Paying Off Debt vs. Investing
Is it better to solely focus on paying off existing debt or contribute to both your debts and investments at the same time?
A feature by The Globe and Mail recently posed that those with student debt shouldn’t even think about investing. So how much wisdom is there in paying off all your debt before investing?
Five Debt Myths Canadians Need to Kick to the Curb
1. Paying Off Debt Delivers the Best Returns
It used to be that paying off all your debt first was the best move specifically because the interest rates being charged were higher than being achieved on certificates of deposit and other investments. Some certainly may be lumbered with high interest rate credit card debt, but the real rate of returns many Canadian investors are realizing can often far exceed the rates being paid on student loans, auto loans, and home mortgages.
2. Debt is a Problem
While there is such a thing as bad debt, individuals and accredited Canadian investors also recognize that leverage can be one of their best allies in generating above average investment returns. Some politicians and regulators have been bearish about the amount of consumer debt in recent years, half of Canadians report they expect to be debt free by 2017. That suggests that consumer and household debt in Canada may not need to be feared as in other markets.
3. Student Debt Needs to Be Paid Off Right Away
Student debt is arranged to facilitate rising income. So don’t stretch too thin trying to race to pay it off too early.
4. Free and Clear Homeownership
Some race to try and pay off home mortgages, chasing the myth of what they believe will be ‘free and clear’ homeownership. The truth is that there will always be insurance, taxes, maintenance and other costs. So why not preserve that capital and invest it profitably instead?
5. Being Debt Free Will Last
Most individuals will find that they continuously re-borrow and max out credit lines. In essence, paying down debt first can be futile, counterproductive and lead to forking out even more in borrowing costs. Slow and steady often wins the race.
The Wisdom in Investing First
Investing is the way to get ahead. Of course credit card companies and other lenders would rather you pay your obligations to them first before borrowing more, but what’s best for you?