Deciding whether you should invest or pay debt

If you are not sure what the most beneficial use of your money is, check these tips for some suggestions.

09:02 21 December 2013

If you are wondering if you should pay debts or set aside money for savings, the simple answer is that either will help your cause on paper. In reality, most people would benefit more by paying of debt. Everyone needs to have a savings for emergencies and to prevent future debt, but the main focus should usually be reducing debt. 

Here are a few reasons why focusing on debt elimination is beneficial:

• Interest—most people pay more in their interest rates on debts than they are able to obtain by putting funds in savings. You will save more money by paying off debt because you will pay less over in interest over time.

 

• Cash flow—paying off debt creates more cash flow in your budget, which can then be used to pay off other debts you might have, or allows you to set aside for savings. If you have been struggling to maintain regular payments, this can relieve a lot of your burden and give you some financial freedom.

 

• Inheritance—in some cases whatever you owe when you pass away may be deducted from your estate, which may reduce the inheritance you wanted your loved ones to have. Taking care of as many debts as possible can help protect the funds your loved ones receive.

Keep in mind that paying off some debts could incur a penalty fee, so before you decide to pay off bills early contact the lender to ensure that you will not be responsible for a hefty fee. If you have a low fixed interest rate, you might be able to use your funds more wisely by investing if you earn more in interest. If you are not quite sure if a change will be better for you, you can always speak with a financial professional for helpful advice.