Pay off debt or invest my money: What is the right way to go?

"Should we pay off our debt, or invest the money we have accumulated?"

This is a question we often get from doctors. It is an interesting question, because there are a couple of opinions about what the right thing to do is. There is never a cookie-cutter answer.

Theories about balancing investments with debt vary widely. Some financial experts say freedom from debt is the most important goal. Others say it is more about the math.

Money should be allotted toward investing if the investments earn a higher rate of return than what debts cost. Still, other financial planners focus on the emotional aspect: How comfortable are you with a certain level of debt? There are doctors who are so relieved at having no debt that the actual comparison calculations became irrelevant. 

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The right plan of action is to use a balanced approach to wealth management. Doctors should manage finances for both present and future needs. That means paying off some debt today, while simultaneously investing with an eye on the future.

Although decisions should take into account one's own needs and circumstances, consider the following guidelines for handling debt in light of investment goals.

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Save for that rainy day

Before paying down debt (beyond required payments) or settling on an investment strategy, make it a priority to set aside funds for an emergency reserve. The recommended reserve should equal 6 months or more of living expenses. (The absolute minimum is 3 months.) These funds should be placed in traditional savings or short-term, highly liquid, non-volatile investments.

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The future first 

As a general rule, a long-term investment plan should take priority over applying extra amounts toward debt. Be careful not to let "lifestyle creep," a tendency toward more expensive tastes and luxury consumption, impede an investment outlook.

By contributing to a long-term investment plan as early as possible, doctors may set themselves up for a brighter and more secure future. If paying down debt is also a priority, one should examine his/her personal budget to decide how much money to direct each month toward investments and how much toward debt repayment, or how much to draw down from accumulated cash accounts.

Just remember, there are no magic numbers. In general, the best advice is to make sure the investment strategy fits the financial expectations for the future.

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Prioritize debts

With an emergency fund in place and an investment strategy up and running, placing any extra money toward debts is also a smart choice. But how does one decide which debts to pay down first?

One approach is to start with the smallest debts first, thus eliminating some of the debt burden and interest payments in a timely manner. It also makes sense to pay off high-interest debts, like private student loans and credit card debt.

Federal student loans and mortgages might be lower priorities, because their rates are often lower and their terms are longer. Vehicle loans might fall somewhere in the middle. Tax considerations might also come into play.

Again, the decision of paying off debt varies from person to person. As you divide and conquer debt, don't forget to consider the emotional side of your strategy. If paying off a certain debt will help you feel more secure, you might want to go with your gut feeling.

You'll enjoy a growing sense of financial freedom as you stay on course and get your debt under control. As debt shrinks over time, you may have more funds available for enjoying the present and focusing on the future.

Remember, the closer you get to retirement, the more important it will be to reduce debt expenditures. You may not be able to control how much income you will have coming in, but you can control how many payments you may have going out.

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John J. Grande, CFP; Traudy F. Grande, CFP; and John S. Grande, CFP, are the editors of the Money Matters column. They are owners and principals of Grande Financial Services Inc., Oakhurst, NJ, (website: www.grandefs.com) and registered principals of Wells Fargo & Co., member of SIPC. The Grandes advise doctors across the country on a diverse range of investment and financial matters. Readers may submit their financial questions to them at john.s.grande@wfafinet.com  

The views expressed in the Money Matters column are the views of Grande Financial Services, and should not be considered as investment advice. Grande Financial Services does not provide tax or legal advice. All information is believed to be from reliable sources, however, Grande Financial Services make no representation as to its completeness or accuracy. Past performance does not guarantee future results. Investing involves risk including the potential loss of principal.

Wells Fargo Advisors Financial Network, LLC, member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Co. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Grande Financial Services Inc. is a separate entity from WFAFN.