A common question we get from our clients here, when a sum of money is received from an inheritance, the sale of an investment, or potentially the sale of real estate, is: “What should I do with this money? Should I invest it or should I pay off my debt?” And when we, as advisors, look at this, we have to remember that there are two sides to this - you have your emotional attachment to your debt, and then you have your logical side of the coin.
So first off, on the "emotional side", a lot of people have an emotional connection with paying off all of their debt, and we generally do recommend avoiding credit card debt or high-interest debt. But in most cases, we think mortgages are okay. A lot of people have this tie to pay off the mortgage - and that’s okay. So we have to take that into account as part of this consideration.
The other side of this is the “logical side,” and with a logical investment mindset, we can look at the opportunity cost of investing money versus paying off debt. As a good example, if you have a mortgage at 3%, if you pay extra money towards that mortgage in addition to your monthly payment, that principal reduction payment is effectively a guaranteed 3% interest rate for your money over the time that you would have been paying that debt. Now, some people might say that sounds really good. And if it does, maybe you should do that. Other people would say, you know I could probably invest that money into the market, work with my advisor on that, and earn 7%, maybe even 8%. If you are able to do that instead, then the opportunity cost of investing is obvious - you would get better returns. A lot of people, when they look at it logically, can say, it makes more sense for me to put that money in investments because I know that I will earn more over time. So, we need to consider both the emotional and logical aspects of this decision, and it’s always a good idea to discuss it with your advisor and walk through the process together.
At the end of the day, deciding whether to invest or pay off debt isn’t just a numbers game—it’s also about your comfort level and long-term goals. The right choice will look different for everyone, which is why it’s so important to weigh both the emotional and logical sides before making a decision. If you’re facing this question yourself, our team at Summit Wealth Group would be glad to walk through the options with you and help you find the approach that fits best with your financial plan.