What should you be doing with your money? The answer isn’t an easy one to find. It really depends on your goals and the reality of your financial situation.

For many households, the reality is that they’re in debt, usually a lot of it. About eighty percent of households are in some kind of debt, including mortgages, while another four in ten households are carrying a credit card balance. For some, borrowing is even a necessity of life. There are just no other ways to reach goals such as higher education or a home.

Meanwhile, saving for your retirement is also essential, but something people do far too little. Without savings, you won’t be able to enjoy the lifestyle you expect when you retire.

That leaves you with some big questions about what to do with your earnings. Do you focus on paying down debt or do you get started with investing? Answering these questions can help make it clear how to move forward.

1. How High Are the Interest Charges?

Whether you should save the money, invest, or pay back debt depends on how much it costs you. If you can expect investments to grow more than the interest charges, it may be worth investing first.

For example, these types of debt are likely less of a priority compared to investing:

  • Student loans,
  • Mortgage payments,
  • Auto loans.

These tend to be long-term loans with interest rates that can usually be outpaced by the stock market.

On the other hand, if you’re dealing with credit cards, interest rates can be 20% or higher. You’re not likely to achieve that kind of growth long-term. Getting these types of debt out of your life should be your priority.

2. Can You Reduce Interest Rates?

You have high-interest debt, but have you considered trying to get those rates reduced? Non-profit credit counselling services exist to help you reduce those rates. You should find out what is credit counselling and where you can find it. It’s offered by certified Credit Counsellors with a non-profit credit counselling agency. They can help you negotiate better terms with your creditors, which can help you start saving money sooner.

3. How Long Until You Retire?

Another important concern is how much time you have until you retire. The point of investing is growing your money beyond what you could save on your own in a lifetime. But that means your savings need time to grow, and the earlier you start, the better.

At the same time, retiring with debt can also be a big problem. Consider splitting your extra income between investments and debt and putting windfalls toward erasing any outstanding debts you have, especially as you get closer to retirement.

4. What Is Your Risk Tolerance?

The historical average stock market return on the S&P 500 is 10% per year, but few years are ever average. You can see large gains followed by even larger losses. In the long-run, stocks are the best way to obtain growth, but as you get closer to the date when you start withdrawing your savings, you want to make more conservative investments that won’t stack up with interest rates on your debt. You would wind up losing money if you invested in bonds over paying back debt.

All things considered, it’s a tightrope balance between saving and investing your money.

 

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