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There are ways to decide whether to pay off loan debt to invest, but you don't have to choose one or the other

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Making a decision between paying down debt and investing isn't easy, as both are worthy goals that can help set you up for a successful financial future. 

However, you don't necessarily have to choose between one or the other — you can put money toward both if you budget appropriately. Investing will be an important part of your retirement goals, while paying off debt can jumpstart your ability to buy a home or begin a family. 

Where do I start?

Begin by mapping out your budget and figuring out how much additional cash you have to put toward either debt or investments after taking care of all your required monthly payments. It may be helpful to define your financial goals and ask yourself where you'd like to be in six months, one year, and possibly even five years down the line. 

You should also make sure you have an emergency fund in place before you use extra money to contribute to these goals. An emergency fund should contain between three to six months worth of expenses and can protect you in case unexpected costs like car repairs or medical bills come up. 

Take your risk tolerance into account when choosing between paying down loan debt and investing. Carrying debt can be stressful, and if it negatively impacts your mental health, you may want to prioritize paying debt down first. On the other hand, you likely have a better chance of a bigger reward with smart investments, so you may decide that's worth the risk.

  Should I pay off my loan debt first?

If you have high-interest debt, you may be better off paying it down than investing in the market. Interest rates on personal loans can max out at around 36%, especially if you have poor credit, while returns on the stock market aren't often that high. Credit cards often have similarly high APRs. 

Even if you choose to invest, by no means should you stop paying off your debt entirely — make at least your minimum monthly payments before you put any spare cash toward investments. Otherwise, you could do significant damage to your credit score and make it harder to qualify for future loans. 

However, by making just the minimum monthly payments, you may end up paying a significant amount in interest over time. 

Deciding what to do with debt that has lower interest rates, like student loans, can be trickier. The interest rate for Direct Unsubsidized and Subsidized Loans for loans disbursed after July 1, 2021, and before July 1, 2022, is 3.73%. You may be able to net a higher return by investing in the market.  

Private student loans generally have higher interest rates than federal loans, though that may not be the case if you pick a variable-rate loan or if you or a cosigner has an excellent credit score. Still, rates on private student loans usually top out at around 13%, so it may be a toss up whether you invest any extra cash or pay down debt. 

Should I invest first?

The average annual return of the S&P 500 was 13.6% over the past 10 years, according to global investment bank Goldman Sachs. The S&P 500 is a broad-based stock market index that is comprised of the 500 biggest US public companies, and is generally considered the barometer for stock market performance as a whole.

The younger you are when you start investing, the more time your investments have to grow. For those new to investing, Insider has guides to help you get started. Here are the best investment apps, the best online brokerages, and the best apps for stock trading

However, you're not certain to make money when you invest. Your investments aren't guaranteed by the government and the market can be volatile — if you're relying on an increased balance within a short amount of time, you might be disappointed.

You could consider choosing safer investments like certificates of deposit or bonds with set returns, but the interest rates on these financial products often are lower than any interest rates on your debt. 

When in doubt, compare the estimated return on your investment with the interest rate on your debt and go with the option that looks more profitable in the long run. 

But whatever you choose to do, your decision is never set in stone. You can always switch up your budget if your financial situation changes or if you're unsatisfied with how you're currently allocating your money — the important thing is that you're taking charge of your financial future. 

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