Many consumers must decide whether it’s better to pay off debt, such as home loans, to save money or to invest it. This is rarely an easy choice.
Budgeting decisions are among the most significant issues for many households. They determine a household’s long-term financial health. But by zeroing in on a scarce key points, individual can determine what’s best for them and create a sound strategy. Consider the steps below.
How much is debt?
Consider how much debt they have and the interest rate. If they have high interest rate credit card debt or high interest rate student loan debt, for example, it makes sense to pay that off before saving or investing the bulk of your extra funds. Why? Those interest rates are likely much higher than they would get by investing the money. Making a plan to pay off that high debt as quickly as possible gives them more financial freedom.
If individual debt has a low interest rate, for example a car loan, government student loans or a mortgage, it may make sense to continue making those regular payments each month and budgeting for them. Also, some interest, like a mortgage, may be tax deductible, so there are other advantages to paying back that debt more slowly. The interest rate they may receive from investing in a mutual fund or stock might be higher than the interest rates they are paying on these types of debts, so they will come out ahead in the long run.
Retirement investing
Many company might offer the opportunity to save for retirement. Funds that come directly from individual paycheck can be invested using automatic direct deposit each pay period. These investments can earn compound interest that benefits individual in their golden years.
There are several advantages to directing a portion of their money to retirement investing. Individual may be able to choose a plan using pretax money, meaning that they pay less tax on their income. They will still be obliged the taxes later, when they withdraw the money, but presumably they will be in better financial shape at that point.
Another advantage to retirement investing through work is that some companies offer a matching plan. They will match a percentage of individual salary or a percentage of their investment. Making retirement investing an automatic payment from their salary is a good way to get into a healthy saving habit and to let the long-term accumulated interest and potential company match work for them.
Looking to the future
If a lot of individual debt is consumer debt, meaning things they bought for their lifestyle, consider scaling back now so individual don’t create more debt in the future. That might mean eating out less, buying fewer electronics or making impulse purchases etc. so they can stabilize their finances and save for the future.
Once their higher debt is paid back, don’t slide into the same habits. Set aside money from each paycheck to invest for their future goals, whether that’s a rainy-day savings account, retirement account or other type of savings.
Get personalized financial advice by talking to a financial professional. A financial professional can help them understand their specific situation, and can help develop a plan for meeting their financial goals.
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