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What’s Smarter: Paying Off Debts or Investing?

By Jason Witcher | on March 29, 2024 | 0 Comment
Expert Advice Featured Financial

Witcher-Color-500If you’re just starting out in your career, you will need to be prepared to face some financial challenges along the way – but here’s one that’s not unpleasant: choosing what to do with some extra disposable income.

When this happens, what should you do with the money? Your decisions could make a real difference in your ability to achieve your important financial goals.

Under what circumstances might you receive some “found” money? You could get a year-end bonus from your employer, a sizable tax refund, or even an inheritance. However the money comes to you, don’t let it “slip through your fingers”. Instead, consider these two moves: investing the money or using it to pay off debts.

Which of these choices should you pick? There’s no one “right” answer, as everyone’s situation is different. But here are a few general considerations:

  • Distinguish between “good” and “bad” debt. Not all types of debt are created equal. Your mortgage, for example, is probably a “good” form of debt. You’re using the loan for a valid purpose – i.e., living in your house – and you likely get a hefty tax deduction for the interest you pay. On the other hand, nondeductible consumer debt that carries a high interest rate might be considered “bad” debt – and this is the debt you might want to reduce or eliminate when you receive some extra money. By doing so, you can free up money to save and invest for retirement or other goals.
  • Compare making extra mortgage payments vs. investing. Many of us get some psychological benefits by making extra house payments. Yet, when you do have some extra money, putting it toward your house may not be the best move. For one thing, as mentioned above, your mortgage can be considered a “good” type of debt so you may not need to rush to pay it off. And from an investment standpoint, your home is somewhat “illiquid” – it’s not always easy to get money out of it. If you put your extra money into traditional investments, such as stocks and bonds, you may increase your growth potential, and you may gain an income stream through interest payments and dividends.
  • Consider tax advantages of investing. Apart from your mortgage, your other debts likely won’t provide you with any tax benefits. But you can get tax advantages by putting money into certain types of investment vehicles, such as a traditional or Roth IRA. When you invest in a traditional IRA, your contributions may be deductible, depending on your income, and your money grows on a tax-deferred basis. (Keep in mind that taxes will be due upon withdrawals, and any withdrawals you make before you reach 59½ may be subject to a 10% IRS penalty.) Roth IRA contributions are not deductible, but your earnings are distributed tax-free, provided you don’t take withdrawals until you reach 59½ and you’ve had your account at least five years.

Clearly, you’ve got some things to ponder when choosing whether to use “extra” money to pay off debts or invest. Of course, it’s not always an “either-or” situation; you may be able to tackle some debts and still invest for the future. In any case, use this money wisely – you weren’t necessarily counting on it, but you can make it count for you.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

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Author Description

As an Edward Jones financial advisor, I believe it’s important to invest my time to understand what you’re working toward before you invest your money. In order to determine the most appropriate financial strategy for you and your family, I will work one-on-one with you through a consultative process to help gain a detailed understanding of your values and goals. We will then work together to employ customized recommendations designed to help address each of your unique needs and goals beyond simply investments. My most successful clients work with me by: • Developing and implementing a comprehensive financial management plan to reach their financial goals. • Making smarter decisions in today’s uncertain political, economic and social environment. • Obtaining a second opinion from a financial advisor in their community. Prior to joining Edward Jones, I served the community as a law enforcement officer for over 13 years, including several years with the Rockdale County Sheriff's Office. I have also served over 14 years in the military, with the U.S. Marine Corps and my current service in the Georgia Army National Guard. I hold a master's degree in public administration and I am also a graduate of the Georgia Law Enforcement Command College. I have lived in the east-metro Atlanta area for over 30 years. As a part of this community, I have a passion for volunteering for various organizations and coaching youth leagues. I am also a member of the American Legion, Veterans of Foreign Wars, chamber of commerce, and currently serve on the board of directors for Rockdale Emergency Relief. In addition, my branch office administrator, Leslie McKinnon, has 12 years of experience with our firm and is also dedicated to providing you with the highest level of service possible. Please don’t hesitate to call either of us with questions concerning your statement, dividends, stock certificates or your accounts in general. It all starts with a discussion about what’s important to you We typically find that most of our clients’ concerns directly relate to what we refer to as the five primary needs. Preparing for retirement With all of today’s responsibilities, it can be hard to think about long-term goals. That’s why we offer a systematic process that starts with understanding where you are today and discussing your vision. Then we can identify the types of accounts and investments that may be appropriate to help work toward your vision. We’ll also review your strategy along the way to help you stay on track. Living in retirement As you approach retirement, your focus begins to change – from saving for a future goal to determining how to provide for your daily needs. You also need to consider whether your savings can last throughout your retirement. We can work with you to develop a strategy. Paying for education You may wish to help pay for education expenses for your children, grandchildren or even yourself. We will work to understand your expectations and discuss the potential costs, benefits and considerations. Based on these factors, we can help develop a savings strategy and discuss a variety of solutions for your education goals. Preparing for the unexpected Unanticipated events like job loss, disability or even death could impact your family’s financial situation. Though you can’t predict the unexpected, you can prepare. We can help you develop a proactive strategy to help protect your family. Planning your estate or inheritance Estate planning is about much more than money – it is how you want important matters to be handled once you’re gone or no longer able to make certain decisions. We can work with you and your tax and legal professionals to implement an estate strategy designed to meet your needs. And if you receive an inheritance, we can discuss appropriate investing strategies designed to support your needs and align with your overall portfolio objectives. Jason Witcher Financial Advisor 1795 Parker Rd SE Suite E110 Conyers, GA 30094 770-648-6235 Edward Jones, its employees and financial advisors are not estate planners and cannot provide tax or legal advice. You should consult your estate-planning attorney or qualified tax advisor regarding your situation.

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    Tags: debtfinancial challengesinvestingIRAmortgagepay off debtspayments

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