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Should You Choose To Invest in Stock or Pay Off Bills?

written by: Tim Plaehn•edited by: Jason C. Chavis•updated: 7/27/2010

The answer of whether to invest in stock market or pay off bills is not cut and dry. You should evaluate your own financial situation and set up a plan that gets you debt free with a large stock market portfolio.

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    Evaluate Your Personal Finances

    The decision whether to invest in stock market or pay off bills depends primarily on your personal situation. There are several questions that should be answered first to give yourself an idea of the best focus for your money.

    1. Are you looking at doing something with a lump sum of money like a bonus or inheritance or will this be a monthly plan to invest or pay down your debt?
    2. What kind of debt do you have? Credit cards, school loans, car loans or a mortgage?
    3. How much of your monthly income is consumed by your bills and debt payments?
    4. Are you an experienced stock market investor with the knowledge to invest properly or is stock investing something new where you believe you can earn better returns?
    5. If you became debt free, would you live a debt free lifestyle or would you continue to use credit cards and build up your debt balances again?

    If you spend some time thinking about these questions and writing down your answers, you will be a long ways toward a personal answer of whether to invest in the stock market or pay off bills.

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    Bills Compared to the Stock Market

    The more thoughful articles discussing whether to pay off debt or invest in the market usually discuss comparing rates of return to make a decision. The thinking is that if you credit card debt costs 12% and you can earn 15% in the market, you are better off putting the money in the stock market. The problem with this approach is that it is not possible for most investors to consistently earn a rate in the stock market that is higher than their credit card interest rates. The stock market went a whole decade, 2000 until 2009, without any gain from the stock market averages.

    Any bill vs. stock market consideration should include this primary directive: Get rid of your revolving debt. Revolving debt is your credit card balances and any other borrowed money where there is just a minimum payment due every month and the balances don't really go down over time. If you have received a lump sum of money and can pay off most or all of your credit card debt, make that your first priority and learn how to use credit cards for your financial benefit.

    If you will use a monthly payment program to reduce your debt, you must make payments significantly larger than the credit card minimum payment. Divide your debt balances by the number of months in your goal to be debt free and add that amount to the minimum payment.

    On the investing or stock market side of the equation, your retirement savings should have a level of importance with paying off your credit cards. If you have a 401(k) plan at work, this should be your first priority for saving and investing. If you have an IRA to provide additional retirement savings, it too should be funded and the money can be used in the stock market.

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    Stock Investing Ideas

    Even if the focus of your stock market or pay off bills plan is toward the pay off bills side, you can still set up some stock market investments to start building your wealth. You can set up some stock investment plans with a relatively small amount of money and have automatic additional investments. Many direct purchase stock plans, knowns as DPPs or Drip plans, allow you to open an account with $250 and have automatic investments of $50 per month. Direct purchase plans allow you to buy stock directly and are set up by individual corporations.

    If you goal is to become a stock trader and make your own stock market decisions, set up a savings plan to put aside some money each month. When your bills are paid off and you are debt free, this savings can be your capital to start stock market trading. You will be a more confidant trader with the knowledge your bills are paid off and the money you make will be yours to keep.

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    References

    MSN Money: When Paying off Debt is a Bad Idea, http://articles.moneycentral.msn.com/SavingandDebt/ManageDebt/WhenPayingOffDebtIsABadIdea.aspx

    USA Today: Pay Off Debt or Invest? http://www.usatoday.com/money/perfi/basics/2006-09-14-debt-invest_x.htm

    Investors Group: How to Pay Your Bills and Invest Too, http://www.investorsgroup.com/english/thePlan/buildPort/payBills.shtml