Balance paying off loans with investing for future

January 25, 2012

Determine whether it's better to invest first or pay off loans first.

Q: I began practicing recently and am finally receiving a steady income. Should I focus first on investing or paying off my educational loans?

Note, by the way, that the "cost" of your debts is not always the same as the interest rate of borrowing, because some student loans are tax-deductible, so the impact on your tax bill needs to be factored into your thinking.

On the other hand, although often it feels good to pay off a debt, once you have done so, the money is gone. In other words, you need to weigh the emotional benefit you derive from paying off a debt against the cost of not having the money available for other uses.

An additional factor to consider is liquidity. In the event of an emergency, you may want to have access to your invested funds, and some forms of investment carry penalties if you withdraw money from them earlier than a specified date.

Finally, remember that some forms of investments, such as stocks, can decrease in value as well as increase. That means there's a chance that if you need to redeem the investment quickly, it could be worth less than it was when you started.

Answers to our readers' questions were provided by Jon C. Ylinen, a financial professional with North Star Resource Group, Madison, Wisconsin. North Star Resource Group offers securities and investment advisory services through CRI Securities LLC and Securian Financial Services Inc. Members FINRA/SIPC. CRI Securities LLC is affiliated with Securian Financial Services Inc. and North Star Resource Group. North Star Resource Group is not affiliated with Securian Financial Services Inc. North Star Resource Group is independently owned and operated. Send your money management questions to medec@advanstar.com
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