A question that is asked frequently in the financial world is: which is better, to invest money or to pay off debt? Most people only have a small amount of money by the time that the budget is balanced, and all bills are paid. In fact, given the latest trends, most families have very little to save or invest.
If this is true for most families in the US, any spare cash that a family may have needs to be treated with lots of care and understanding, to get the most return out if it. If you are a young family that has kids, perhaps thinking about a house, 2 cars, etc. then you don’t have much money to waste.
So, the question is, how can your little spare change be used to maximize its return? Is it better to invest the money and get a nice 8% to 10% average return, or is it better to pay off debt?
In this article we will see a few examples and let you decide what to do with your hard-earned cash. So, lets get to it, shall we?
Most families that have young children, should always have an emergency fund. If you do not have an emergency fund to cover most small inconveniences that life throws at you, I will suggest that you start there. Click HERE to read one of our articles that talks about it.
Investments (especially those that are for retirement) usually give people an average of 8% to 10%. Investment places like mutual funds and investment portfolios usually give people a good return of investment (this just means, you get a great mount of money in relation to the money you invest). For example, if you have a $100 you will get between $8 and $10 per year. Not too bad for such a small amount. If you start investing tiny amounts like that, over time, you could be producing a lot of money each year. Imagine if you had $100,000 instead? You will be getting over $700 a month! Now this might make you think: WOW, lets start investing right away! But before you jump the gun, let’s look at an example of what happens with a small amount of debt as well.
If you had a credit card, with an interest rate of 6% (let’s use this as an example), you will be thinking: well at 6% I would rather invest the money and get 8% to 10% in return which is more than 6%!! However, what you need to stop, and think is how credit cars interests are calculated (something that most people don’t know). Credit cards calculate their intertest daily. That means, that at the end of each day, credit card companies will add a little bit of money to your balance, having a compounded effect on your bill. For example, say your average daily balance was exactly $1,000 for the entire year. If the bank had a 6% interest rate just once a year, you’d pay $60. But since your interest compounds daily, you’d be on the hook for something closer to $65. In this simple example you can see how that 6% rate is not really 6% which makes it hard for people to get out of debt and makes the banks a lot of money!! But wait! Don’t stop there, the actual average of credit card’s interest rates in the US is more like 16%!! Which means that for the same $1,000, you will be paying more like $173 at the end of the year.
Although, investments do have compound interest rates as well, it seems clear, that if you have some spare cash, getting out of debt makes more logical/financial sense. However, here at Saving For Hope, we want to emphasize an aspect of debt that sometimes get forgotten. It is the negative grip of debt in the life of a family. For us debt is not a solid financial foundation and statistics more and more prove that the more debt you have, the worst you will be financially at the end of your life (no matter if you live to be 50 or 100).
For us at Saving For Hope, we emphasize that the bible, for the most part, refers to debt as a negative entity. Debt is the setup, where financial slavery can occur (and occurs daily in the US). Proverbs 22:7 say: “The rich rule over the poor, and the borrower is slave to the lender.” (NIV). This bible verse speaks truth to the grip of debt upon an individual (or a family in our context). Debt grabs a hold of a person and makes that person a financial slave living in bondage instead of freedom.
This aspect of debt sometimes is forgotten by financial gurus. Debt makes a person a slave to it. On a practical sense, that means that you can’t invest or do anything that you want with your spare cash, because you are obligated to pay a monthly fee to a credit card, or a car payment, fill in the blanks. Instead, make the resolution to get out of debt quickly and work towards financial freedom.
In that sense, getting rid of debt also gives you a sense of freedom, accomplishment and pride, that no interest rate, or money in the world can simply buy. That is what we are all about, freedom! we are not shy about it, and everything we do, is to raise awareness of the power of debt, and to help people get out of the cycle of poverty! So, go ahead start today. Take control of your family’s financial freedom. Enjoy!