When an opportunity arises, individuals, or rather debtors with high debts, often seek debt advice on if investing the excess funds at hand will help get out of debt soner. Getting out of them early could be an option only if you have extra funds due to inheritance money, tax refund, job incentives, or another cash windfall. However, there is no hard and fast solution to get out of debt fast.
If you can afford it, making a lump sum payment would clear off your debts at once. If not, you can find other methods. In a typical case, if an individual earns some extra income, they might either choose to do the following:
- Get out of the debts first, then invest the excess funds.
- Invest in stocks to earn good returns and then get out of debts.
- Keep repaying the debts gradually while making suitable investments in stock.
Out of the three situations, it cannot be concluded which method is sure to work. The individual’s situation, debts, and stock investment are accountable. Therefore, no matter how much your excess funds are or your debt value, you must research cautiously and adequately consider every factor in deciding whether to invest, plan to write off debt, or do both at the same time. Whichever method you follow, there are varied pros and cons to it.
That being said, here you can find the pros and cons of all three situations. Because when you know the degree of benefits, you will get by applying a particular method, making an informed decision becomes more manageable.
Get out of debt first, then invest in stocks.
The financial advisor will most likely suggest you pay off your debts first before investing in stocks if you seek financial advice as your step change your financial journey. By doing so, you won’t have any vulnerable factors to affect your credit rating. Regardless, if you opt to get out of debt rather than investing in stocks, you might want to consider the following reasons:
- Prioritising debt repayment rather than investing in stocks effectively boosts your credit ratings. Your financial report and credit rating will not be affected by any obligations by paying off your debts fast. If your credit score improves, you can easily access credits and other financial products.
- Getting out of debt fast will remove any financial strain on you. You won’t have difficulty managing your ordinary living expenses.
- Paying off debt fast can help you save up a significant value on interest and charges. Interest will be included as long as you keep repaying your debts. So, by the time you finish the debt repayment, you might have spent more money than what you owe. Thus, using the excess funds at hand to get out of debt fast will reduce the overall interest value.
- Another non-financial reason to prioritise debt payment over investing in stocks is that high debts and creditors pressure can put the individual in depression. To prevent psychological impacts due to excessive debts and better mental health, paying off debts before investing in stocks is good.
Decide after considering the above reasons why you should get out of debts first rather than investing in stocks.
Invest in stocks instead of paying off debts
As much as investing in stocks might bring your considerate returns, there are also as many risks associated with it. People usually make stock investments to earn huge returns and pave the way for financial security for future terms. Prone to multiple risks and market fluctuations, investing in stocks is a long-term option, the returns of which you can use to get out of debt.
That’s why financial advisors associated with national debt help often suggest assessing all the investment risks so that you do not incur huge losses. If so, loss of money will impose an immense burden on you in addition to pending debt repayment. Moreover, debts are a short-term financial expense that you could, if affordable, can get rid of via different debt measures. Thus, even if you want to get out of debt fast, consider the long-term benefits of stock investment.
While the final choice is for you to make, you might want to check out the reasons why investing in stocks is preferable before getting out of debt fast.
- Investing in stocks is beneficial to meet long-term goals. The amount of money you invest in stock can be later obtained as a retirement benefit along with interest. In short, you should prefer investing in stocks if you want higher interest returns for the long run instead of making interest payments for the debt. Otherwise, you may miss out on the positive market fluctuations by paying to get out of debt fast. You can check Best Investing App written by Bankrate.
- The interest rate on the debts will be relatively lower than the interest returns you will receive by investing in stocks. So, consider investing in stock if you want to make less interest payment towards the debt with no impact on your fund at hand.
- Unfortunately, if you face any casualty in the future, you will have the reassurance of earnings from the stock investment that will benefit your offspring and partner. In brief, you will have financial security.
Suppose you have stock investments. Now, think about if you have a high debt load with interest. To get out of debt fast, you can choose to sell the stocks to raise money to pay off the debt. The basic concept that applies when considering getting out of debt fast and stock investment is the payout Vs. return.
Invest in stocks to pay off/ get out of debt fast
The last method while considering debt payoff and stock investment is to invest in stocks while paying off the debts. You do both at the same time. There are savings and the possibility of future earnings, while on another side you regularly make payments to get out of debt fast. It’s all about financial balance
A few reasons you should make a stock investment while clearing off your debt is the ultimate solution.
- Like any rational individual, you might want to get out of debt faster if you can afford to make the necessary payment. However, if you have high obligations to repay, you should now invest the excess funds to secure your future. That is, you can consecutively pay off the debts and invest in stocks while still having enough funds to live by. You can get out of there sooner while you reap the benefits of the investment for a long time.
- Let’s say that the financial market is excellent right now. If you do not grab this opportunity to invest in stocks but focus on getting out of debt, you have to bear the opportunity costs. You should apply this option if you want higher investment returns than what you pay for debt interest.
- You can efficiently balance your financial affairs by investing in stocks to get out of debt fast. If you focus on debt repayment, you lose your chance to get higher returns. If you fail to save or invest money, you might again have to struggle to control your finances and become debt-free. You get out of debt fast by investing in stocks while consecutively paying off the debts.
This third method is the ultimate solution to get out of debt while building financial security.
Things to consider to know whether to invest in stocks or get out of debt fast
When a person with huge debts gets more than sufficient income at hand, the first thought is to get out of debt as soon as possible. While being entirely debt-free is good, saving or investing the excess income for other productive and future benefits is more important. As such, below are a few factors that you should consider while trying to reach a perfect outcome.
- Debt value
The more debt you have, the more significant impact on your credit score. If you don’t rebuild your credit score soon enough, you might not access further credits. So, you should follow ways to improve your credit utilisation rate and credit rating. Review your budgeting process and decide the best bet you have to not lose points on both sides. StepChange Debt Advice is the best option if you have unsecured debt like Credit Card, Gas Bill, Mortgage etc.
- The interest rate on debt
If you got a low debt interest rate, you could put off clearing them for another time. But, if the interest rate on your debts is high, you better focus on paying them off first. If the high-interest rate on debts is not cleared fast, the resulting amount will be tremendous. To get the best outcome from such a situation, you should compare the debt interest rate (annual percentage rate) with the potential interest rate on returns on the stock investment.
If the debt interest rate is higher than the returns on investment, you will have to pay up more than what you are earning as investment returns. You might face a huge loss.
- Retirement period
If you are an adult working person with high debts, you can cease to get out of debt, instead focus on investing in stocks and saving up funds. Not having any future financial security at that period is bad. But if your retirement is near, you must get out of debt fast. Some debts can have severe implications during retirement.
Conclusion
Anyhow, you must play safely while investing in stocks. If you cannot reach the right decision, consider getting help from a financial advisor. Your investment goals and debt payout should reflect your capacity and financial situation. As you know, every solution to get out of debt has its merits and demerits.
