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09 Nov, 2016
Savvy Tips

Paying debt versus investing – what should you do with your money?

We all experience moments of financial difficulty from time to time. Whether due to personal, national, or international circumstances, we are bound to be faced with serious questions. When money is tight, it's understandable to consider whether to focus on paying off debt or leave your investments in fact. In order to find the best possible solution, a personal approach is required. No two people or households are the same. The same can be said for financial needs and concerns. When you are faced with this decision, the best approach is to analyze the pros and cons of each option before making your final choice.

Define your financial goals

When investing, you have two main options. You could opt for short-term or long-term policies. Short-term policies are great for when you're in a real financial bind, and you need cash in on your investment for any reason. Long-term investments, like pension funds, are best left to accumulate until the time comes. Cashing in on some smaller short-term investments is, therefore, a better choice than sacrificing your future financial stability by using your pension fund to pay your bills or current debt. All things considered, it's always better to let your investments grow for as long as possible. Only ever withdraw if absolutely necessary and once you have exhausted all other options. If security is your concern and you plan on putting your money to use relatively soon, such as a deposit on a new home, a new car, or to pay for your wedding, you could benefit from something more secure. A GIC, or guaranteed investment certificate, is one such example of a secure financial move, albeit one with somewhat more moderate returns.

What is the extent of your debt?

Your debt could be manageable, or it could severely weigh you down. No matter the type of debt, regular payments need to be made as stated in the agreement. Failing to make these payments will lead to penalties. The severity of which varies based on the terms of the agreement. If you are struggling to make payments on your mortgage, this will certainly take priority over any investment. In addition, if the interest on your debt exceeds the amount you're earning on your investment(s), then it makes sense to cash in and pay off your debt before signing up for any further investments. When cashing in, you need to choose your policy or policies wisely. If you cash in a policy that is not tax-free, the tax you pay could make for a less than lucrative outcome.

Finding middle ground

If you're not particularly happy about cashing in or leaving things as they are, you might just be able to make a compromise. Compromising does not mean that you have to lose out. It just means that you might not be in the position to take action right away. If your funds are invested in high-risk accounts, you might feel happier moving them to something that's a bit of a safer bet. Discuss your options with your bank to establish all of your options and what each one entails. If your funds are currently tucked away in a savings account with a high-interest rate, then it might be best to leave it be. Sure, you won't earn as much, but it's a lot safer at the end of the day.

Remember, the higher the risk, the greater the reward. Of course, higher risk means that the scales can tip either way which could result in significant financial losses. If you are planning on saving your money for your retirement or another goal in the distant future, then long-term low-risk investments are ideal for your pocket and peace of mind. Of course, every investor has their own individual concerns and financial needs. This is why, at Wallet Savvy, we encourage everyone to schedule a meeting with the appropriate bank representative or manger to discuss your options in details. 

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