Investing vs. paying off credit card debt

If you have credit card debt, you may wonder if using your extra cash to pay down balances or invest is better. With only so much money, how do you know which option should come first?

To wisely prioritize your money, it can be helpful to ask yourself the following four questions:

1. Do I have enough emergency savings?

Before investing or sending extra money to your credit cards, ensure you’re prepared for an unexpected financial hardship. For instance, if you lost your job or business income, do you have cash in the bank to help you manage a difficult situation?

How much emergency money you need depends on your household income, living expenses and debt payments. A good rule of thumb is to keep at least three to six months’ worth of your living expenses.

For instance, if you spend $4,000 a month on essentials (such as housing, utilities, food, healthcare and debt), make a goal to keep at least three times that amount, or $12,000, in an FDIC-insured, high-interest savings account. Even a small cash reserve is better than nothing.

If you don’t have a healthy emergency fund, creating one should be your top financial priority before investing or paying extra to your credit card debt.

2. Am I protected with the right insurance?

If you’re uninsured or underinsured, a disaster, theft or accident could jeopardize your financial security. So, make sure you have enough liability coverage for your auto, home or renters policy in case of an accident and you get involved in a lawsuit for expensive medical payments.

Renters insurance is a bargain for the protections you get, costing less than $170 per year on average nationwide. Like homeowners, renters insurance covers some of your personal belongings, liability and living expenses if you must relocate temporarily after a covered disaster.

As you build wealth, consider purchasing an affordable umbrella liability policy that covers you above and beyond what your auto and home policies provide. If you don’t have the proper insurance, you’re not ready to invest or pay extra on your credit card debt.

RELATED: Your guide to finding the right coverage for the lowest rates

3. Am I building a secure financial future?

Once you’re prepared for the unexpected with emergency savings and insurance, it’s time to think about your future financial security. While many Americans qualify for Social Security retirement benefits, the average monthly payment in 2023 was about $1,900. That’s close to the poverty level for a household of two.

Therefore, you must fund your own retirement. I recommend investing in tax-advantaged accounts, such as a workplace retirement plan or an individual retirement account (IRA). If you have business income, you can use an account for the self-employed, like a solo 401(k) or SEP-IRA.

A good rule of thumb is to invest a minimum of 10% to 15% of your gross income for retirement. If you do that consistently for decades, you’ll probably retire a millionaire or multi-millionaire!

It’s wise to prioritize your retirement ahead of creditors. Otherwise, you may not be able to retire or risk running out of money in your golden years. So, only send extra to your credit card debt once you regularly invest some amount for retirement (even if it’s small).

4. Which credit card should I pay down first?

Before paying down your credit cards, create a debt plan by listing your debts, creditors, outstanding balances and interest rates. Then, sort the list by highest to lowest interest rate.

In general, it’s best to pay down your highest-rate debt first. For instance, if you have a credit card balance at 22% APR, a car loan at 9% APR and a mortgage at 6% APR, pay down the card first because it costs you the most interest on a percentage basis.

There’s less benefit to paying off low-rate debt, especially for those with tax-deductible interest, such as mortgages and home equity loans. A good rule of thumb is to make debts with interest rates under 6% or 7% your last payoff priority because you can likely get higher returns by investing your money instead.

To sum up, once you have essential financial protections, including cash savings, various insurance policies and regular retirement contributions, you can responsibly tackle high-rate debts, such as credit cards. Until then, make timely minimum card payments to build a positive credit history.

About the author

Laura Adams is a money expert and spokesperson for Finder. She’s one of the nation’s leading personal finance and business authorities. As an award-winning author and host of the top-rated Money Girl podcast since 2008, millions of readers, listeners and loyal fans benefit from her practical advice. Laura is a trusted source for media and has been featured on most major news outlets, including ABC, Bloomberg, CBS, Consumer Reports, Forbes, Fortune, FOX, Money, MSN, NBC, NPR, NY Times, USA Today, US News, Wall Street Journal, Washington Post and more. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Her mission is to empower consumers to live healthy and rich lives by making the most of what they have, planning for the future and making smart money decisions every day.

This article originally appeared on Finder.com and was syndicated by MediaFeed.org.

Written by

Laura Adams

Money Expert and Spokesperson

Laura Adams is a money expert and spokesperson for Finder. She's one of the nation’s leading personal finance and business authorities. As an award-winning author and host of the top-rated Money Girl podcast since 2008, millions of readers, listeners, and loyal fans benefit from her practical advice. Laura is a trusted source for media and has been featured on most major news outlets, including ABC, Bloomberg, CBS, Consumer Reports, Forbes, Fortune, FOX, Money, MSN, NBC, NPR, NY Times, USA Today, US News, Wall Street Journal, Washington Post, and more. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Her mission is to empower consumers to live healthy and rich lives by making the most of what they have, planning for the future, and making smart money decisions every day. See full bio