It is a question we hear a lot from the high earners we work with; and one that is particularly common among health care professionals – should I pay off a debt or should I invest? The long and short answer to that question is – it depends. Consider the two scenarios below…two common situations with very different recommendations.
Scenario one – Should I pay for a home in cash or get a mortgage?
This is a common question among high earners. They have money in savings that could be used to purchase a home in full, however, they are wondering if it would be better to obtain a mortgage and invest the money they would have used to purchase the home.
The most important first step in determining the right answer for the client is to assess the current mortgage interest rates vs. how much they could earn on investments. For example, when looking at the current average mortgage of around 3.7% vs. an investment with an earning potential of 6-7%, it might be better to take out a mortgage and put the funds you would have used in the home purchase for other investment opportunities. In addition to the tax advantages of a mortgage, the earnings from the investments could be used to pay off the mortgage quicker.
Scenario two – Should I pay my student loans or invest?
Often, having a high earning job such as a physician also can come with a great deal of student loan debt. Medical professionals regularly ask us if it is better to invest the money they are making or pay off their debt. Again, as in the above scenario, it depends.
Consider this situation – a practitioner has a student loan that is drawing 7.5% interest. They also have the opportunity to purchase investments that could potentially earn the above noted 6-7%. In this scenario, it is better to pay off the debt than it is to earn less than the interest they would accrue on the loan.
In the end, every situation we encounter is unique and requires its own considerations. Additionally, each client is different and has special circumstances to consider. With that in mind, we always recommend talking to a fee-only financial planner about your specific situation to ensure that the best possible decisions are made on your behalf.