Pay Off Debt vs. Invest: How Millionaires Prioritize Their Money (2024)

FAQs

Pay Off Debt vs. Invest: How Millionaires Prioritize Their Money? ›

If the return on investment is higher than the debt interest rate, they may choose to invest while managing their debt efficiently. Conversely, if the debt carries a higher interest rate, they prioritize paying it off to reduce financial liabilities.

If the interest rate on your debt is 6% or greater, you should generally pay down debt before investing additional dollars toward retirement. This guideline assumes that you've already put away some emergency savings, you've fully captured any employer match, and you've paid off any credit card debt.

Even if an expected rate of return on an investment is much higher than the interest rate you're paying on debt, there are no guarantees that the rate will continue. On the other hand, the money you save by paying off debt and avoiding extra interest is guaranteed.

Prioritizing debt repayment before saving is a prudent financial strategy that can lay the groundwork for long-term financial stability. This approach acknowledges the urgency of addressing existing debts, particularly high-interest ones, as they can be a substantial drain on your financial resources.

Wealthy individuals create passive income through arbitrage by finding assets that generate income (such as businesses, real estate, or bonds) and then borrowing money against those assets to get leverage to purchase even more assets.

Millionaires typically balance both paying off debt and investing, but with a strategic approach. Their decision often depends on the interest rate of the debt versus the expected return on investments.

Reasons why companies might elect to use debt rather than equity financing include: A loan does not provide an ownership stake and, so, does not cause dilution to the owners' equity position in the business. Debt can be a less expensive source of growth capital if the Company is growing at a high rate.

If you feel confident you can pay any debts back over time, making minimum payments might be sufficient. If you're dealing with anxiety or feeling overwhelmed because of your debt, you may want to work toward paying it off quickly to save yourself stress.

It's tempting to focus on saving money or paying off debt but it's better to try to handle both. This way you get the benefit of saving money from tackling debt while also having an emergency fund for the unexpected.

Start chipping away at your highest-interest debt first.

Every dollar counts. Once you pay off that credit card or other high-interest debt, put the money you were paying on your highest interest debt—the minimum plus the little extra—towards the debt with the next highest interest rate.

What is the 50 30 20 rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

If you have an emergency fund saved, you're probably ready to prioritize paying off debt during a recession. When it comes to paying down debt during a recession, you want to focus on your highest interest debt first – things like payday loans and credit cards are a good place to start.

His approach involves using debt strategically to enhance wealth. Kiyosaki categorizes debt into good debt and bad debt, with good debt being that which helps build wealth, such as loans used for acquiring income-generating assets like real estate, businesses or investments​​.

“Only 31% averaged $100,000 a year over the course of their career,” the study found, “and one-third never made six figures in any single working year of their career.” Just look at the story of former custodian Ronald Read for a perfect example.

Currently, wealthy households can finance extravagant levels of consumption without even paying capital gains taxes on the accruing wealth by following a “buy, borrow, die” strategy, in which they finance current spending with loans and use their wealth as collateral.

Which is better debt fund or equity fund? The choice between debt and equity funds depends on individual investment goals, risk tolerance, and time horizon. Equity funds offer higher potential returns but come with higher risk, while debt funds are safer but offer lower returns.

It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to avoid ultimately paying more in interest. If you're in or near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.

If you have a substantial amount of high-interest debt, consider paying it down before saving for a house. Any interest – but especially high-interest debt – can significantly extend your debt repayment timeline and eat away at the money you could be saving for a home.

Wiping out high-interest debt on a timely basis will reduce the amount of total interest you'll end up paying, and it'll free up money in your budget for other purposes. On the other hand, not having enough emergency savings can lead to even more credit card debt when you're hit with an unplanned expense.