A balanced approach to wealth management serves  both today’s needs and tomorrow’s goals. For some,   that may mean paying off some debt today while  simultaneously investing for the future.   Of course, your own needs and circumstances  will be unique. But hopefully, this video   can help you evaluate alternatives and find an  approach that fits your situation and goals. If you have some extra cash flow each month, you  might be wondering what the best thing to do with   it is: should you pay off debt, or should you  instead invest? The answer can be complex, and   it varies depending on your financial situation.  So, it’s crucial to consider where you are   financially, the rates of return you could expect  with each option, and a variety of other factors.

So before you start putting money away toward  either option, it’s essential to make sure you   have your financial basics covered. And  the best way of doing this is to create a   budget if you don’t have one already so you  can see how your monthly income is spent. Since your finances are finite. You, therefore,   have a limited amount of money to pay down  debt, invest and cover your expenses. This   is why it’s important to learn what  comes in and goes out each month. If you stick to your budget, you’ll have  better control of your personal finances.   This will allow you to dedicate as much  cash as possible towards each ‘category’,   thus increasing your net worth whilst  building a solid financial plan.

Once you determine the amount you’re able to  set aside for paying off debt or investing,   you’ll need to prioritise your options.  Investing is a way to set money aside for the  future in an investment vehicle. Examples of   this include bonds, stocks or mutual funds. The  great news is that, the value of these vehicles   will grow with time. On the other hand, debt  represents money that you’ve spent already and   that your lender is charging you interest on.  When this debt is left unpaid, it only grows   with interest charges adding to your balance  and incurring interest charges on their own. In the case of investing, this is the rule  of thumb: if you can earn more interest on   your money by investing it than your debts  are costing you, then investing makes sense.   Another thing to consider is your risk  tolerance. If you are comfortable taking   the gamble that your investments will depend on  the rise and fall of the markets, then investing   is a better option as opposed to someone who’d  be restless wondering how the market will be. When it comes to paying down debt,  there are several good arguments   for opting to pay down debt rather than  investing.

For one, your debt carries   a relatively high-interest rate. This is  especially the case with credit card debt.   Another reason to pay down debt is your credit  score, which is important if you’d like to borrow   money for a mortgage or get a loan on a car.  If you have a low credit score you’re likely   to pay higher interest rates (that is if you  can get a loan at all). Your credit score can   also affect other areas of your life. Some  examples include the premiums you’ll pay for   insurance, whether you’ll be able to rent  a place, or if an employer will hire you. Paying off debt - especially if you have lots   of it - can be the right way  to go for that reason alone. Psychology is also a factor that comes into  play. If your debts are making you lose sleep,   then you’d rather repay them even if you might  get a better return on your money by investing.

When you think about it, paying down debt or  investing doesn’t have to be an “either – or”   decision. Why not do both? Investing and  paying off debt are essential financial goals. Your investments and your debt  are elements of your net worth.   While your assets increase your net worth,  your debts are dragging it down. Since your   focus should be increasing your net worth, you  should aim to increase your assets and minimise   your debt at the same time. To do this, commit  as much of your cash flow to fulfilling these   goals as possible, ideally all of your free cash  flow after you factor in your necessary expenses. If you have high-interest rate credit card  debt, focus on paying it off first.

If you   are investing when you have credit card debt,  you are likely paying a higher rate on your   debt than you are earning via your investments.  Unless you have a huge amount in investments,   you end up losing money overall. Some debts  tend to be lower however, such as mortgages   and student loans which you don’t need to be as  aggressive with those as with high-interest debts. How to start investing Investing your money is important to  building wealth. But you need to make   certain you’re ready before you start  using your cash to buy investments.   If you have a lot of credit card debt, you  may not be in a position to invest much.

When you have a limited amount of money, you  have to decide how best to use it to maximise   the return on investment it provides. In most  cases, paying off credit card debt is going to   provide a better return on investment than just  about anything else you could do with the money. The one exception to this is if your employer  provides a 401(k)-matching contribution when   you invest in your workplace retirement plan.  If your employer matches contributions you make,   that’s free money. The specific return  you get will depend on the percentage   of contributions the company matches, but it’s  common for employers to match 50% or a 100% of   contributions up to a certain percentage of your  salary.

