So you’ve come into a bit of money. Maybe a little more than just a bit of money. Either way, you feel inclined to spend it on taking care of your bills or tucking it away in a savings account. So now you’re faced with the ultimate question: how should you use your money?
First off, paying your debts helps you improve your credit score. For the uninitiated, credit scores are essentially your key to unlocking bigger and better opportunities. Check your credit at 3creditscores.net if you don’t know it yet; knowing is already half the battle. Having a better credit score can help you get access to more lucrative investment deals or even credit cards with better reward systems.
ValueWalk's Raul Panganiban with Maurits Pot, Founder and CEO of Dawn Global. Before this he was Partner at Kingsway Capital, a frontier market specialist with over 2 billion AUM. In the interview, we discuss his approach to investing and why investors should look into frontier and emerging markets. Q2 2021 hedge fund letters, conferences and Read More
Generally, the lower your credit score, the better off you are with prioritizing your debt. While it is possible to explore investment options even with some debt to your name, having too much debt that is affecting your credit score will prevent you from investing to your full potential. This is because you are aware that you have your daily expenses as well as your debts to think about; this will cause you to settle on less risky investment options that have a low return. Either that or you invest in the wrong thing and end up losing everything instead.
Settling debt can be as straightforward as making monthly payments towards that debt for a fixed term. However, if you owe too many people too much money, some debt relief may be a viable option for you to undergo. There are a ton of avenues to help you reorganize your debt, one of which is of course filing for bankruptcy. Once you’ve settled all or most of your debts, then you can consider moving on to investing some of your hard-earned money and making it grow.
A lot of people who are living paycheck to paycheck are often clueless about investing. What they may not realize is that if they have set up a 401(k) or a retirement fund, they have already set up an investment fund for themselves. You can start your own retirement fund even with just $100; you just have to decide which is better: a Roth IRA or a Traditional IRA. Both retirement savings accounts have their own fair share of pros and cons, so you need to consider which one will work best for your situation.
But choosing whether or not to invest first or settle debts first can also be affected by your risk tolerance. Basically, risk tolerance is how well you can still live at your current state following a negative outcome in your investment choices. For one, your age does matter. Risk tolerance is higher for younger people since they can still make back the lost money. Another thing that factors into risk tolerance is the availability of an emergency fund and how long it can support you. A three month emergency fund is less likely to make you more risk tolerant than a six month emergency fund.
Deciding whether to prioritize debts or investments still is dependent on personal choice, but also on other factors such as risk tolerance. Bearing in mind how things will work out after the money is allocated will help you make a better decision.