pixelfit / Getty Images
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Trusted by
Millions of Readers
The financial strategies of millionaires often revolve around the crucial decision of whether to prioritize paying off debt or investing. This choice is not merely about immediate financial relief but about aligning actions with long-term wealth accumulation and stability. Keep reading to delve into the approaches and considerations that guide the financial decisions of the wealthy.
Do Millionaires Pay Off Debt or Invest?
Millionaires typically balance both paying off debt and investing, but with a strategic approach. Their decision often depends on the interest rate of the debt versus the expected return on investments. If the return on investment is higher than the debt interest rate, they may choose to invest while managing their debt efficiently. Conversely, if the debt carries a higher interest rate, they prioritize paying it off to reduce financial liabilities.
The Importance of a Balanced Financial Strategy
The key to a millionaire’s financial success often lies in a balanced approach. They understand that excessive debt can be a barrier to wealth accumulation, yet also recognize the power of compounding returns through investments.
Investing as a Priority
Investing is a fundamental aspect of a millionaire’s wealth-building strategy. They often focus on long-term investments, understanding that the power of compounding interest and growth can significantly increase their wealth over time. Millionaires also diversify their investment portfolios, spreading their assets across various investment vehicles to mitigate risk.
Debt Management
Millionaires do not ignore their debts. They employ effective debt management strategies, ensuring their debts are under control and do not hinder their financial growth. This often involves paying off high-interest debts and utilizing debts that can bring in more value, such as mortgages for investment properties.
Making the Decision: Factors To Consider
When deciding whether to pay off debt or invest, several factors come into play:
- Interest rates: Compare the interest rate of the debt with the potential return on investments.
- Risk tolerance: Understand your comfort level with investment risks versus the guaranteed return of paying off debt.
- Financial goals: Align your decision with your short-term and long-term financial objectives.
- Income stability: Consider your job security and income stability, which can impact your ability to manage debt and invest simultaneously.
Final Take
In the end, whether millionaires pay off debt or invest is not a one-size-fits-all answer. It’s about making informed decisions based on personal financial situations, goals and market conditions. By weighing the costs and benefits of each option, millionaires make strategic choices that best suit their path to financial growth and stability.
For individuals looking to emulate these successful financial habits, it’s crucial to evaluate their unique circ*mstances and possibly seek guidance from financial advisors. Understanding the principles behind these decisions can provide valuable insights into managing and prioritizing your finances effectively.
FAQ
Here are the answers to some of the most frequently asked questions about millionaires.
- Is it better to invest your money or pay off debt?
- The decision to invest or pay off debt hinges on comparing the interest cost of the debt with the potential return on investments. If the expected return on investment is higher than the debt's interest rate, investing may be more beneficial. Conversely, if the debt's interest rate is higher, paying it off could be the wiser choice.
- Can a millionaire be in debt?
- Yes, millionaires can be in debt. However, they typically manage their debt strategically, using it as a tool to leverage opportunities and grow their wealth, rather than letting it become a financial burden.
- What do most millionaires invest in?
- Most millionaires diversify their investments across various assets, including stocks, bonds, real estate and sometimes more speculative ventures like startups. They focus on long-term growth, balancing risk and return effectively.
- What are the three things millionaires do not do?
- Millionaires usually avoid the following:
- High-interest debt: Millionaires typically steer clear of high-interest consumer debt, like credit card debt, that offers no return or tax benefits.
- Neglect diversification: They don't put all their eggs in one basket but diversify investments to mitigate risks.
- Ignore long-term planning: Millionaires rarely disregard the importance of long-term financial planning and continually adjust their strategies based on market changes and personal goals.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
FAQs
If the return on investment is higher than the debt interest rate, they may choose to invest while managing their debt efficiently. Conversely, if the debt carries a higher interest rate, they prioritize paying it off to reduce financial liabilities.
Do millionaires pay off debt or invest? ›
They stay away from debt.
One of the biggest myths out there is that average millionaires see debt as a tool. Not true. If they want something they can't afford, they save and pay cash for it later. Car payments, student loans, same-as-cash financing plans—these just aren't part of their vocabulary.
