Photo by Mikhail Nilov
When managing your finances, one common question is whether you should prioritize paying off debt or investing your money. The answer can be complicated, as it depends on various factors specific to your financial situation. However, many finance experts recommend tackling high-interest debt, particularly credit card debt, before investing in stocks.
assess your budget. Evaluate your income and expenses, ensuring you can comfortably cover essential costs like rent or mortgage payments, utilities, transportation, and groceries. If you consistently have money left over after covering your expenses, you can make better financial decisions.
It’s important to avoid overspending on non-essential items.
Before allocating funds to debt repayment or investments, establish an emergency fund. This reserve is essential to cover unexpected and costly expenses such as medical bills, car repairs, or job loss. Even starting with a modest emergency fund, such as $1,000 or $2,000, can prevent these unforeseen events from driving you further into debt. Aim for a long-term goal of saving three to six months’ worth of living expenses, insurance company John Hancock advised.
“You’re constantly told [to] put money in the market as soon as possible so your returns can compound, and I don’t disagree with that,” Douglas Boneparth, certified financial planner and president of Bone Fide Wealth, told CNBC’s Frank Holland during the CNBC Make It: Your Money virtual event. “But this assumes you don’t need to go to that well and interrupt those investments, that you can actually stay invested.”
You want to make sure you are financially prepared to become an investor. That means taking a hard look at your current finances. Also, make sure to review your employer’s retirement plan. Many companies offer to match a portion of your contributions to your 401(k) or 403(b) accounts. This employer match represents free money for your retirement savings.
If you’re dealing with various debts, it’s crucial to distinguish between them.
Not all debt is created equal. For instance, federal student loans often have lower interest rates than high-interest credit card debt, ranging from 16.99% to 23.91%. Paying off high-interest credit card debt before investing can be a smart financial move. By addressing this debt first, you can save hundreds or even thousands of dollars in interest payments, freeing up cash to bolster your emergency fund or kickstart your investment journey.
Three key principles of successful long-term investing are to start early, reinvest earnings, and maintain a diversified portfolio.
Three fundamental principles of successful long-term investing are to start early, reinvest earnings, and maintain a diversified portfolio.
Getting out of debt is possible. Ask Bernadette Joy, the founder of Crush Your Money Goals, a financial coaching business. Her financial journey speaks volumes. In 2016, upon graduating from the University of North Carolina’s MBA program, Joy and her husband faced $300,000 in debt from student loans and two mortgages. Through budgeting and debt repayment, they managed to become debt-free by 2020. Following this accomplishment, they shifted their focus to building their investment portfolio, resulting in their current net worth of nearly $1.5 million.
“People get caught up in ‘Do I pay off debt first, or invest?’ and I’m like, do the no-brainer thing and pay off the debt, especially when the rates are so much higher,” Joy told CNBC.
“There aren’t a lot of new skill sets you have to learn when paying down debt. You basically just have to press the button,” she said. “Investing is a skillset that you have to spend more time learning.”
Photo by Mikhail Nilov: https://www.pexels.com/photo/woman-in-white-scoop-neck-long-sleeve-shirt-using-silver-laptop-6969754/
