Should I Invest or Pay Off Debt?

Should I invest or pay off debt? ...it depends on how savvy you are with managing your finances. 

Whether you have student loan debt, mortgage debt, car loan debt, or credit card debt, it's important to know a good way to approach this. First, you need to understand some basics - the definitions of investment, debt, net worth, assets, and liabilities.

Lets go over each. Start with knowing these 2 ideas:

1. Net Worth = Asset - Liability 

2. Understanding Debt 

There are many ways to have increased Net Worth, by increasing (Investing In/more) assets and decreasing liabilities.   

1. Net Worth increases with: 

1. Decreased Debt

2. Increased Assets

    or

3. Keeping Debt the same and increasing Assets
4. Keeping Assets the same and decreasing Debts

2. Debt can also be borrowed to increase assets

1. Debt on asset is good

2. Debt on liability is not good

    

Asset is something that pays you

• Rental property (monthly income) 

• Things that appreciates over time

Liability is something you pay for (so keep this as minimal as possible, less is better). Only use debt on absolutely needed items like a normal car or so.

If you pay down debt but your assets are unchanged = your net worth increases

If debt is unchanged, but your assets are increased = your network increases

Know that the term INVESTING has to do with growth, and that you want to make investments in Assets for growth, not liabilities. On the other hand, if you pay off or reduce your Debts, you are also making a good investing to increase your Net Worth!

The more assets you have the more net worth you’ll have. The key is to keep your liability low and be in your financial control. 

Debt is debt, but Debt is an issue if you're unable to pay it off or if you cannot manage it. So it's better to see "Debt as your inability to pay what you owe," so you can better make better financial decision. For example:

• If you have a $1 million investment portfolio, but you have a $200K mortgage.  You don’t really have debt or need to fear it, because you have money in the portfolio that you can liquidate to pay it off at anytime (assuming the amount in the portfolio remains higher than $200K).  

• But if you have a school loan, it should be paid off. 

• If you have savings, but there’s debt, then it’s ok if the debt helps you increase your assets' value.

• Credit card debt should be paid off ASAP

• Even if you can invest in something that makes 10% to cover the interest of the credit card, there’s the need to pay tax on the earnings. So it’s best to pay off these bad debts first.

• Pay off

• Student loans

• Car loans

• Anything with a high interest rate

If interest rates are low, it’s best to think wisely and consider using debt to increase your investing power to grow your Assets. On the other hand, if interest rates are high, you should consider paying off more of your debt to reduce your capital costs and debt exposure. Again, the answer to the original question is that it all depends on a person's own financial plan, as there's no clear answer for that applies to everyone's financial profile. 

So in summary, know that:

• Net worth = asset - liability 

• Asset is something that pays you

• Liability is something you pay for, keep at minimal, less is better. 

• There are many ways to have increased net worth, so understand how you can balance your assets and liabilities.

• Rethink how you define "Debt" - Debt is your inability to pay what you owe.