What does exercise and diet have in common with managing debt and investment
Both require finding the right balance to get the best results.
Thinking of your body as a bank where you just deposit and withdraw calories neglects the fact that your overall health requires a much more holistic approach. Balancing both a nutritious diet and regular exercise will help you get the greatest results to look and feel your best.
Similarly, with your finances when looking to pay off debt or invest your money it also involves a much more holistic approach. Firstly, taking a close look at your overall financial situation is key. Observe and draw comparisons between what your debt is costing you and what you expect to make in return for your investments. If you can find the balance to do both, you will achieve the best results.
When deciding between debt repayment and investing, our financial advisers at Locumsgroup are here to help, here’s what you need to consider:
DO THE MATH
Just like everything else with your finances, deciding how to best use your money is all in the calculations. Take a look at your debt and calculate exactly how much it will cost you to pay it off. Be sure to include any interest, fees and penalties into these calculations. It’s important to get a clear picture of your debt so that you can make the best decision for your finances.
Next, take a look at your after-tax rate of return on any investments you may be considering. You will most likely need to pay taxes on your earnings, which could decrease your actual return, so keep that in mind.
Since the question is whether to repay debt or make an investment, you want to calculate the difference between three numbers: the cost of your debt (primarily interest charges) with this hypothetical additional payment, and the cost of your debt without any extra payments; and the potential return on the investments that you make with the savings.
You want to know if putting this pool of extra money into debt will save you more money than it could earn as an investment. That’s not the whole story, of course, but finding those three numbers will help provide an objective, numerical baseline for your decision.
EXAMINE YOUR FINANCIAL SITUATION
If you’re carrying a lot of high-interest credit card balances, paying off these debts may be the better way to go for now. Paying off those debts will not only save you money (that you can later invest), it can also help improve your credit score. If you’ve been struggling to balance your finances because of debt payments and building strong credit is a priority for you, then debt repayment is definitely the smart option.
If your debt is manageable and your interest rates are low however, investing some of your funds might be a wise option. Especially, if those investments are part of a long-term savings plan and you manage your risk.
Before making the final decision though, it’s wise to make sure you have ample emergency funds set aside. When it comes to investing, the funds you set aside are sometimes difficult to access, at least for a period of time. If you have to withdraw those funds early, it may come with a penalty that could eat into your returns.
CAN YOU DO BOTH?
Once you have assessed your financial situation, consider finding balance to both pay down debt (especially the high-interest loans), and invest. This way you can achieve both goals at once yielding optimal results.
Remember, perhaps the key to personal wealth is: “spending less than you earn and using the surplus to pay down debt or make investments”.