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In this highlight, we discuss if you should pay off your debt or invest.
As interest rates continue to rise, it’s becoming increasingly important to decide whether to put more money towards retirement or saving to reduce loans originating in the next few years. This decision can be difficult, but there are ways to prioritize your financial goals and make the most of your money.
In order to understand the best way to prioritize your financial goals, it’s important to consider the historical context of inflation and interest rates. For example, from 1980 to 2021, the spread between inflation and the S&P 500 was 8.9%. This means that, even though investment returns can be volatile, investing is still the smart play in the long-term for wealth building.
When it comes to the decision of paying off debt or saving for the future, it’s a matter of opportunity cost. In other words, you should consider what the best use of your dollars is. For example, if you have a low-interest mortgage, it may make more sense to invest that money and earn a higher return, rather than paying off the mortgage. On the other hand, if you have high-interest debt, such as a credit card with a 19% interest rate, it makes more sense to pay off that debt first.
To determine what is high and low interest for you, it’s important to do an analysis of your various loans, such as your car loan, student loan, and any other loans you may have. The goal is to determine which loans make the most sense to pay off first, and which loans make more sense to invest in.
According to the Financial Order of Operations, high interest debt should be knocked out first, while low interest debt is not tackled until later in the process. You can find more information about the Financial Order of Operations here.
Ultimately, the purpose of your money is to do the things that you want it to do. Money is a tool to help you achieve your goals, not a goal in and of itself. If your goal is to be debt-free, then paying off debt should be a priority. However, if your goal is to build wealth, then investing should be a priority.
It’s important to remember that as interest rates continue to rise, you will need to do this analysis on a regular basis to ensure that you are making the best financial decisions for your next dollar. With careful planning and a focus on your financial goals, you can make the most of your money and achieve financial stability and security.
