Extra cash in the bank? Should you pay down your debt or invest?

By Tom Kirk

One question I often get asked is, “What should I do with that extra cash in the bank?” Whether you decide to pay down debt or invest, your decision depends on the kind of debt you have and how you are going to invest. Our wealth services firm in Melbourne recommends considering the following factors.

After you have established a cash reserve for emergencies, pay off your worst debt first. Credit cards, for example, can bear 18 percent interest or more, so every amount of principal you pay down is like earning 18 percent interest on that amount since you avoided paying interest into the future. That’s a great rate of return!

After that it gets more complicated. If you plan on investing first, consider empirical data such as the rate of return you might get if you invested compared to the rate of interest you are paying on your borrowed funds. If you can make a higher rate of return investing than you are paying on your debt (positive arbitrage) you may want to consider investing and not paying down your debt, especially during your working years.

But there is also the emotional benefit many people experience when they become entirely debt free. This benefit is hard to quantify but is no less real. It can strongly drive behavior toward debt reduction regardless of empirical evidence that may suggest you could have more money if you invested instead.

These and other variables should be considered when developing an integrated financial plan with your WealthCoach TM so that this goal of debt reduction is coordinated with your other goals of wealth accumulation and financial independence, resulting in an optimized strategy for your particular situation and circumstances. Call our wealth services firm in Melbourne today to see if we can help you create the life you dream about.