Solutions to Make Better Decisions with Your Taxes and Money

6 Things You Should Know About Investing vs. Paying Off Debt

6 Things You Should Know About Investing vs. Paying Off Debt - TaxACT Blog

You know you need to pay off debt. You also need to save for emergencies, education, a house, and retirement.

There’s only so much money to go around, however. If you try to pay off 100% of your debt before you start to save, that could take too long.

If you try to put money into savings at today’s low rates, at the same time you’re paying high credit card interest rates, you’ll never get ahead, either. So, what’s the best plan?

Knowing these six things may help you decide how to prioritize your savings and debt repayment plans:

Your emergency fund comes first

You can get out of debt without putting money into savings, but you probably won’t stay there.

If you make just enough money to pay your bills, and you have nothing set aside for garden-variety calamities in life, you’re almost certain to go into debt the next time the car dies or you need dental work. What other choice do you have?

Try to keep one month’s salary in a savings account or other accessible place, so you know you can cover minor emergencies when you need to.

Whenever you have to dip into the emergency fund, save like crazy to pay yourself back. Tweet this

Once you get used to having an emergency fund, you’ll wonder how you ever slept at night without it. Work on building your fund up to three or six months’ worth of living expenses.

6 Things You Should Know About Investing vs Paying Off Debt

Your credit cards are not an emergency fund

Credit cards charge way too much interest to make good substitute emergency funds. Plus, your credit limit could be pulled at any time. Then what would you do?

Besides, when you hit financial hard times, the last thing you’ll want to do is go farther into debt.

Credit cards make fine payment tools but they’re lousy long-term loans. Tweet this

Some debt is OK; other debt is toxic

It would be wonderful if we could live without debt, but that’s almost impossible these days.

If you tried to save enough money to buy a house, home prices would probably rise faster than you could tuck money away.

Mortgage debt is “OK” debt.

It’s usually at a low interest rate, and if you can resist refinancing, the balance usually goes down over time.

Mortgage debt is even tax deductible for most people.

Other loans are somewhat OK.

Student loans, if you can’t avoid them and you plan wisely, should more than pay you back with a lifetime of higher earnings and a satisfying work life.

The interest rates are low.

Car loans, furniture and carpet payment plans, credit card debt, and delinquent bills should all be paid off as quickly as possible in most situations.

If they have a high interest rate, they can be toxic to your financial life. If it’s hard to pay your bills, you may have to add living expenses to your debt just so you can make the payments.

The cycle goes on.

When you think about paying off debt vs. investing, concentrate on paying off the toxic debt first. Tweet this

Make a list of your debts and prioritize them by the order you want to pay them off.

The most important ingredient of a savings plan is time

If you don’t have retirement, savings, or investment accounts, consider opening one today.

If you start saving in a 401(k) plan in your 20s or 30s, it’s not that hard to be ready for retirement when the time comes.

If you wait until you’re 50, it’s going to be tough.

It’s not just that you have to save more money in a shorter period of time.

Thanks to compound returns – earning interest or other income on previous years’ returns – you’ll have a lot more money if you invest the same amount of money over your working lifetime than if you stash it all away towards the end.

That’s why you should open accounts and start saving, even if you can’t save much.

Before you pay off all your debts, pay yourself first. You can’t afford to wait. Tweet this

Never leave employer matching contributions on the table

If you have an employer matching plan at work, be sure to take advantage of it.

Say your employer matches 50% of your contributions to your 401(k) plan, up to a limit. (Some employers match 100%.)

By all means, make your plan contributions and take your matching share, even if you still have consumer debt.

It’s just too good of a deal to pass by.

You should get in the habit of saving, even while you get out of debt

The question isn’t whether you should pay off debt or start saving first.

You can’t do it all at once, but you can work on your most important savings and debt reduction goals if you carefully prioritize them both.

On the debt side, pay off credit cards and delinquent bills.

Paying off your house is great, but it’s a much lower priority than getting rid of all consumer debt once and for all.

On the savings side, create an emergency fund ASAP, if you don’t have one.

Take advantage of employer matching funds. Open financial accounts and start putting something into them every month, even if it’s only $20.

Start learning about investing while you pay off your debts.

That way, when your debts are gone, you’ll be ready to get serious about working toward all your lifetime financial goals.

TaxAct makes preparing and filing your taxes quick, easy and affordable so you get your maximum refund. It’s the best deal in tax. Start free now or sign into your TaxAct Account.
About Sally Herigstad

Sally Herigstad is a certified public accountant and personal finance columnist and author of Help! I Can't Pay My Bills, Surviving a Financial Crisis (St. Martin's Griffin). She writes regularly at CreditCards.com, Bankrate.com, Interest.com, RedPlum, and MSN Money. She is an experienced speaker and a member of Toastmasters International. Follow Sally on Twitter.

Speak Your Mind

*