Should you pay your debt or invest?

Updated by in Categories:Investing, Tags:Tags

A tough question to crack is how to prioritize your limited income. If you have to choose between paying your debt or maximizing your money, which one should you pick?

The short answer is, no. You should pay your debts first. Limit your borrowing. But find out why people borrow money to invest.

Pay your debts first if you are just starting with wealth-building

You should pay your debts first. The interest rate you are paying on top of the principal is what’s going to erode your net worth, not to mention late fees and other charges lenders will add on your bill should you fail to pay the minimum on time.

Another reason for this answer is the volatile nature of investments. Unlike a debt’s interest rate that’s established and which you are bound to pay, your investment returns are never guaranteed. A fund or portfolio that’s been performing very well last year may not provide the same level of gains this year.

So if you are thinking that you can use the earnings that you get in order to settle your debts, you should instead do just one thing: pay your debts first. And when you are able to bring down the size of your debts to a level where you have spare cash, then that’s the appropriate chance to go on investing.

Be very cautious when borrowing money to invest

But this might lead you to ask about entrepreneurs. These are people who take on huge amount of debts to launch a business. Shouldn’t you follow their example?

Well, they are risk-takers. If they are just like you whose wealth is yet to be established, then they are opening themselves up to the risks of bankruptcy when the investment turns out to be a failure.

But entrepreneurs are far from that. They calculate the risks and returns, too. And they are also people who have assets that they can rely on should their businesss venture fails. They can still fulfill their obligations to their lenders when the worst happens.