Investing Or Paying Down Debt? 6 Steps To Help Decide Between The Two

By: ispeculatornew
Date posted: 01.25.2012 (6:00 am) | Write a Comment  (3 Comments)

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We all know that the economy is weak, that unemployment is high, that debt is exploding, that it would be much higher if all laid off workers were still looking for a job or if those that recently graduated had decided to enter the job market. We know all of that. It still hurts when we know people that are affected personally by the economic struggles. One of the top ways that I use to discuss with readers is using the mailing list. I give out a lot of information, about dividend stocks, tech/web stocks, and more. But I also ask questions and discuss with many of you. If you have not joined our mailing list, I’d love for you to give it a try, it is free. You can signup for the tech newsletter here or join the dividend focused newsletter one here:

Back to the subject though. Sometimes, I receive a few comments that are very similar and this week I did receive a few that all had a very sad reality.. Many of us would love to do the two at once but the economic uncertainty has forced us to choose….

Investing Or Paying Down Debt?

It’s sad that we even have to consider a choice between the two, it’s far from the American dream. Many readers have been hesitating between the two in recent months. Why?

-worried about their job security
-rising interest rates
-volatile stock market
-low interest rates on money balances

There is clearly a very high correlation between the economy and this debate. The better things are, the less we worry about holding debt because we are confident that:

-we can pay the debt at any point
-buying assets that rise in value is much more profitable than paying down debt

The Sad But True Reality

We have to look at facts, a large majority of Americans (Canadians, Europeans, etc) face a much grimmer future than just a few years ago.

How I Look At This Decision

There is no right or wrong answer here obviously, we are all different and can live with different levels of debt. Here are the steps that I use:

Step 1 – Find Your Current Location

As in any other journey, in order to know where to go and what steps to take, you need to know what your departure point is and in this case, that is finding out what assets and debts you currently hold. Ideally, break it down by asset and debt category and find out how much interest you are paying on your debts. That will make a critical difference in how you decide to spend any surplus.

Step 2 – Determine How Much Money You Have Available

There are many different ways to do this, using a budget is clearly one way. What you are trying to find is the monthly amount that you can afford to set aside either to invest or to pay down debts. Many would base that number off of their budget but I personally prefer looking at the past 6-12 months in order to see how much I was able or could have saved.

Step 3 – Determine Your 6, 12 and 24 Month Goals

If for example you know that you are able to set aside $500 per month, you should be able to set aside $3000 over 6 months, $6000 over 1 year and $12,000 over 1 year. Look at your current investments and debts and determine for each of those how much you would like to contribute to each one.

Step 4 – Investments Split In 2

I think there are 2 types of investments that you can start off with:

#1-Emergency fund – Safe investing, to reduce stressful moments and give you some flexibility if something goes wrong
#2-Longer Term Investing – retirement, dividend investing, etc

How much you should hold in emergency funds really depends on you. Some say that you should have a few weeks while others want to have enough to live off of for one year. I personally like to have a few months but will increase it very slightly every year.

Step 5 – Setup Automatic Payments

No matter if it’s debt or investments, you can always contact your bank to make those payments automatic which for most people (including myself) makes it easier to contribute. Paying yourself first is a commonly used theory and I’m personally a believer. The odds of me paying $500 into my investing account the day that I get my pay are greater than waiting at the end of the month to see if I have a surplus.

Step 6 – Adjust And Restart

This is a never ending process. As time goes by, circumstances change, your job might become more or less fragile, you might be willing to put on more or less debt or see great investment opportunities. You can (and should) obviously adjust all of these over time. That being said, those with a specific plan of action will generally do much much better than those that don’t. Set up a plan, stick to it and adjust over time, you will be much better off.

It Doesn’t Get Any Easier

I wish I could say that at some point it becomes easier to decide between the two but it doesn’t. However, over time, I think we can all get a much better feeling over what the right proportions should be for each of us and get closer to the “ideal weights”.

How about you? How do you decide between putting that extra money in investments or paying down debts?

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  1. Comment by Zavi — January 25, 2012 @ 8:08 am

    great post. it’s really difficult to answer, because it depends of each situation and case.

    As for me, I want to pay down debts. I just bought a house with my spouse and we have a lot of debts (cost incurred when buying, I don’t have a lawnmower or I need new curtains for the bedroom or new furniture).

    My new resolution is to produce a monthly budget, just because I need to know how much is getting in and how much is getting out… But right now, it’s still difficult for me to set 6, 12 and 24 Month Goals…

  2. Comment by Stephen — January 25, 2012 @ 12:09 pm

    My job situation has been a bit precarious for a while now and I had to decide weather to keep investing or paying down the debt. I chose to pay down the debt. I already have an emergency fund so every extra dollar goes to paying down the mortgage and it feels great. I still contribute to my IRA accounts though.

  3. Comment by IS — March 11, 2012 @ 2:21 pm

    @Stephen — Completely understand but do you have an idea at what point you would reconsider investing part of the money you can save?

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