What's more important, paying off debt or investing?

A less aggressive investment mix, meaning one with a lower allocation to stocks, may be expected to result in slightly lower returns (on average) over the long run. And with slightly lower expected returns on investing, paying down debt comes out ahead even at slightly lower interest rates .

Why paying off some debt should be prioritized before investing?

Even if an expected rate of return on an investment is much higher than the interest rate you're paying on debt, there are no guarantees that the rate will continue . On the other hand, the money you save by paying off debt and avoiding extra interest is guaranteed.

Is it better to pay off debt or keep money in savings?

While paying down high-interest debt will help you reduce the amount of interest you owe , not having an emergency fund can put you deeper in the red when you have to cover an unexpected expense. “Regardless of [your] debt amount, it's critical that you have money set aside for a rainy day,” Griffin said.

How rich people use debt to build wealth?

Some examples include: Business Loans : Debt taken to expand a business by purchasing equipment, real estate, hiring more staff, etc. The expanded operations generate additional income that can cover the loan payments. Mortgages: Borrowed money used to purchase real estate that will generate rental income.

How the wealthy use debt to avoid taxes?

A wealthy individual or family procures an asset that's likely to appreciate over an extended period of time. The second phase of investment strategy is to “borrow”. Instead of selling these assets when they need cash (which would trigger capital gains taxes), they borrow against them, using the asset as collateral .

Pay Off Debt vs. Invest: How Millionaires Prioritize Their Money (2024)

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Do Millionaires Pay Off Debt or Invest?

Millionaires typically balance both paying off debt and investing, but with a strategic approach. Their decision often depends on the interest rate of the debt versus the expected return on investments. If the return on investment is higher than the debt interest rate, they may choose to invest while managing their debt efficiently. Conversely, if the debt carries a higher interest rate, they prioritize paying it off to reduce financial liabilities.

The Importance of a Balanced Financial Strategy

The key to a millionaire’s financial success often lies in a balanced approach. They understand that excessive debt can be a barrier to wealth accumulation, yet also recognize the power of compounding returns through investments.

Investing as a Priority

Investing is a fundamental aspect of a millionaire’s wealth-building strategy. They often focus on long-term investments, understanding that the power of compounding interest and growth can significantly increase their wealth over time. Millionaires also diversify their investment portfolios, spreading their assets across various investment vehicles to mitigate risk.

Debt Management

Millionaires do not ignore their debts. They employ effective debt management strategies, ensuring their debts are under control and do not hinder their financial growth. This often involves paying off high-interest debts and utilizing debts that can bring in more value, such as mortgages for investment properties.

Making the Decision: Factors To Consider

When deciding whether to pay off debt or invest, several factors come into play:

Interest rates: Compare the interest rate of the debt with the potential return on investments.
Risk tolerance: Understand your comfort level with investment risks versus the guaranteed return of paying off debt.
Financial goals: Align your decision with your short-term and long-term financial objectives.
Income stability: Consider your job security and income stability, which can impact your ability to manage debt and invest simultaneously.

Final Take

In the end, whether millionaires pay off debt or invest is not a one-size-fits-all answer. It’s about making informed decisions based on personal financial situations, goals and market conditions. By weighing the costs and benefits of each option, millionaires make strategic choices that best suit their path to financial growth and stability.

For individuals looking to emulate these successful financial habits, it’s crucial to evaluate their unique circ*mstances and possibly seek guidance from financial advisors. Understanding the principles behind these decisions can provide valuable insights into managing and prioritizing your finances effectively.

FAQ

Here are the answers to some of the most frequently asked questions about millionaires.

Is it better to invest your money or pay off debt?
- The decision to invest or pay off debt hinges on comparing the interest cost of the debt with the potential return on investments. If the expected return on investment is higher than the debt's interest rate, investing may be more beneficial. Conversely, if the debt's interest rate is higher, paying it off could be the wiser choice.
Can a millionaire be in debt?
- Yes, millionaires can be in debt. However, they typically manage their debt strategically, using it as a tool to leverage opportunities and grow their wealth, rather than letting it become a financial burden.
What do most millionaires invest in?
- Most millionaires diversify their investments across various assets, including stocks, bonds, real estate and sometimes more speculative ventures like startups. They focus on long-term growth, balancing risk and return effectively.
What are the three things millionaires do not do?
- Millionaires usually avoid the following:
  - High-interest debt: Millionaires typically steer clear of high-interest consumer debt, like credit card debt, that offers no return or tax benefits.
  - Neglect diversification: They don't put all their eggs in one basket but diversify investments to mitigate risks.
  - Ignore long-term planning: Millionaires rarely disregard the importance of long-term financial planning and continually adjust their strategies based on market changes and personal goals.

Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.