Debt vs. investing: How to handle competing budget factors


John Schmoll

John Schmoll

Blog author John Schmoll

John Schmoll, MBA, is a former stockbroker, mutual fund administrator and veteran of the financial services industry who launched personal finance site Frugal Rules in 2012. John’s work has been featured in Forbes, Fortune, U.S. News & World Report, Yahoo!Finance, CNBC, Daily Finance and more.

Published December 9, 2016|6 min read

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Managing your finances can seem like a high wire act: You must take care of immediate needs while trying to focus on what's best for the future. For many it can seem impossible to walk that tightrope, making it easy to feel overwhelmed.Paying off debt vs. investing is one such tightrope. Both can be overwhelming to manage, especially if you have high-interest debt, struggle with investing, or simply don’t know where to start when it comes to investing your money. You may feel it's imperative to focus on one to the detriment of the other. Unfortunately, such an imbalance can leave you in a precarious situation.

It may feel impossible to balance short-term financial goals with long-term ones, but it is possible with some concerted effort.

The call to ignore

When dealing with two competing factors vying for attention, you may be tempted to simply ignore one item. This is especially the case when something feels so far off that it makes sense to put it on the budgetary back burner.For example, when comparing paying off debt vs. investing, debt can feel restrictive. It impacts what you can do in the present, and is very much a short-term problem that can bleed into the long term. With the average credit card debt hovering over $16,000 for those who carry debt, it’s easy to feel like you must focus all your energy on paying down your debt, even if that means neglecting your long-term needs like investing and saving for retirement.In fact, some experts even recommend ignoring your long-term needs altogether and focusing everything on your short-term debt problem, so it doesn't turn into a longer-term problem. Once the debt is gone, they argue, you can turn your focus to your investing needs. There may be some wisdom in that advice, but ignorance may, unfortunately, turn good intentions into a foolish approach that can put you further behind in the future if you aren’t diligent about tackling your debt now.

How to balance the two

Finding balance begins and ends with a budget. Don't have a budget? Now is the time to start one. Budgets may seem restrictive; they may seem like they won't let you have fun, they may seem impossible. Those are simply myths that can hold you back from not only mastering your money but also finding balance between two competing factors like debt and investing.

The first step is to track your spending for at least a month. Track everything you spend. That $5 you spent at the coffee shop today? Write it down. That $40 you spent to get gas for your car? Write it down. This can happen anywhere from a simple spreadsheet to an app like You Need A Budget that will help you categorize spending.Do this religiously for a month and then go back to see how you spent your money. Not only will this allow you to learn your spending patterns, but it'll also help you spot savings opportunities.What should you do with that savings? Apply it directly to one, if not both, of your needs. As your savings grows, you can throw extra money at your debt and possibly free up money for investing.The second step is to identify if you’re eligible for free money. Everyone loves free money, but is it really possible, or is it a myth like Midas’ golden touch? It’s very possible anyone whose employer offers a 401(k) match. If you don't have a 401(k) plan or your employer doesn't offer a match, take an amount that works for you each month (no amount is too small to start) and put it into a retirement account so it can grow for you.You should also find out if your employer offers a health savings account, or HSA. This lets you put aside money tax-free and use it to buy qualifying healthcare purchases. That way you save on your tax bill while buying the things you’d need to purchase anyway, giving you a little extra money every April to pay down debt or invest.The final step to successfully balance debt repayment and investing is to analyze your debts. List them all out, starting with the highest interest rate, so you can know exactly what you have to repay. This helps you plan out your attack and achieve greater balance. The two schools of thought involving paying down debt revolve around either paying off the lowest debt first, or the highest debt. The highest debt may be accruing the most interest, making it tempting to pay off, but the smallest debt might be easiest and getting that out of the way can be a good confidence booster to help tackle the others. Whichever method you choose, stick to it!

Make your money work for you

When you’re trying to balance multiple needs, it’s imperative to make your money work for you as much as possible. Doing so allows you to take the limited funds you have and supercharge them so you can work on both goals. Take credit card debt, for example.

The current average credit card interest rate is over 15 percent, according to If you have credit card debt, have you looked for ways to save money on your payments? It is possible, through a variety of options, such as:

The benefit of each of these options is that they can save you money and allow more of it to chip away at the actual principal. Not only can that help you pay off debt faster, but it may free up some money for investing. The key in all of this, of course, is that you’re ready to end the cycle of debt.The same works for investing. What kind of fees do you pay on your investing? Higher fees don't equate to better returns, just more money in the pocket of the person managing your investments. Regardless of which area it is, make sure your money is working for you, as it’ll help you achieve a greater balance.Lastly, don’t overlook found money. Whether it’s a raise, an unexpected gift or something else, throw that money at one of your two goals to help further them along.

Time is your best friend

Just as compound interest aids your investing, it also applies to paying off debt. This is key to remember if you’re tempted to ignore your long-term goal for the sake of your short-term goal.That long-term goal may seem far off, but working at it now will help you accomplish it quicker, even as you focus on your short-term goal. Ignoring either of these goals can be detrimental. You may feel the small amount you're able to devote to the longer-term goal will do nothing. That simply isn't true; it can work for you, and you can have some type of balance between your two competing goals if you have a plan.Your new plan can help guide your actions to ensure success on both fronts. Just remember that it may change over time, so check in on it at an interval that works for you. Streamline it to meet your needs and time will work with it to help you attack both goals successfully.Walking the tightrope of managing a short-term goal and a long-term goal is difficult, but with the right balance, you can cross safely to the other side.