WHEN it comes to managing personal finances, two of the most common goals people set are reducing debt and building wealth through investing. Both are important, but many investors struggle with the question: Should I pay down my debt first, or should I start investing? The answer isn’t always straightforward, as it depends on the type of debt you carry, the cost of that debt, and your financial goals. With the right approach, though, you can strike the perfect balance between debt reduction and investing.

Carrying debt comes with a cost in the form of interest payments. High-interest debt, such as credit card balances and some personal loans, can quickly erode your financial health. For example, carrying a $1,000,000 credit card balance at 48 per cent interest would cost about $480,000 per year in interest alone, money that could otherwise be invested to grow wealth.

Reducing and eliminating high-interest debt should be your priority before committing large sums to investing, as paying down debt is just as important as securing guaranteed returns.

Techniques for Debt Reduction

1) Snowball Method – Focus on paying off the smallest balance first while making minimum payments on others. The quick wins provide motivation and momentum.

2) Avalanche Method – Pay off the debt with the highest interest rate first. This saves the most money on interest over time as high-interest rate debts are eliminated.

3) Consolidation or Refinancing – If possible, consolidate multiple debts into one lower-interest loan, or refinance high-interest loans to reduce costs.

4) Automated Payments – Set up automatic payments above the minimum to ensure consistency and prevent regressing. This can be in the form of salary deductions or standing orders with your bank.

While aggressively reducing high-interest debt is critical, it doesn’t mean you should ignore investing altogether. Certain opportunities, such as contributing to a retirement plan, can provide benefits that outweigh the cost of carrying some lower-interest debt.

Starting early with small, consistent investments allows you to harness the power of compounding interest, and you will see the acceleration effect over time. Maintaining this disciplined approach ensures you don’t lose valuable time in building long-term wealth. The key is striking a balance: eliminate the most expensive debt as quickly as possible, but don’t let the pursuit of debt freedom keep you from laying the foundation for future financial growth.

So how do you decide where to direct your money? Here are a few guidelines:

Tackle High-Interest Debt First: Focus on paying it down before investing heavily.

Invest While Managing Lower-Rate Debt: For debts like mortgages or student loans it may make sense to continue making regular payments while also investing. The potential returns from investing may outweigh the cost of the debt.

Build an Emergency Fund: Aim for at least three to six months of expenses in a liquid account. This prevents you from relying on high-interest credit cards in case of unexpected expenses.

Allocate a percentage of any extra income to debt repayment and the remainder to investments — It may be split 70/30 or 60/40 depending on your specific situation. This way, progress is made on both areas simultaneously.

Every situation is unique. The best balance between debt reduction and investing depends on your income, interest rates, financial goals, and risk tolerance. It is always important to consult a reputable investment advisor who can help you evaluate your debt load, prioritise repayment strategies, and design an investment plan that works alongside your debt reduction efforts.

Paying off debt and investing are not opposing goals but are complementary strategies in building long-term financial security. By aggressively reducing high-interest debt, maintaining steady contributions to your investments, and striking the right balance, you can set yourself on a path to both financial freedom and sustainable wealth creation.

Dwayne Neil, MBA, is the AVP, personal financial planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.