Should you pay off debt or invest first?
Investing your money into securities, shares, and other assets is one of the best ways to make sure that you’re making the most out of your income. After all, for years now, the modern bank accounts throughout the world have failed to offer good interest rates for those who put their earnings away for a rainy day. That means that even if you don’t touch your cash for years at a time, you won’t get anything out of it. That doesn’t necessarily mean that saving is a bad idea; it just means that you’re not going to grow your wealth unless you’re willing to take some risks with your cash. The more you’re willing to risk, the more you can earn in returns. However, before you start looking into strategies like swing trading or day trading, you’ll need to ask yourself whether you’re in the right position to start thinking about future wealth.
Why would you invest anyway?
The first thing to think about is why you’re going to be trying to grow your money. Although placing your cash into an ISA or another kind of bank account won’t make it grow much, you at least know that you’re not going to lose any of your earnings. Unfortunately, for many of us, this means that we’re missing out on the potential of things like compounding interest. If you have a financial goal that you would like to achieve in the years to come, such as buying a new home, getting married to your partner, or even paying for your child’s schooling fees, buying securities and assets could help you to reach those goals faster. However, there’s also a risk in any environment that you could end up losing money too. That’s why many say that you should never invest anything that you can’t afford to lose.
Does debt come first?
For some people, the most obvious strategy seems to be spending their cash on assets first and then using the returns that they get to pay off things like debts and build better savings account. However, this is actually approaching things the wrong way around. Although it’s tempting to ignore things like loans that are dragging your finances down, the first thing you should do in any financial plan is get your debts under control. In most cases, the cost of your loan repayments and interest is likely to outweigh any of the returns that you initially receive from securities – unless you’re engaging in a high risk and high reward strategy.
Getting rid of as many of your loans as you can before you think about experimenting with your money will ensure that you don’t end up in a dangerous situation with any creditors. It could also mean that you don’t have to worry as much when you encounter a loss in your portfolio, because you know that your debt is already handled. It might even be a good idea to think about building a significant savings pot just in case before you begin to spend your money elsewhere too. This emergency fund will come in handy if anything goes wrong in the years to come.