Clearing Debt or Investing: Which is Best?

There comes a time when people start to think about their long-term financial security. Many consider investing as a potentially lucrative side hustle that could turn into a career. But, many people are carrying debt, so in this scenario, is it a better strategy to clear that outstanding debt, or is investing the priority? In this article, we will examine this quandary in more detail to help you make an informed decision. 

Assessing the Situation

It’s important to state upfront that there is no one-size-fits-all answer to this question. Everyone has a different financial situation and it’s essential to assess your situation before you commit to a strategy. In an ideal world, you would pay down your debt and invest at the same time. In reality, most of us don’t have sufficient funds to do both at the same time. So, it’s a great idea to consider your priorities and take a close look at your budget. Start with how much spare money you have left at the end of each month. If you need to pay bills with a credit card, it would be unreasonable to consider investing. Create a budget and update it regularly to fully understand how much you have left after all expenses are covered. This will give you a detailed breakdown of your debts which will help you to make informed choices. For example: If you’re dealing with a relatively low credit card balance, which has a 0% APR promotional rate, you may want to consider using any spare money to begin an investment fund. But, if the rates are high it’s more prudent to pay off the debt quickly. 

Do You Have Savings?

If you are saving, it’s a good idea to look at what you’re doing with your funds. Saving regularly is an excellent idea, it lays the foundation for solid investing. But, if you’re dipping into those savings regularly or even clearing the account occasionally, you don’t want to tie that money up in an investment account. There is a compromise, using a CD or high yield savings account can help. This will give you a better rate on your savings and some extra flexibility if you need to access your money in an emergency. 

Have You Established an Emergency Fund?

Choosing to clear debt or invest should be influenced by your access to an emergency fund. Think of this as a cash reserve that can be used to cover unexpected emergencies that could potentially derail your financial plans. Financial experts have differing opinions on how large an emergency fund should be, but 3-6 months of your expenses is a solid choice. These funds should be kept in an account that’s easy to access and they cannot be used for daily expenses or investing. When the emergency fund is in place, it’s easier to use additional funds to begin investing. 

Are You Spending Too Much Money?

The answer to this question is almost always yes. Although it may be hard to believe, there is more room in most budgets for the spending to be brought under tighter control. With some careful planning, it is entirely possible to save more money each month without making drastic changes. There are some very simple strategies that can be used to make savings that can really add up over time. Let’s take a closer look at three tips that have helped many people to get their finances under control fast.

1. Avoid Eating Out

Eating out is far more expensive than making food at home. Establishing a complete halt to eating out may be difficult for many, but it’s a great way to save money quickly. There is an upside, this is a great way to learn how to cook and eat meals with your family and friends at home. Learn some new recipes or familiarize yourself with some family favorites. Even those that cannot cook can buy a ready made meal and cook it at home. This simple form of home cooking is still cheaper than eating a meal in a moderately priced restaurant. The main drawback for some people would be the lack of socializing with friends, but this doesn’t need to be a problem. Making a switch to a potluck or dinner party at a different home once per week is fun. Round off the meal with some party games or a board game night and you have a fun night out at home.

2. The Spending Freeze

This is an effective and drastic approach to avoid spending any money that isn’t an essential bill. No trips to the coffee shop, no impulse purchases, and the credit cards stay in the wallet. It’s surprising how much money we spend without thinking about it, all those small purchases add up to a lot of money. A typical spending freeze would last for an entire month to give you some breathing room. If this approach sounds too draconian, start small by making your coffee at home or establish a no spend day. The goal is to increase awareness of how and where you spend your money. 

3. Meal Planning

To avoid eating out and make the most of eating at home, it’s important to plan those meals around the pantry. For most households, grocery shopping is one of the biggest expenses, and any savings that are made there can be significant. The first step to plan meals for the week ahead is to examine the contents of the refrigerator, freezer, and pantry. There are often forgotten food items that are reaching their expiration date or that need to be cooked with something you don’t have. Filling in these gaps when you’re shopping is a great way to make a meal cheaper. Make meals that you can eat fresh and make extra to freeze for another day to stretch the budget further. Remember that leftovers can make great sandwiches and always check the offers. 

In Conclusion

A lack of cash can be depressing, but it is possible to clear debt or have savings to start investing if you get your finances under control. Use the tips in this article to keep more of your money, pay off your debts, establish an emergency fund, and then you will be ready to invest and engage in long-term financial planning.