Wealth Connexion explains how to weigh up dedicating your finances to paying off your debts or investing them for the future.
As financial advisors in Brisbane, we are often asked by our clients whether their income is best spent paying off their existing debts or investing in their future (including their retirement). While both options have their pros and cons, we outline important considerations you must make when deciding how to wisely allocate your finances.
Pay off Debts
The average Australian has more than $20,000 in debt, so it’s likely that this strategy is front of mind when considering how to maximise your finances for the future. As compared to investing, high-interest debts, such as credit card debts, tend to accumulate interest faster than most investment returns. Thus, paying off these debts can potentially save you money in the long run.
Furthermore, if you are considering applying for a loan in the future, lenders may consider your debt-to-income ratio. By lowering or eliminating your debt, you can improve your financial standing and acquire loans more easily in the future, meaning you will be able to acquire more assets that can be added to your portfolio. If you need advice on how to pay off your debts effectively and strategically, contact Wealth Connexion: your financial advisors in Brisbane.
Investing for the Future
On the flip side, instead of using your income to pay off debts quickly, investing could result in higher returns over time. These investments have the potential to grow significantly through compound interest, which may outweigh the interest saved from paying off lower-interest debt. Therefore, if your debt has a low-interest rate, you might be able to earn higher returns by investing in assets with great growth potential.
Investing also has a number of other benefits, including providing the potential to diversify your portfolio and earning returns from a number of asset classes, such as stocks, bonds and real estate. Furthermore, investing can help your funds grow at a rate that can potentially outpace inflation.
Balancing Both
After learning the pros and cons of both strategies, it can be difficult to know which option is best for your finances, or you may decide you want to balance both. Ultimately, your decision may not be binary. Striking a balance can be a sensible option, as allocating a portion of your funds to both can help you progress in both areas. Before choosing either path, ensure to build an emergency fund to cover unexpected expenses.
Getting Expert Advice
It is always wise to seek out professional advice when it comes to preparing your finances for your future. There are many variables that contribute to developing the most effective strategy, and these change on a case-by-case basis. Thus, we recommend consulting with professional financial advisors in Brisbane, such as Wealth Connexion. Get in touch today about creating a robust financial plan.
