Prioritize Your Investments and Debt
Invest in the Higher Returns by Determining if it is More Beneficial to Pay Debt or Invest in Something With a Higher Return
Just as it pays to invest your money wisely, it also pays to make your debt payments wisely. And in some cases, it makes sense to pay your minimum debt payments and invest your would-be debt payments in something else. Without getting into too much detail, we’ll give a few examples of why this is important and then list some simple financial guidelines to follow.
A good example of how you can save money by prioritizing your investments is if you have credit card debt. Say you have two credit cards, one is at a 9% rate and the other is at 18%. Instead of paying $100 to each account each month, it makes much more sense to pay the minimum fee (assume $20) to the 9% card and pay the remaining $180 to the 18% card. The same rule should be used when making payments to a car payment versus a credit card versus a mortgage versus any other interest bearing payment. Here are some guidelines to follow when making these payments:
- Interest rates matter. Always pay your highest interest rate loan first.
- If you have several high interest rate loans, you may want to refinance or consolidate your loans to a lower interest rate loan. Be careful not to consolidate your loans and then build back credit card balances.
- Call your high interest rate lenders and ask them for a reduced rate. You’d be amazed how easy it is to reduce your interest rate. Sometimes a simple call can change your rate from 18% to as low as 9%.
- When comparing rates on mortgages, remember that mortgage interest expense is tax deductible. Depending on your income tax rate, a typical 8% mortgage is really equivalent to a 5-6% rate on another loan.
- If the interest rates you are paying are lower than the return you expect to make on another investment (and you can afford the extra risk), invest your money and make reduced or minimum debt payments.
- If your only debt payment is a low interest rate mortgage, it often makes sense to pay only the minimum amount and invest the rest of the money in other asset classes.
The next rule is to diversify your investments and wealth.