Paying Off Debt vs Investing: Which Is the Right Way to Use Your Money?

Everyone needs a strategy for dealing with debts. Should you pay them off as quickly as possible, or invest the money you have for greater returns?

Annie Button offers her advice on debt management and how investment stacks up against simple repayment.

It is an interesting question that many people will have to face at some point in their lives: if you have some extra money, is it best to use it to invest in something that will hopefully give a profitable return, or pay off previous debts that you have accumulated?

As with virtually all matters of money, this is very much a question that can be answered only by looking at your personal circumstances. Your current budget and your plans for the future have a serious effect on the best moves to make with your money. 

Investing can provide you with a greater amount of money than when you started, which could conceivably make it easier to pay off debts in the future. But at the same time, large debts mean expensive interest payments, and these can actually hinder your ability to save extra money and continue investing. 

Here we take a look at your options when it comes to using extra money in the wisest way: should you invest, or should you pay off debts?

Not all debt is created equal

Debt is a real problem. In the UK, households have an average of over £60,000 in debt as of October 2020. And yet, this is an inevitable part of living. Without taking on debt, the majority of the country would not be able to buy a property or make major purchases such as cars. 

Sometimes, unforeseen events force individuals to take on debt – such as in the case of needing emergency repairs to a property. Credit card debt is also very common, with many preferring to make purchases and defer payment to later.

However, it is important not to lump all debt together. Some debts – such as mortgages or student loans – come at a relatively low rate of interest compared with others such as personal loans or credit cards. 

Without taking on debt, the majority of the country would not be able to buy a property or make major purchases such as cars. 

Pay off high-interest debt as a priority

Credit report providers Experian state that “prioritising the debt with the highest interest rate will save you more money and allow you to redirect funds to other financial goals faster”, and this is a good place to start. 

In general, it is always best to pay off any high-interest debt as soon as possible. This is simply because any investment that you might make needs to achieve a better return than the rate of interest that you are paying on your debt. This is clearly harder with high-interest debt. 

The value of investing

It can be very tempting to look at the extra money that you have available – whether it comes from savings, disposable income, or a financial windfall – and see the opportunity to turn it into more. 

This is especially true coming out of 2020, where many people have seen their financial situations change drastically. But is 2021 the right time to invest? 

Of course, everyone is facing uncertainty due to the COVID-19 pandemic and while this can be worrying it can actually make things interesting from an investment point of view. Typically the market responds poorly to uncertainty and challenges.

We are in a situation where the pandemic has caused shares in many previously profitable and successful businesses to fall dramatically. With vaccines now available, and a more positive outlook on the horizon, it may not be long before the stock market begins to stabilize. As such now could be an ideal time to invest. 

Always get financial advice

No matter your financial situation, it is a great idea to take financial advice before making any move relating to investments or debt. As mentioned above, this really can come down to the specifics of your situation and a financial adviser can help with this. In fact, it can be advisable to look at specialists offering wealth management services.

“Wealth management is important,” says Jonathan Baggot of Numeric Accounting; “it is all about aiming to sustain and grow long-term wealth. The financial market is complex, so wealth management specialists have the knowledge needed to explain plans and schemes clearly and concisely while offering impartial and unbiased financial planning advice”

Final thoughts

Paying off debt is important – but making smart investments as early as possible is best if you wish to reach your financial goals. Everyone’s individual financial situation is different, so following the advice of professionals is a great way to make smart decisions. 

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