Should I Pay Off Debt or Invest?
Pay off debt or invest–that is the question. One of the answers could hinge on whether you’re paying out more debt interest than you're earnings from investments.
Spoiler alert! The answer is going to be both, but we'll dig into whether you might benefit more from paying off debt faster than required or paying the minimum and investing more.
Determining where to focus more of your assets first requires calculating how much money you owe on credit cards, a mortgage, auto and/or student loans, and other outstanding debt and their different interest rates. You'll also need a realistic, conservative estimate of the rate of return on all of your investments. But don’t panic because a Huntington Financial Advisor can assist.
How to Balance Paying Off Debt and Investing
One rule of thumb (yes, even for this issue) suggests that you consider putting whatever discretionary funds you have toward whatever is higher–the interest rate on your debt, or the expected rate of return of your investments. The bottom line is focusing on what's in your immediate best interest–saving money by paying down debt or earning more through investments.
A conservative benchmark of what your investments could bring in had been 6% based on the average stock market return of 10% per year for the past 100 years†. But market volatility and 40-year high inflation over the last couple years upended that goal. If you get 6% or more, great, but what is really worth thinking about is what's higher, the percentage of interest on debt or percentage of investment returns.
A weighted average interest rate is an average that is adjusted to reflect the contribution of each loan to the total debt.
What's your weighted average?
When holding debts with various interest rates, it'll be necessary to figure out the weighted average, which is based on different amounts you owe, and the interest rates assigned to each debt.
No math whiz needed–there's a calculator for that! To figure out the weighted average percentage of interest you're paying on all your debts, you can access this very simple calculator and fill in the fields for balance and interest rate of each debt. You should see the total debt you owe and the weighted average interest rate.
Compare the weighted average interest rate to the estimated rate of return on your investments. Whichever is higher is where you could benefit by placing more of your cash. It may be tempting to focus solely on saving money or paying off debt but it's better to try to handle both. Regardless of where you focus, you should also consider contributing to a 401(k) and/or other retirement funds. This 'pay off debt or invest calculator' can definitely get you started, but a Huntington Financial Advisor could assist with the calculations and investment options as well.
This information may help you determine where more of your focus should be. Because there are many factors to consider when figuring out if you should invest or pay off debt, we can help.
Connect with Huntington's Advisory Resource Group
For 35 years, Huntington Financial Advisors have been providing prompt, personal service to clients like you for moments that matter. We offer meaningful advice and can create a plan that is designed to focus on your key priorities to help achieve your goals. Call Huntington's Advisory Resource Group at 800-530-1690 to learn more or use Advisor Connect to find an advisor who's a good match for your unique position.
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† O'Shea, Arielle, and Royal, James. Feb. 13, 2023. What Is the Average Stock Market Return? NerdWallet. Accessed May 2. 2023.
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