Profits vs Losses

Back to Basics Part 2: Investing vs. Debt Payment

by Philip Tull | May 22, 2017 | Financial Planning

In my last blog we got back to the basics of how to prioritize paying down debts. Of course not everything is cut and dry, and as one of my friends pointed out, “Phil, your firm focuses on investments…shouldn’t I use my money to make more money in the stock market instead? Then I can pay off my debt later all at once.” This is a valid question, so let’s look at this scenario as well.

So the question is: Is it more beneficial to pay off my debt sooner through larger payments or allocate my funds into investments?

The problem is there is no concrete answer, as the answer is best considered a moving target which consists of two variables: Interest Rate and Return.

Interest Rate

With the majority of young adults’ debt consisting of student loans, we will focus on their interest rate.

In 2013 the senate passed a bill on new federal loan rates for undergraduate students to borrow at a 3.9% interest rate and graduate students at 5.4% for subsidized and un-subsidized loans. After the falling interest rate in 2013, 2014 saw the interest rate rise by 0.8% to 4.7%. These rising and falling rates should be a key determinant in the first steps of your evaluations of debt and investment opportunity.

Return

The second piece to this evaluation is in many ways a “risk vs. reward” scenario. If you are willing to take on the risk of catching a down market and losing money for the opportunity to make more money than your loan interest, then yes, you could save and invest your money. On the other end, if you would rather have a definite return and pay down your debt, then it is generally best to direct your efforts toward paying off your debt.

If possible, it is best to consult with a financial professional to help you determine the best course of action for your priorities, but there is also a wealth of information available online, so make sure you do your research!

Philip Tull recently received his Master of Financial Planning from Kansas State University, and will soon sit for the CFP® exam. He is a skilled soccer player and coach, an avid snowboarder, and a fearless fisherman. One of his goals is to make sure his Millennial peers don’t spend the rest of their lives living in basements – whether real or proverbial.

This blog article is provided for general information only, and nothing contained in the material constitutes a recommendation for purchase or sale of any security, or investment advisory services. Reproduction of this material is prohibited, and all rights are reserved. Read the full Disclosure.