No matter what the source of the money is, you should give careful consideration to the decision of paying off the debt or investing. There are good arguments for this, for both financial and non-financial reasons. Financially, the debt is paid and you are no longer paying interest — and those are good things. There are also psychological and emotional benefits, as well. Mortgage-burning parties used to be a big deal.
These parties were meant to be a celebration of becoming true owners of a property, free and clear of the responsibility and risk of the property being encumbered. Homeowners didn't have to worry about what would happen if they lost their job or some other economic misfortune arose. They could sleep a little easier at night knowing that, if nothing else, "I've got a roof over my head.
Now, on the flipside, a school of thought suggests that if your after-tax return on investments is greater than your after-tax cost of your debt, then you should invest the money. We will assume that the interest is deductible. Clearly there is the risk of comparing a certain debt cost versus an uncertain investment return, so be very careful if you take this approach.
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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Consumer Debt Basics. Credit Card Basics. Debt Repayment Options and Advice. Retirement Planning K. Key Takeaways Investing and paying down debt are both good uses for any spare cash you might have.
Investing makes sense if you can earn more on your investments than your debts are costing you in terms of interest. Paying off high-interest debt is likely to provide a better return on your money than almost any investment.
If you decide to pay down debt, start with your debts with the highest interest rates and work down from there. Article Sources. Investopedia requires writers to use primary sources to support their work.
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Putting money toward extra mortgage payments not only caused debt to go down, but the equity to go up — and therefore our whole net worth to go up, too.
My debt-free journey inspired me to learn different ways to make money beyond traditional investing. I turned my side hustle—a local dress rental business—into my full-time job. I also carried the great money-managing skills I built from paying off debt to run that business debt-free, which is rare for a brick-and-mortar retail business.
At the beginning of , I started my second business, a financial education company based on large speaking engagements and workshops. Cut to three months later, and the pandemic completely derailed my plans. Still, I managed to keep trucking with my new business, even with no income and no guarantee of success. Six months into the pandemic, many people are pausing investing or even withdrawing from their retirement plans because they have no other option.
Because we had taken care of our debt years ago, my husband and I are still able to contribute fully into our retirement accounts. Paying off debt and then saving also helped us increase our emergency fund from three months to almost a full year. All told, not having debt gave me the freedom to continue building my business without worrying about bills as much as before.
It was all we felt we could afford. Confession time: We even withdrew from our k once before we had healthy money habits, and it seemed a lower priority to invest in something so far away when we had immediate expenses to face, a situation so many people are now facing.
Seems pretty good, right? Consider this alternative. None of that would exist without first becoming debt-free. Even I underestimated how becoming debt-free can build the mental fortitude and discipline to become a better long-term investor, much like how running a mile at a time prepares you to run a marathon.
However, before you throw your retirement account to the wind to tackle debt, here are a few crucial pieces of advice, based on my own experience:. I learned a lot about myself and my priorities, personally and financially, with an aggressive debt payoff plan, a clear end goal, and optimism to see it through.
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