How should you make the most of your spare cash?

People with extra cash often find themselves in a dilemma about whether they should use it to pay off their debt or invest money. There has never been a straightforward answer to this question, as it relies on your financial condition and goals.

Investing and paying off the debt are both excellent uses for spare cash. Investing should make sense when you get more return than the interest you pay on your debts. However, debt settlement should be preferred if they carry high interest rates.

Option 1: investing money

Investing money in stocks, mutual funds, and bonds can allow you to earn dividends and interest. It will help you grow your wealth, provided the returns are higher than your debts are costing you as interest payments.

Understand the types of debts you owe because not settling your accounts will keep accruing the interest. It will eventually roll up the debt. For instance, credit card debt costs you 20%, and you are earning a 25% return on your investments in aggregate. Even so, it does not make sense to invest money. That is because your credit card debt is high-interest debt.

The idea of investing sparing cash in lieu of paying down your debt is good as long as you have low-interest debt. Moreover, it is not as straightforward as it seems. The investment world is extremely volatile. It is likely that you lose your return. Investments with lower risks are subject to very low dividends. Bonds and fixed deposits offer very low rates of returns, which might not be enough to offset the debt cost.   

Risk tolerance capacity also decides whether you should invest money. Investing is not meant for a chicken-hearted. If you can bear the risk of losing your assets, you should dip your toe.

Option 2: paying off debt

There are several good reasons for choosing to settle your debt before investing your money. One of them is that you can save a lot of money on interest payments. Deferring payments will attract late payment fees and interest penalties, which quickly add up the debt cost. This is particularly true when you are carrying high-interest debt.

Experts suggest paying off your debt makes more sense than investing spare cash as you can reduce the burden of debt. After paying all dues, you can take control of your money. If you are relying on a quick cash loan or a credit card to cover your expenses, you should drop the idea of investing money.

After getting out of debt, you can fix your credit score as well. Even if you make a minimum payment, you cannot stop losing your credit points. A high credit utilisation ratio and a high debt-to-income ratio will also affect your credit rating. Paying off your debts will help you fix issues on your credit report.

You should always build up a nest egg of at least 3 months’ worth of living costs before starting to invest money. Having some money stashed away for a rainy day will help tide you over when you lose returns.

Bear in mind investing requires commitment. You cannot grow your wealth overnight, so you should be prepared to invest money for at least 5 years to earn better returns. If you are the kind of person who cannot wait, investing is not for you.

Option 3: Investing alongside paying off the debt

Investing alongside paying off the debt may be possible only in theory. Even if you earn higher returns on investments than the interest your debts cost you, returns cannot be guaranteed. The opportunity cost of investing your extra money will cost you double if the market is turned upside down.

• If you decide to invest money, you will still have to stick to all debt payments. Otherwise, late payment fees will be added, and your credit score will go down.
• Consider the early repayment charges you will have to pay while clearing your accounts in full. It should not be more than you actually save by paying off the debt.

Investing alongside paying off debt is a viable option only when you have enough spare cash to clear all your outstanding balances. Experts never suggest using half of your debt settlement because unpaid balances will accrue interest; as a result, your debt will continue to increase.

Ways to pay off debt

Experts suggest that you pay off your debts before investing money, no matter what. Debts are very expensive, and the world of investment does not guarantee returns. Here is what you should do to settle your unpaid accounts faster:

• Pay off your high-interest debt first.
• Consider getting rid of credit card debt to avoid per-day interest payments.
• Transfer your credit card balance if you have multiple maxed-out cards. Chances are you get a 0% interest-free card, provided your credit score is up to scratch.
• Use an unsecured loan to pay off all your existing debts. Interest rates will be higher as you are already having difficulty paying off the debt.
• If you are deep in debt, you should make minimum payments on each debt. Talk to a debt management company that will negotiate with your lenders. You will have to pay fees.

The final thought

You should use your spare cash to pay off your debts before investing it. If you want to invest money, make sure you have settled all accounts, such as credit card debt and a direct lender bad credit loan. Despite losing your money, you should not have any difficulty keeping up with your payments.

You should talk to a financial expert to come down on one side of the fence or the other. They will evaluate your financial condition thoroughly before suggesting any plan. It is a good idea to consult an expert, but do not throw caution to the wind. You should also use your mind to understand what is better for you; after all, the ball is in your court.