Is paying off debt more important than investing? ›
If the interest rate on your debt is 6% or greater, you should generally pay down debt before investing additional dollars toward retirement. This guideline assumes that you've already put away some emergency savings, you've fully captured any employer match, and you've paid off any credit card debt.
Should you save money or pay off debt first? ›
As you pay down your debt, you might be more comfortable saving more. And if you hit a roadblock, you might need to reduce the amount you save. That's why it's important to have an emergency fund to fall back on instead of relying on your credit card.
Why paying off some debt should be prioritized before investing? ›
There are several reasons to consider paying off debt before you start investing: The sooner you eliminate debt, the less interest you will have to pay on that debt.. With no debt payments, you may have more money in your budget to save and invest.
What are the 3 things millionaires do not do? ›
The 10 things that millionaires typically avoid spending their money on include credit card debt, lottery tickets, expensive cars, impulse purchases, late fees, designer clothes, groceries and household items, luxury housing, entertainment and leisure, and low-interest savings accounts.
Does Dave Ramsey think mortgages are bad? ›
In fairness to Ramsey, he does not completely condemn mortgages the way he does other types of debt. He even recommends a mortgage company that offers no-credit approval if you meet other requirements.
Do investors prefer debt or equity? ›
Debt financing may have more long-term financial benefits than equity financing. With equity financing, investors will be entitled to profits, and if you sell the company, they'll get some of the proceeds too. This reduces the amount of money you could earn by owning the company outright.
Should I spend all my money to pay off debt? ›
Many financial experts suggest the “50/30/20” rule, where you funnel 50% of your take-home income toward essential expenses, 30% toward wants, and 20% toward savings and debt repayments.
Should I pay off debt during inflation? ›
Prioritize paying down high-interest debt
If you have any credit card debt, that debt will increase at a higher rate, and become more expensive over time. Avoid that extra expense by taking steps to pay down any credit card debt you might have and paying off your balance each month if you can.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.
Why pay off debt first? ›
Credit card debt and high-interest loans can accumulate interest at rates that far exceed what you can earn in your savings account. Debt reduction not only frees up your financial resources but also alleviates the emotional stress associated with financial obligations, providing peace of mind.
Which debt is best to pay off first? ›
Prioritizing debt by interest rate.
This repayment strategy, sometimes called the avalanche method, prioritizes your debts from the highest interest rate to the lowest. First, you'll pay off your balance with the highest interest rate, followed by your next-highest interest rate and so on.
Why do investors prefer debt over equity? ›
Since Debt is almost always cheaper than Equity, Debt is almost always the answer. Debt is cheaper than Equity because interest paid on Debt is tax-deductible, and lenders' expected returns are lower than those of equity investors (shareholders). The risk and potential returns of Debt are both lower.
Why do investors prefer debt? ›
One major benefit of debt financing is that the lender has no influence on the company, and the relationship with the financier terminates once the interest is repaid. Next, interest payments on debts are tax deductible.
Should I stop contributing to my 401k while paying off debt? ›
If you have low-interest rate loans and expect higher returns on the investments in your 401(k), it may be a good strategy to contribute to your 401(k) while chipping away at your debt—making sure to prioritize paying off high-interest rate debt.
Do most millionaires have debt? ›
Wealthy people aren't afraid of borrowing. But they typically don't borrow money to live beyond their means or because they failed to save for emergencies or make a plan to cover expenses. Instead, rich people tend to use debt as a tool to help them build more wealth.
What are the top 3 careers reported among millionaires? ›
Dave Ramsey on X: "Top 5 Careers of Millionaires: 1. Engineer 2. Accountant (CPA) 3. Teacher 4.
What percent of millionaires are from investing? ›
In new research published Monday by Ameriprise Financial, 80% of Americans with $1 million or more in investable assets said financial planning and investing enabled them to reach that benchmark.
Do most millionaires pay off their house? ›
In fact, the average millionaire pays off their house in just 10.2 years. But even though you're dead set on ditching your mortgage ahead of schedule, you probably have one major question on your mind: How do I pay off my mortgage faster?
