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  • Writer's pictureElizabeth Schwartz

Should You Invest Or Pay Off Debt?



Hey there, fellow female money maker! So, you've probably wondered: should I start investing while I'm still paying off debt? It's a bit of a financial conundrum, isn't it? And it's one of the main concerns I hear from A LOT of women who want a better financial future but feel stuck on the debt trap. On one hand, you want to build wealth and secure your future. But on the other, those damn debts just won't go away. Student loans, huge pain in the a**, like none of us had any idea what we signed up for (trust me, neither did I!), and credit card debt... no one tells you that you need to pay the thing in full. I remember thinking that paying the minimum balance was all good and that that's how a credit card works LOL


Anyways, let's chat about it all in plain English!


Understanding Interest Rates: Okay, so let's talk interest rates. They're basically the extra money you pay on top of what you borrowed. If your debt has a high interest rate, like those pesky credit cards, it's eating into your paycheck. But if it's low, like under 7%, it's not as scary because anything under 7% is considered low. That's the first thing to check out before making any moves.

Opportunity Cost: Ever heard of opportunity cost? It's like what you're giving up by choosing one thing over another. If your debt interest rate is lower than what you could potentially earn through investing, you might consider putting your money into investments. It's like deciding between paying off your student loan or investing in the stock market where your money could grow faster. Something I actually did was invest in the stock market in order to pay off my student loans faster from the money I earned in the stock market.


Tax Perks: Here's a fun twist: some types of debt come with tax perks! Take mortgages, for example. The interest you pay might be tax-deductible, meaning you could get a break on your taxes. So, even if the interest rate seems a bit high, you might not actually be paying that much after tax benefits.


Comfort Zone: Personal finance isn't just about numbers; it's also about your peace of mind. If the idea of investing while you still owe money stresses you out, it might be best to focus on paying off those debts first. Being debt-free can feel like a weight off your shoulders and give you the confidence to chase your financial dreams.


Time Horizon: Let's talk long-term vs. short-term goals. If you're in it for the long haul and have decades before retirement, you might feel more comfortable investing while slowly chipping away at low-interest debt. But if you're saving up for a big purchase soon, like a house or starting a family, it might make sense to prioritize paying off debt first.


Alright, now that we spoke more generally, let's talk about something called the 7% rule. It's not a hard-and-fast rule, but more of a guideline that some financial experts suggest when deciding whether to invest or pay off debt.


The idea behind the 7% rule is pretty straightforward. If the interest rate on your debt is less than 7%, you might consider investing your money instead of prioritizing debt repayment.


Here's why:

  1. Opportunity for Higher Returns: Historically, the stock market has delivered an average annual return of around 7% to 10%. So, if you can potentially earn more by investing than the interest you're paying on your debt, it might make sense to put your money into investments where you have the opportunity to EARN more instead for the future instead of having "wasted" or spent that money on low cost debt.

  2. Flexibility: By following the 7% rule, you're giving yourself some flexibility. You're not necessarily rushing to pay off every last penny of debt before you start investing. Instead, you're finding a balance that works for you and your financial goals.

Now, remember, the 7% rule isn't a one-size-fits-all solution. It's just one factor to consider when making financial decisions. Your personal situation, risk tolerance, and goals should all play a role in your decision-making process. For example, if you have credit card debt, which right now is averaging a 20% APR, then I suggest paying that off ASAP, mostly because the interest added to your credit card statement will add up substantially quicker than the money you would earn from investing in the stock market. This could be one of the things that continues to hold you back from a secure financial future, so definitely pay off the high interest debt first and then invest.


So should you invest while paying off debt? It's not a one-size-fits-all answer. It depends on your situation, how comfortable you are with risk, and your goals. Take a look at your interest rates, crunch the numbers, and see if the 7% rule makes sense for you.


And as always, if you're unsure about what to do, don't hesitate to seek advice from a financial advisor who can help you navigate your options. Whether you decide to tackle debt first or dip your toes into investing, the important thing is that you're taking steps to build a solid financial future. You've got this, girl!

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