Checking your bank balance is always nice when you can see a big, fat savings account growing by the month. Your automatic transfers are working to your benefit, and your nest egg is growing each month.
But what about the big, fat credit card debt you’ve got on the other side of your balance sheet?
While personal finance gurus often recommend “paying yourself first,” meaning you should put money into your savings accounts before tackling your monthly bills, a high-interest credit card debt could be costing you more than your investments can earn.
It’s important to recognize that tipping point, and put your money where it makes the most sense for you.
What’s more important: debt or investments?
That depends on a lot of factors, according to a spokesperson at Equity Associates Inc. He says your age, your debt level and the amount you have invested can all play a role in whether you decide to keep investing, despite unpaid credit card debt.
“Everyone has a personal comfort level with debt,” he says.
There are times paying the debt first makes sense. “If you’ve got a lot of credit card debt and not a lot put away, you’re better off chipping away at the credit card debt before you invest,” the spokesperson says.
Tony Cuzzocrea, owner and president of Planmar Financial Corp., agrees, although his company generally discourages selling investments to pay debt.
“If you’ve got a credit card and you’re paying 29 per cent [interest], there’s no doubt you should redeem your weakest investments; sell them and pay the debt down,” he says.
If you’re making more money than you’re paying out, though, Cuzzocrea says, then hold onto those investments.
Factors to consider
- Money earned versus money paid.
Because earnings on investments are variable, it’s hard to pinpoint what your accounts will look like in the future in comparison to your debts, the Equity Associates spokesperson says.
With investments, you can’t say, “I’m guaranteed $X over the next 10 years, he says, whereas with credit card debt, you know exactly how much you’ll be paying because the rate won’t change. - Emotional factors.
Further confusing the picture, interest rates on your accounts don’t tell your whole financial story. Money carries weight beyond crunching numbers, the spokesperson adds.
“There’s a lot of logic versus emotion,” he says about investment decisions. “It’s easy enough to say, ‘Here’s what the numbers look like,’ but from what I’ve noticed, a lot of it is the emotional side of it.”
For instance, you may have worked for a long time to build up your investments, and it may be difficult for you to cash them out and spend the money in one to pay down debt. - Taxes.
Taxes also can play a factor.
“When you redeem an investment, if you’ve made any profit, there will be some taxes to pay on that,” says Cuzzocrea. Consider what that will cost you before you cash out.
Bottom line: it’s going to come down to your personal situation. Assess the reasons for your debt. Don’t cash out your investments, pay off your credit cards, then start charging outside your means again. It’s not worth spending your hard-earned savings to keep up a debt cycle.
Cuzzocrea says that in the last 10 years, Canadians have accumulated huge amounts of debt, often at high interest rates. If rates rise further, you could be looking at paying off your debt for a long time. So, at the end of the day, it’s most important to get out of debt.
Perhaps cut back your investments if you don’t want to cash them out, or, if things are really dire, cash out and start over once your debt is cleared.
“Whether you pay them with extra income you’re earning, or if you have to sell off some investments, work hard at paying off those debts,” Cuzzocrea says.
