Debt can feel like an ever-present weight. Finding the path to financial freedom can help you begin a new, less stressful life, completely debt-free — but it’s not easy. DebtBlue specializes in finding you the ideal path to your own financial freedom.
One of the questions we hear all the time is “Should I try to pay off my debt at all costs or continue to save for emergencies, investments, and living expenses?”
If you have debt, it’s time to start making a plan to pay it off. But does that mean you can’t save money and invest at the same time?
It’s the perennial question — should I save up and invest or pay off my debt?
There are three basic answers to this question:
1. The Mathematical Answer
The mathematical answer to this question involves comparing interest rates on your debt and investments. For instance, if you have a student loan interest rate of 5%, but you are making a 10% return from the stock markets, the mathematical answer would tell you to pay the minimum on your debt and invest the rest. Keep in mind, that this only works if you actually invest the rest. If you pay the minimum on your debt, but spend the rest on living expenses, you will be losing money, especially if you put it on your credit card.
Since credit card interest rates are so high (around 15% APR), it’s almost always a good idea to eliminate this debt completely before moving on to saving and investing. The only reason to think you’re better off saving and investing than paying off your debt is if your debt is low interest and your investments are yielding high returns.
2. The Emotional Answer
The emotional answer basically wants to get rid of all debt, except for the home. Instead of complicating things with math and multiple lines of credit, many people operate on the principle of becoming debt-free first and then saving money for things like retirement accounts. If you hate being in debt, pay it off as soon as you can.
3. The Hybrid Answer
The split approach is what most of us do. This involves paying off our high-interest loans, such as credit card debt, and investing the rest. For many people, the biggest hurdle to investing for the future is just starting. When you open up an investment account, such as a Roth IRA, and automate your payments, you will be surprised at how fast you can pay down your debt and build up your investment account at the same time.
Interest On Interest On Interest
It’s important to know about compound interest, which works for you when you invest and against you when you borrow. If you aren’t paying off your credit card in full every month, you are paying interest on top of interest. If you are investing money, you’ll earn interest on the money invested, plus the money made, which compounds year after year.
To give you a sense of the power of compounding interest, if you invest $1,000 today with a 10% return, in 50 years you will have $145,449. This sounds great, and it is, but compounding interest works against you when you’re in debt.
For instance, if you bought a mattress for $1,500 on your credit card with a 14% APR (annual percentage rate) and you only pay the minimum balance, it will take you 7 years and 9 months to pay off the entire balance and you’ll pay an extra $562 in interest.
And 14% APR is a rather low interest rate for credit cards. They can easily go up to 30%. Don’t panic if you have a lot of credit card debt! DebtBlue can help!
Reduce Your Debt with DebtBlue
If you have several high-interest credit cards and the interest rates and fees are getting too high, you may be interested in debt consolidation. This is a loan that consolidates all your credit card debt into one bill and one payment per month. Usually, the interest rate on the consolidation loan is less than the rate on your credit cards, helping you pay off your credit card debt a lot faster. Debt consolidation loans are typically single percentages and not double-digits, which is where the real savings happens.
Debt resolution is another option for paying off your debt faster. Debt Resolution is the process of having an expert Debt Negotiator negotiate on your behalf with the credit card companies to have a portion of your credit card debt written off, wiped clean and forgiven for good.
Every situation is different. For a personalized approach to paying off debt and improving your financial situation, contact DebtBlue today for your free, no-obligation consultation.