Common Money Myths - Myth # 5

Myth: You Shouldn't Invest Until You've Paid Off All Your Debt.

If you’re waiting until all of your debts have been paid off before you start “paying yourself”, you could be missing out on the long-term benefits of compound interest (i.e. you earn dividends on the funds that you’ve deposited and when you hold onto these balances without making any withdrawals, the dividends accumulate not only on the funds that you deposited but also on the earnings).

In addition, some view certain categories of debt as “good” such as student and mortgage loans. These two loan categories may help you improve your financial position over time. With student loan debt, getting an education may allow you to earn a degree in a field that could pay a higher salary than what you’re currently making. In reference to mortgage loans, you’ll be earning equity along the way as you pay down this debt, which could also improve your financial position, especially when you’re ready to sell your home. The average home appreciates close to 4% per year, assuming that you maintain it well and make repairs and improvements on an as needed basis.

By contrast, if you have credit card debt, you should focus on paying down these balances as the amount that you could earn in savings will likely be way lower than the interest rates charged on the balances (i.e. stock market investment returns average 10% whereas credit card interest rates average 20%). As your credit card balances are paid down, the money used to pay off these outstanding charges every month could then get redirected towards a saving account.

It has been said that you should always have at least 3-6 months of salary saved for emergencies in case someone in your family loses their job. Since it may take a while to be able to accumulate these funds, it’s best to start small. Try setting aside just $5 - $10 each week (make your own coffee or pack your lunch before you leave for work).  You’ll be surprised how quickly these funds can accumulate. Just think, you could reach $100 in savings in a matter of months! And, as you pay down your credit card balances, you can add these payment amounts to savings instead.

Information about credit card interest rates vs the stock market taken from The Balance -

Information about property values taken from Homelight


Information about Common Money Myths was taken from a study recently conducted by Lending Tree -​-in-at-least-one-money-myth