You Have Extra Cash. Do You Pay off Debt or Invest?

Deciding whether to pay off debt or invest your money requires careful consideration of various financial factors, risk tolerance, and your overall financial goals. Here's a breakdown to help you make an informed decision:

1. Assess Your Debt: Start by evaluating the type of debt you have. High-interest consumer debt, like credit card balances, should generally take precedence. These debts often come with interest rates that can quickly accumulate and offset any potential investment gains. Prioritize paying off these high-interest debts to save money in the long run. On the other hand, low-interest debts like a mortgage or student loans might be manageable to maintain while simultaneously investing. Compare the interest rates of your debts with the potential returns you might earn from investing.

2. Evaluate Investment Opportunities: Consider the potential returns on your investments. Historically, stock market investments have yielded an average annual return of around 7-10%. If your debt interest rates are significantly lower than this average, you might be better off investing your money rather than paying off the debt early. However, investing comes with inherent risks. Markets can be volatile, and there are no guarantees of returns. Assess your risk tolerance and time horizon for investing. If you're uncomfortable with the uncertainties of investing, prioritizing debt repayment might provide a more stable financial foundation.

3. Define Your Financial Goals: Your financial goals play a pivotal role in this decision. Are you saving for retirement, a down payment on a house, or a major life expense? Consider the urgency and importance of these goals. If your financial goals have a longer time horizon, investing might be a viable option as you have more time to ride out market fluctuations. Conversely, if you have a near-term goal, like buying a home within a couple of years, it might make sense to focus on paying down debt to improve your creditworthiness and reduce monthly obligations. A balanced approach could involve allocating a portion of your funds to both debt repayment and investments, aligning with your goals and risk tolerance.

A rule of thumb: if the debt interest rate is higher than the expected returns on your investments, consider paying down your debt. Conversely, if the interest rate on your debt is lower than your expected investment return, investing your money is the savvy choice.

In summary, the decision to pay off debt or invest depends on a variety of factors including the type of debt, interest rates, potential investment returns, risk tolerance, and your financial goals. While there's no one-size-fits-all answer, carefully evaluating these factors can help you strike a balance that aligns with your financial situation and aspirations. If uncertain, seeking advice from a financial advisor can provide tailored guidance based on your unique circumstances.

-Brett Miller, CFA, CFP® - Financial Advisor

-Scott Miller – Senior VP - Investments

Any opinions are those of Brett Miller and Scott Miller and not necessarily those of Raymond James. This information is intended to be educational and is not tailored to the investment needs of any specific investor. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results.