s face it, investing is sexy. You start with some money and, pretty much through magic, you get MORE money. You feel like a rock star and a millionaire all at once.

Compare that to paying off debt. One day, you’re minus something, and the next day you’re minus a little less. It just doesn’t feel as good.

Calculating Returns

As an investor, you’re always thinking about the risk/return balance. In the scheme of your entire financial situation, paying off debt is equivalent to a guaranteed return on investment. If your average debt carries at an 8% interest rate, you’ll have to do significantly better than that on your investments to cover taxes and other fees that go along with investment income.

The Power Of Focus

There’s a certain amount of distortion that comes with having to juggle both debt and investments. You’re pulled in two directions, and it means every dollar is a bit confused. Imagine for a moment putting your investing on hold and focusing on paying off your debt completely.

Start by using a debt repayment calculator to figure out how long it will take at your current rate to pay it off. Now calculate how much you contribute to your investments every month and add that amount to your debt repayment plan.

Now get excited about being out of debt. Think about how every single dollar will increase your net worth in a positive way, rather than just slowly filling in a hole to bring you to zero.

There’s a power to this type of focus. Knowing how much more money you’ll have for investing at the end of this road will help motivate you. Using your calculator every time you find some extra cash to throw down on your debt and seeing how much sooner you’ll be done is exciting.

What About The Time You’re Not Investing?

Of course, focusing on debt like this means there will be a period of time where you’re not investing. In theory you’re losing out on some returns there. Back to thinking about the guaranteed return from paying off your debts, combined with all the additional money you’ll have once your debt repayment is finished means you’ll be able to make up that down-time very quickly.

In the end, you’ll be in a stronger financial position. With no monthly debt payment obligations to worry about, you can spend more time learning about investment options and get more aggressive with your strategy.

If your debt load is looking like it’ll take years to pay off, it makes sense to speak to a professional to learn about other options that are available to you. Debt.ca has number of solutions and is a great place to learn about these options.

Readers what’s your take? Are you debt free or investing while paying down your debt?

9 Responses to “Paying Off Debt Versus Investing”

  1. Brett @ wstreetstocks

    Jan 23. 2013

    Investing is definitely more fun than paying off debt. However, I believe that you should pay off your debt before you invest your money.

    Reply to this comment
    • The Dividend Ninja

      Jan 23. 2013

      I agree. I’d exlcude the mortgage though, since you can start building up a nice portoflio to produce income when the mortgage is paid for. 🙂

      Cheers!

      Reply to this comment
  2. Eddie (@Finance_Fox)

    Jan 25. 2013

    Pay off debt before you invest. And this is coming from someone who was in debt not too long ago. When you try to do both at the same time, it’s hard to focus and dedicate yourself fully.

    Reply to this comment
  3. Integrator

    Jan 31. 2013

    I think pay off bad debt (credit card, personal loan, non asset building debt) first. I actually use leverage to build my dividend portfolio. I don’t suggest taking it to extreme levels (I consider anything beyond 50% of total portfolio value extreme), but some modest debt can actually help build dividend income and wealth faster….. at least its helped in my case!.

    Reply to this comment
  4. Save on Money

    Feb 07. 2013

    Pay your debt first before investing. It’s pretty hard to invest at something while you are drowning your self in debt. But what if you’re investing for a home then you get yourself a mortgage – you are actually investing for something through a debt right?

    Reply to this comment
  5. Trevor

    Apr 07. 2013

    OK, I agree with paying off debt as fast as possible. In my eyes it is the same as making money. I have no debt (wasn’t always the case) and have managed to put together a significant deposit for purchasing my first home. I am a little nervous about taking on a big debt but will be doing just that with the purchase of a house.

    Now I want to pay off the debt as fast as possible, (I think I can get it paid off in 7 years), but I also want to start dividend investing to start preparing for retirement. What is everyone’s opinion on home loan debt? Is it any different then any other sort of debt. Or should I try for to do both at the same time? Could I actually make more money by focusing on dividend investing than the money I would save by reducing the home loan?

    Cheers for the advice.

    Reply to this comment
    • The Dividend Ninja

      Apr 09. 2013

      Hi Trevor,

      Great comment, and that could be a post in itself. 🙂 I think everyone is in a different situation, nor am I financial advisor or financial planner. So you really need to do what works best for you.

      In your case you are in great shape! You’ve paid off your consumer debt, and you have a whack of cash to buy a home and/or invest. That’s a nice situtation to be in. 😉

      Well done!

      Cheers

      Reply to this comment

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