Payoff Debt or Build Wealth? (2024)

FAQs

Payoff Debt or Build Wealth? ›

Taking this into consideration, if you have debt with interest rates north of 10%, it's likely best to pay this down first. However, if you have an auto loan or mortgage with a 3% interest rate, it is probably better to invest your money, as you can reasonably expect in the long term to earn more on your investments.

Investing and paying down debt are both good uses for any spare cash you might have. Investing makes sense if you can earn more on your investments than your debts are costing you in terms of interest. Paying off high-interest debt is likely to provide a better return on your money than almost any investment.

You may feel more comfortable focusing on building an emergency fund before tackling debt. In situations where loans are secured at a favorable interest rates, you might prefer to save and invest in the hopes those returns will exceed the interest that accrues on your debt.

Millionaires typically balance both paying off debt and investing, but with a strategic approach. Their decision often depends on the interest rate of the debt versus the expected return on investments.

Increasing the down payment will not increase the amount of house for which a lender will qualify you. Using the funds to pay down debt may, because debt is one of the factors used to assess the adequacy of your income, and it also affects your credit score.

Wealthy people aren't afraid of borrowing. But they typically don't borrow money to live beyond their means or because they failed to save for emergencies or make a plan to cover expenses. Instead, rich people tend to use debt as a tool to help them build more wealth.

If the interest rate on your debt is 6% or greater, you should generally pay down debt before investing additional dollars toward retirement. This guideline assumes that you've already put away some emergency savings, you've fully captured any employer match, and you've paid off any credit card debt.

“Every single day your high-interest debt goes unpaid, it's costing you money — a LOT of money — in interest,” Krawcheck says. Instead of putting your extra cash toward an emergency fund, she suggests that focusing all of it on credit card debt first will save you more in the long run.

Start chipping away at your highest-interest debt first.

Every dollar counts. Once you pay off that credit card or other high-interest debt, put the money you were paying on your highest interest debt—the minimum plus the little extra—towards the debt with the next highest interest rate.

Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

How rich people use debt to get richer? ›

Wealthy individuals create passive income through arbitrage by finding assets that generate income (such as businesses, real estate, or bonds) and then borrowing money against those assets to get leverage to purchase even more assets.

Dave Ramsey Insists 'If You Can't Afford A Home On A 15-Year Mortgage, It Means You Can't Afford The House. Period. ' — But Under His Recommendations, You Need To Bring Home $12,000 A Month Plus An $86,000 Down Payment. Dave Ramsey delivered a definitive stance on the debate between 30-year and 15-year mortgages.

The people who have all the money often go by unnoticed, dressing well, but without flash, driving used cars and living in the first house they bought in a modest neighbourhood. The authors called them the quiet millionaires. They often work in, or own, unglamourous businesses that spin off steady streams of cash.

Paying off debt means you'll have more money available to put toward other financial goals, such as investing, adding to your emergency fund, or saving for retirement. You can also use the extra money to pay for your everyday needs, thus limiting the amount of credit card debt you rack up in the future.

While paying down high-interest debt will help you reduce the amount of interest you owe, not having an emergency fund can put you deeper in the red when you have to cover an unexpected expense. “Regardless of [your] debt amount, it's critical that you have money set aside for a rainy day,” Griffin said.

If you've recently paid off a debt, it may take more than a month to see any changes in your credit scores. You can receive free Equifax credit reports with a myEquifax account.

Investing has the potential to generate higher returns than paying off debt. This is especially true over the long term. However, there are risks when you invest, and high returns are not guaranteed. That's why experts suggest starting to invest early on, so you have a long enough time line to weather market downturns.

Debt is only beneficial if it's used properly. Good debt can generate significant value, may offer tax advantages, and could even elevate your credit score. Such as home loans or investments in long-term wealth growth opportunities like student loan programs.

Get Out (and Stay Out) of Debt

Let's get one thing straight: The only “good debt” is paid-off debt. Your most powerful wealth-building tool is your income. And when you spend your whole life sending loan payments to banks and credit card companies, you end up with less money to save and invest for your future.