By now, many of us have received our $1200 COVID-19 stimulus payments from the federal government — Well, $2400 if you are married and file jointly with an additional $500 per child.
For many, these funds will be expensed immediately for things like food, bills, and other living expenses. For others, who are not facing any financial strains, the funds will remain sitting in your bank account or will be used to minimize any debts.
If you’re facing the dilemma of paying off debt or investing your money, you might also be wondering if you can come out ahead with some combination of both. Fortunately, there is a middle ground that allows you to pay off your debt while making smart investments to increase your current income.
If your debt is like a leaking boat, the best step is always to plug the largest leak first. High-interest credit card debt is by far the largest leak and should be considered a top priority.
Sometimes, investing instead of paying off debt may even be a more cost-effective decision. If your investment yields earnings greater than the interest on your debt, your money is better spent on those higher yield investments.
Let’s look at different scenarios to help you determine the most lucrative options for your own situation:
1. When investing is a better option. You may have a mortgage or student loan debt that carries with it a set monthly interest rate. Whether or not the interest from these loans is tax-deductible may influence your decision to invest or pay off the debt. If the debt costs you less money per month than you could otherwise earn through profitable investments, like stocks or real estate, then it is in your best interest to focus on investing.
2. Say “yes” to free money. If you currently have debt and are employed by a company that offers a 401k plan, you are turning away free money by not enrolling or raising your contribution. Saying “no” to a 401k is essentially leaving money on the table.
3. When it’s better to pay off your debt. Of the many different kinds of debt, credit card debt often carries some of the highest interest rates in the industry. These interest rates can now be as high as 18% to 28%, and trying to find investment options that yield such a percentage in earnings may prove difficult. Unless you find an investment option that provides you with that percentage amount in returns, it may be in your best interest to focus exclusively on paying off the debt.
You may now be seeing the bigger picture regarding debt and investing. In essence, it is a balance of interest rates. Finding a balance where you are paying off your high-interest debt while investing in stocks that also provide a high percentage in returns is ideal. The investments will be more cost-effective than paying off your low-interest debt.
If you’re still deciding on whether to pay off your debt or invest, make a list with your debt on one side, and investment options on the other side. Compare the interest rates from both sides and decide which requires your attention first. Then your plan will be your most lucrative solution.
I would be crude of us to discuss investing your hard-earned money without discussing the risk.
When you’re ready to invest, you’ll likely consider the amount you have available to invest and what you want your financial gain to be over a specific period. You may be quite specific about these factors, or maybe you care only about the bottom line and how much you stand to lose or gain. For your own peace of mind, it’s wise to determine your level of risk tolerance for your investments. Understanding your own wants and desires related to your finances will largely determine how you decide to allocate your funds.
When you’re younger, you may have more tolerance for loss because you have more time to make up any losses before you retire.
It’s wise to know your level of investment risk tolerance. Because making investments are so integral to you and your family’s financial future, it’s important you be intimately connected with your feelings and ideas about investing your money and the risks involved.
Consider your answers to the following questions to help you determine your level of risk tolerance regarding investments:
1. How much are you willing to risk? Based on how much money you currently have, how much of it are you willing to risk in an investment?
2. Are you okay with no cash flow? Can you handle no investment cash coming in for a while if a large investment goes south?
3. Is an investment “doable” in your eyes? If you’re considering a specific investment, do you feel the investment is one you could make without hesitation?
4. What is your experience in investing? Are you able to adjust to money losses in the short term to gain funds over the longer term?
5. How old are you and how much are you worth? These factors are also important when it comes to making difficult decisions about how to invest your money.
If you seriously ponder the above questions and your responses, you’ll be able to determine successfully your risk tolerance for investing.