Save and Invest or Pay Down Debt?
Here is a question most people ask: should I be putting money in savings and investing at the same time that I'm paying off a debt?
It always seems reasonable to keep putting together money for future needs such as retirement, college for the children or a new home, or emergencies. Most people think of it as a simple mathematical solution: if you can earn a higher interest rate on your investment than what you're paying on your loan, then invest! This can be quite dangerous as was proven in the late 90's when people actually took more loans to invest in the booming stock market - and then the bear market hit causing people to lose a lot of money.
However, a reasonable way to figure out what to do is to differentiate between good and bad debt. The debt you would want to get rid of as soon as possible is any high-interest loans and credit card debt. Student loans and mortgage can be paid off in time while saving for the future. Making a list of all the loans along with the interest rates will help determine which ones should be paid first.
Pay Off High-Interest Debt
Your high-interest credit card debt should be paid off first. Comparing a card with an interest rate above 15%, you'll need to make more than 20% after-tax return on stocks or bonds to make them a better investment. Paying off a credit card would be a better choice.
However, if your employer offers a 401(k) plan and matches your contribution upto a certain limit, fund it upto that level. Do this despite having credit card debt. This is because you will be getting a 100% return on your investment.
Identify Good and Bad Debts
Normally it is not a good idea to pay off home mortgage unless you have a lot of extra cash. Instead, you can use that money to invest in liquid assets. Still, paying off your mortgage by the time you retire should be your priority.
Invest - AFTER Eliminating High-Interest Debt
After getting rid of high-interest consumer debt, you should start saving as much as you can. The best choices would be to invest in a 401(k) or an IRA.
When investing, do keep in mind cash that might be needed in case of emergencies. You should have at least an amount that would help you manage for at least three months in case your cash inflow stops. There are many other tips for saving money. Also, you can use this pay down or invest calculator to help you decide.