Many who have a surplus of cash look for places to put it to help it to grow. Like planting a new bulb of flower, you want to nurture and grow your cash and it makes sense that investing it is the place your mind should go. The thing is, while you have a surplus of cash and outstanding debt, you have to ask yourself where the best place to put your money is: investing it or paying off debt?
It’s quite the dilemma, because once you put that money into debts to pay off, you won’t see it again. Yes, you will be free from the shackles of certain debts, but you will also have lost out the chance to double or even triple your cash. If you invest it, you get the chance to watch it grow and earn interest, which pays you more later on. This allows you to pay off your debts and still have some leftover cash. You could have a mortgage and a low interest credit card as your outstanding debts, and if you have the money to pay those off outright, you could find yourself debt free entirely. The question is whether paying off debt is a conservative option for you. Having a cash buffer for a few years can be better than paying off a mortgage, though, so you have to really assess whether paying debt will leave you better off in the long run.
Building a cushion of emergency funds before you start thinking about investing surplus money or paying off debt is a smart move to make. This can help you to weather the storm should you lose your job or find yourself injured. There is also the consideration that some debts are good debts to have. Having a mortgage, for example, that you pay for regularly is a good way to keep your credit score in the green zone. Paying off all your debts may mean reduced stress on your monthly outgoings, but it also leaves your credit questionable as companies are not able to see whether you are making regular payments.
Investing cash means building up a money reserve that protects you and your family when things get rough, or when you hit retirement. Having the money to buy a second home and rent it out means you have an income that is passive, and you could then use that income to pay off debt. It makes sense to invest some money in your retirement fund, and your emergency fund if you are lucky enough to come into a windfall. Once you’ve done that, any leftover cash should then be used to pay off debts. Doing it this way, you can make sure that you have both invested your money and paid off debt that has been holding back your monthly cash. You then free up your monthly income to put toward other debts and give yourself a bit of breathing room. You don’t have to choose when you can have both.
