Here, we look at your options to help you decide if it’s better to invest some of it or repay your debts early.
Typically, the cost-effective option is to repay any debt with the highest interest rate first – before you start investing – as it’s charging you the most to borrow the money.
It could be sensible to clear debt from overdrafts as quickly as you can too, to reduce the amount of interest you pay and take control of your finances. If you feel you’re having to rely on your overdraft, it may not be the right time for you to invest.
We recommend that you build up an emergency fund of at least 3 months’ worth of living expenses before you consider investing. That way, you're less likely to dip into your investment if life throws you any surprises – and you can give your money time to potentially grow.
Keep in mind – investing should be seen as a medium to long-term commitment, which means you should be prepared to invest for at least 5 years. This is to give your investment a better chance to ride out any short-term fluctuations.
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If the returns you’re expecting to make by investing are greater than the interest on your debt, could it make sense to invest instead of paying off your debts early? Maybe in theory. But investment returns are only expected – not guaranteed and you may not get back what you invest.
Here are a few factors to consider:
One thing that’s certain is your debt, whether interest-bearing or not, is a commitment that you need to be able to honour. Investing is the last thing you should do if it puts you at risk of not being able to pay off your debts.
A mortgage can be an exception to the ‘pay off your debts first’ rule.
Unlike short-term debts, mortgages are long-term commitments that have been priced to be paid off over the full term.
Also, by waiting until the mortgage has been repaid before you start investing, you‘ll be limiting your time in the investment market. And one of the strengths of investing over the long term is it gives your money time to potentially grow.
It’s true that making overpayments on your mortgage could save you money on interest in the long run. However, not all mortgages are flexible. Before making overpayments, you should check the terms of your mortgage to see if they are allowed and, if so, whether there are any early repayment charges.
If your mortgage won’t let you make overpayments or limits them to 10% a year, it could make sense to put any extra money into an investment. That way, you’d be building up a separate pot of money, alongside the value in your property, to help improve your financial future.
Keep in mind – investing comes with risk, and there’s a chance you may get back less than you put in.