Should I Pay Down My Debt - Or Invest For My Financial Future

It's a question that we in the mortgage business hear all the time from potential clients.

"Should we eliminate debt first - or invest in the financial markets first," they invariably ask.

It's a fair question.

Remember, it all comes down to interest rates. In this case it's a good idea to invest money if you can earn a higher interest rate than you are paying on your loans and debts. For example, if the interest rate on a student loan is four percent and you invest in a mutual fund that promises a higher return, and then you will be netting a gain.

That said there's no guarantee that your mutual fund will even earn four percent next year. As a matter of fact, it could lose four percent.

That's why, in most instances, it's better to pay off your debt first. The interest rate fees you kill by paying off the loan alone make that strategy a savvy move.

If you insist on going the investor route, put the maximum you can in your company's 401(k) plan (or if you're self-employed a "Solo" 401(k) that caters specifically to small business types). If your company has a 401(k) matching plan, it's crazy to turn down free money. But, since your retirement plan distributions are tax-deferred and come out of your gross paycheck amount and not your net, you'll hardly notice the money is missing.

So the school of thought here is, before paying your cell phone bill, or your cable bill, pay yourself first. After all, you have as much right to your money as anyone else. Paying yourself first doesn't mean allotting yourself some spending money right off the top on margaritas with the gang or on a new Hermes scarf. Paying yourself first means giving you a chance to help your savings grow by putting some cash aside for your investments, like you do with a 401(k) or an Individual Retirement Account. It's no secret that progress toward financial independence can be accelerated significantly by putting your money to work for you.

The higher your income, of course, the more latitude you have. You might think about getting into a mutual fund immediately and initiating a systematic plan to make a substantial deposit once or twice a month.

Paying yourself first is all about developing the saving habit. Many people don't save because they don't think they can afford to put anything aside. In truth, they can't afford not to put something aside for themselves.

But only after your most pressing debts are paid off first.

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