Investing vs. Paying Off Debt
On a regular basis, I get asked a variation of “Should I take money from my investment account to pay off my student loans/mortgage/some other debt?” Like many other areas of personal finance, there is no one-size-fits-all answer. I like to focus on the following two factors:
- Rates – You should first look at the difference between the interest rate you’re paying on your debt and the average rate you’re making on your investments. If there is a large difference between the two, the decision likely becomes a no-brainer. If the rates are close, the choice can be difficult.
- Personal Comfort – The emotional stress of owing money is, for some, extremely uncomfortable. If having an outstanding debt makes it hard for you to sleep at night, you’ll probably look at the difference between the rates as inconsequential.
If you are looking to pay down some debts, it’s important to have a strategy. Most people order their debts by either the size (smallest to largest) or by rate (highest to lowest) and simply go down the list paying them off one by one. Whatever strategy you use, it’s important to write down your plan and record your progress as you go.