Thursday, March 13, 2008

Paying Down Debt vs Investing

I think a very common quandary that people end up in is deciding whether they should pay down their debt or invest in their future (typically retirement accounts like 401(k)s. Although I intend to address this topic more thoroughly later I think there are some specific situations that have easier answers and I will attempt to sift through the main ones.

The Credit Card Rule: Alright, first and foremost you always want to pay your credit cards down. Having high revolving balances on credit cards is the most damaging to your credit score and usually your wallet (credit cards typically have higher interest rates).

The Private Loan Rule: Private college loans do not have nearly as many benefits in terms of taxes and interest rates as due federal loans. Because of this it makes sense to pay them down as much as possible. Ideally you don't want any debt, but private loans are generally worse than federal.

Always Plan Ahead: In general it is a good idea to at least invest some portion into an IRA, 401(k), etc. Even if it is only $50, for most people this is the easiest way to invest. Since it is pre-taxed dollars you save double time. Once your cashflow starts to really improve you may look into real estate investing or some other method where you have more direct control over your money (instead of leaving it up to the company and its management). You may even be interested in starting your own business!

Like I said, I will attempt to explain more of your options in future posts, but for now hopefully this helps you out!

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