So, investing enough to earn the full   employer match could end up giving you a return on  investment of around fifty to a hundred percent. Investing in your retirement account is often a  good place to start. Experts recommend putting   at least 15% of your annual income towards  your retirement. Whether you do this through   a work-sponsored retirement plan or an individual  retirement account is up to you, but make sure   you’re never leaving any money on the table, such  as from an untapped employer match to your 401(k). Retirement aside, the right investments  for you will depend on your risk tolerance.   Stocks are generally riskier  than bonds. To lighten the risk,   you can turn to mutual funds. They can  help provide diversification among stocks,   bonds and other investments to reduce the  risk from each one individually. Your risk   tolerance can be factored by income, age,  lifestyle and when you’ll need the money. Carrying debt can be stressful, and if  it negatively impacts your mental health,   you may want to prioritise paying debt  down first. Debt can completely derail   your financial goals. It eats through  your savings and can offset the gains   you make through investing.

On the other  hand, you may have a better chance of   a bigger reward with smart investments,  so you may decide that’s worth the risk. Keep in mind that investing doesn’t come  with guaranteed growth. Any average or   likely rates of return you may see are  often based on long-term performance;   you may experience higher highs,  and lower lows in the short term. If you choose to invest, by no means should  you stop paying off your debt entirely. You   should aim to at least make your minimum  monthly payments before you put any spare   cash toward investments. You really don’t  want to miss your minimum payments. Think   of your minimum debt payments as fixed  expenses. After regular living expenses,   minimum debt payments should be the  next priority.

Failing to do so,   could lower your credit card score making  it harder to qualify for future loans. The younger you are when you start investing,  the more time you have for your investments   to grow. However, there’s no guarantee  that you’ll make money when you invest,   as the market can be volatile. If  you’re relying on an increased balance   within a short amount of time, you might be  disappointed.

Whichever decision you make,   your decision is never set in stone. You can  always switch up your budget if your financial   situation changes or if you’re unsatisfied  with how you’re currently allocating your   money. The important thing is that you’re  taking charge of your financial future. Make sure you have an emergency fund  in place before you use extra money to   contribute to these goals. An emergency fund  should contain between three to six months’   worth of expenses that can protect  you in case unexpected costs come up. Without a financial safety net, you’re one  unexpected medical bill, car accident or surprise   expense away from even more debt. Some people,  particularly those worried about income loss,   prefer building a large cushion of cash for  emergencies first over paying down extra debt. By using automatic deposits, you can create  an investment plan and stick to it over time,   treating your investments as part of your  fixed budget. Your safety net will give you   some financial breathing room, and before you know  it, you’ll be making progress toward retirement,   a down payment on a house, college for  your kids or whatever goal you had in mind.

As you approach saving, investing and paying  off debt, keep in mind that it doesn’t have to   be all or nothing. You don’t just have to focus  on one thing at a time. If you do, it could end   up taking longer to start working on each of  your goals, which could delay your success. The best path to long term financial  sustainability is paying off debt and   investing at the same time. This approach will  help you improve your financial discipline,   and will ensure that all of your hard-earned cash   takes you one step closer to achieving  your financial goals one cent at a time. Try and find a balance between everything.

While  it can take a little longer to achieve each goal   this way, it can give you a more well-rounded  financial foundation and pay off in the long run. When making decisions about  debt reduction and investing,   keep in mind that the need to  eventually pay off principal   is certain, but investment returns are not.  Investment performance will vary over time,   and it’s possible to experience losses as well  as gains. At the same time, it’s well known that   investors who start earlier can benefit  from compounding and time in the market. But there aren’t any magic numbers. That’s  why it’s important to work with your financial   advisor to create an investment strategy that  fits your financial expectation for the future. Having some extra cash is an enviable situation  to be in. When making decisions about debt and   investing, be a long-term thinker: Think  about the position you want to be in the   next ten or so years.

Then evaluate what  actions today will be most effective in   helping you achieve your long-term  financial goals. Whether to invest   or pay down your debts is a decision only you  can make. Whichever you choose is better than   merely spending it. You’ll be in a better  financial situation than you were in before. If you’re interested in getting my savings  and budgeting guide or retirement guide,   click on the link in the descriptions. Well, thank you all so much for watching, if you  found this video helpful, be sure to give it a   thumbs up and subscribe to our channel for  more tips on how to improve your finances. Until next time, take care!.

As found on YouTube