Should you invest save or pay off debt

Invest, Save or Pay Off Debt: What’s Right For Me?

15th November 2022

When you find yourself with a little extra money left over at the end of the month, knowing whether to save or pay off debt (or even invest it) can be a difficult choice. Relieving yourself of your debt can help alleviate a great deal of stress, but then again, so can the peace of mind that comes from building an emergency fund.

The option you choose will very much depend on your own particular circumstances, interest rates and mindsets, so here we’ll explore which option is right for which people.

Option 1: Paying Off Debts

Often the first, most pressing option that springs to mind when you come into some money is to pay off any outstanding debts. And rightfully so. However, there are certain kinds of debt which aren’t overwhelming or as immediate.

If you’re regularly (and comfortably) making your monthly mortgage payments, for instance, then having that bit of debt isn’t necessarily an issue which needs to be instantly addressed. That’s not to say you can’t put your money towards paying off your mortgage, but if you’re able to continue with your monthly payments without much bother, then saving might be preferable.

If, however, you’ve taken out a loan with a high APR, then it’s definitely worth making this a priority to pay off, otherwise, that interest is going to keep building. Ultimately, your goal should be to get rid of any debt so paying off your debt is always a good option.

It is worth noting, however, that certain credit agreements will stipulate an early repayment charge. You should always ask your lender for the total amount you will need to pay to clear the debt so as you can make an informed decision.

Option 2: Saving

Usually, we’d recommend that at the very least, everyone (who can) should be building or already have an emergency savings fund. This is typically between 3-6 months of expenses so you can survive the unexpected. The emergency fund is designed to help you out with any emergencies or unpredictability in life.

However, while an emergency fund is super important and will help you sleep better at night, it may not actually be the best option for you financially. It’s all about interest rates.

Weighing up whether putting money towards savings is the best option for you depends on the account into which you plan to put said funds. Interest rates are currently rising, which is better for savers than it is for borrowers, but rates vary from account to account and from bank to bank.

Put simply, if your savings account has a higher interest rate than your debt charges, then you should consider saving. Usually, however, this isn’t the case, so you’d benefit more from paying off your debts than waiting for savings interest to build.

Option 3: Investing

Previously a preserve of the ultra-rich, investing has become far more accessible in recent years. Thanks to stocks and shares ISAs, and trading platforms like eToro, the world of investing has been well and truly opened up.

Investing is always a risk. The higher the risk, the higher the potential reward and vice versa. The money you put in could significantly increase in value, but conversely, your investment could very well tank and you’ll be left with less than you initially put in.

There’s a good chance that if you have debt, investing is the last thing on your mind. That’s not a bad thing - it might not be the right time to start investing just yet. Only once you’re debt free and have an established emergency fund might you think about investing.

Final Thoughts

Whether you save, pay off debts or invest, it’s important to consider all options first to determine which pathway is truly right for you and your money. If you have urgent, outstanding debts, you should absolutely pay off your debts first. If you don’t and you’re looking to build an emergency savings fund and have a good interest rate, then saving is a viable option.

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